IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE	
CIV-2013-404-001806
[2018] NZHC 2638	

BETWEEN	STUART WALTON HERRON
Plaintiff	
AND	WAYNE ANDREW WALLACE
First Defendant

SHADES OF AUTUMN LIMITED
Second Defendant

BELMONT LIFESTYLE VILLAGE LIMITED
Third Defendant	

Hearing:	26 February 2018 (adjourned part-heard) Memorandum of Counsel dated 13 August 2018 Minute dated 21 August 2018
23 August 2018 (balance of hearing)	
Appearances:	R Dellow for the Plaintiff (February only) C Patterson for the Plaintiff (August only)
M Corlett QC and E Armstrong for the Defendants	
Judgment:	10 October 2018	

JUDGMENT OF HINTON J

This judgment was delivered by me on 10 October 2018 at 11.30 am pursuant to Rule 11.5 of the High Court Rules

…………………………………………………………………… Registrar/Deputy Registrar

Counsel/Solicitors:
Chris Patterson Barrister Ltd
Marc Corlett, Queen’s Counsel, Auckland Wilson Harle, Auckland

STUART WALTON HERRON v WAYNE ANDREW WALLACE [2018] NZHC 2638 [10 October 2018]

[1]	This  judgment  re-visits  an  indemnity  costs  award  made  by  Faire  J  on  1 December 2016,1 following a decision of the Court of Appeal on 14 August 2017. The Court reduced the judgment sum from $966,531 to $291,531, and directed that costs needed to be re-fixed by this Court.2 The key point is the effect on a contractual indemnity costs award of the claimant party’s limited success.

[2]	There are also two separate costs issues arising out of interlocutory applications before Faire J, where costs were not fixed at the time. These are:

(a)	The plaintiff’s claim for costs following the defendants’ urgent interlocutory application dated 9 June 2017 to vary consent orders in relation to the substantive and costs judgments of Faire J and the (late) withdrawal of that application on 20 June 2017.

(b)	The plaintiff’s claim for costs following the defendants’ unsuccessful application to re-call and stay the substantive judgment.

Background

[3]	The background to the case is very clearly set out in the Court of Appeal judgment.

[4]	Mr Wallace and Mr Herron are property developers who undertook a number of projects together. In 2005, it was discovered that Mr Wallace had diverted funds from their projects. They entered into two settlement deeds. This proceeding was about whether Mr Wallace had been discharged from some or all of the indebtedness agreed under those deeds, or if not, how much he owed to Mr Herron.

[5]	Mr Herron sued for $5.6 million approximately, including interest.

[6]	Of  the  two  settlement  deeds,  the  principal  settlement  deed,  signed  on 20 October 2005, was called SH8 (also referred to as the Sidmouth Settlement Deed).

1	Herron v Wallace [2016] NZHC 2896.
2	Wallace v Herron [2017] NZCA 346.

In it, Mr Wallace acknowledged he owed Mr Herron $3.160 million. Materially, SH8 also outlined circumstances in which Mr Wallace was entitled to a reduction or credit.

[7]	A further deed of acknowledgement of debt, called SH9, was signed at the same time, recording a $600,000 debt due from Mr Wallace to Mr Herron. Faire J found this was a double-up on the first deed, and was purely an acknowledgement of debt, not a new debt, and the Court of Appeal upheld that finding.

[8]	Faire J ultimately entered judgment for the plaintiff in the sum of $966,531, being part of the claim under SH8.

[9]	The plaintiff sought costs on a contractual indemnity basis, relying on a provision in SH8, which provided:

12. All parties to this Deed indemnify Stuart Herron from any losses suffered by Stuart Herron and agree to pay Stuart Herron’s legal costs on an indemnity (solicitor/client basis) in enforcing this agreement in the event of any breach by it of any party.

[10]	The original amount claimed for solicitor/client costs (excluding any uplift) by the plaintiff before Faire J was $393,165.52 (exclusive of GST). Faire J awarded costs on an indemnity basis. But he adopted a rigorous process to determine the appropriate quantum, including directing appointment of an independent costs expert. The parties were able to agree to the appointment of Mr Mark Russell, barrister, as costs expert. Mr Russell’s fee, including disbursements and GST, was approximately $45,000, which the defendants were later directed to pay.

[11]	Adopting most of the recommendations in Mr Russell’s report, Faire J deducted $101,285 from the plaintiff’s original claim, and ultimately awarded costs to the plaintiff of $291,880.52.3 With GST, that came to $335,662.60.

[12]	The plaintiff had also entered into a contingent fee arrangement which included provision for the plaintiff to pay his lawyer an uplift of 75 per cent on solicitor/client costs if successful, and the plaintiff was apparently billed on that basis.

3	Coincidentally, this sum is almost identical to the final judgment sum following the Court of Appeal decision.

[13]	Mr Russell assessed that an uplift of 75 per cent may be justified in a complex commercial case involving significant risks, but, in this case, a fair and reasonable uplift was no more than 50 per cent. Faire J declined to award any uplift, holding that, at the time the parties entered into the deed, conditional fee arrangements were unenforceable in New Zealand, for public policy reasons.4

[14]	Both the substantive judgment of Faire J and the costs judgment were then the subject of appeals and cross-appeals to the Court of Appeal.5

[15]	The Court of Appeal allowed the appeal by the defendants in part, reducing the quantum of the plaintiff’s judgment from $966,531 to $291,531, and dismissed the cross-appeal. The Court found that Mr Wallace was entitled to the reduction of
$675,000 on the basis that Mr Herron was himself responsible for a relevant condition not being met. The Court applied the principle that a party cannot take advantage of their own wrong.6

[16]	The Court of Appeal did not deal with the costs appeal, saying that costs would first need to be re-fixed by the High Court in light of their decision. The Court said that, in doing so, the parties were free to advance the arguments that they had made before the Court of Appeal regarding costs.7 These arguments were recorded by the Court of Appeal as being:8

(a)	Do public policy reasons exist for denying Mr Herron indemnity costs, or alternatively, should reductions be made to Mr Herron’s award for those parts of the claim he failed to prove?

(b)	Should an uplift be applied to any award of costs made to Mr Herron pursuant to an indemnity right?

[17]	The Court of Appeal went on to say, in relation to the referral back to the High Court, that this Court is “at liberty to reconsider the conclusions it reached below

4	Herron v Wallace [2016] NZHC 2896 at [14]; citing Kain v Wynn Williams [2013] NZSC 26 at [2].
5	Wallace v Herron [2017] NZCA 346.
6	This was a point that had not been argued before Faire J.
7	At [119].
8	At [121].

in light of the revised fortunes of the parties after this decision”.9 The Court also said they would merely observe that they “would rather doubt the conclusion in the final costs decision to the effect that conditional fee arrangements were unenforceable in October 2005 for public policy reasons”.10 They pointed out that Kain v Wynn Williams, the Supreme Court decision which Faire J cited in support of this proposition, was actually authority to contrary effect.11 The Court of Appeal in Kain said that there was no prohibition on conditional fee agreements. Rather, each case had to be considered on its merits.12 The defendants were declined leave to appeal to the Supreme Court and the relevant finding was not affected by the leave decision.

Analysis

[18]	I consider that my task is (at most) to review the existing costs judgment of Faire J in light of the contrary “findings” by the Court of Appeal, being:

(a)	The finding that the defendants were successful in part and were entitled to a further reduction of $675,000 in the judgment sum, bringing the judgment sum down to $291,531, materially lower than in the High Court.

(b)	The observation of the Court of Appeal as to the correct effect of Kain v Wynn Williams on conditional fee agreements and the claim for a costs uplift.

What reduction should be made, if any, to the plaintiff ’s indemnity costs award?

[19]	Mr Corlett QC, for the defendants, submits that, following the Court of Appeal judgment, the plaintiff’s costs award should be set aside, and the defendants should be awarded costs. Alternatively, at best for the plaintiff, costs should lie where they fall. He relies on allegations as to Mr Herron’s misconduct (allegedly advancing claims that lacked merit, failing to discover documents, and giving evidence contrary to

9	At [120].
10	At [120]. Compare Faire J’s judgment: Herron v Wallace [2016] NZHC 2896 at [14].
11	Kain v Wynn Williams [2013] NZSC 26.
12	Kain v Wynn Williams [2012] NZCA 563, [2013] 1 NZLR 498 at [31].

dealings), the defendants’ partial, but material success on their appeal, and the plaintiff’s failure on his cross-appeal.

[20]	I disagree that costs should be awarded in favour of the defendants, or left to lie where they fall.

[21]	I do not consider non-disclosure of documents by the plaintiff, or alleged misconduct on his part, to be relevant for present purposes. These matters are not the subject of new findings by the Court of Appeal, nor even clear on the face of the Court of Appeal judgment. And, further, these were matters on which submissions were made or could have been made to Faire J, but he did not take either point.

[22]	I also do not consider the plaintiff’s failure on his cross-appeal is relevant. In this regard, the Court of Appeal simply upheld what Faire J had already found. The relevant findings therefore cannot make any difference to the award of costs by Faire J. The plaintiff’s failure on his cross-appeal has properly been the subject of a costs order in the Court of Appeal in favour of the defendants.

[23]	That leaves only the question of the effect on the plaintiff’s costs award of the defendants’ partial success on the appeal.

[24]	This is a case where indemnity costs have been awarded on the basis of a contractual provision.

[25]	The leading case on solicitor/client costs is the Court of Appeal’s decision in Black v ASB Bank Ltd.13 The Court noted that when indemnity costs are claimed on a solicitor/client basis under a contractual provision, the Court must undertake a different analysis than it would when awarding indemnity costs in its discretion, under rr 14.6(4)(a) or (b) of the High Court Rules 2016.14 The Court must assess what the necessary steps to the claim are, and whether the costs claimed for those steps are reasonable.15 The word “reasonable” here does not, however, import the same

13	Black v ASB Bank Ltd [2012] NZCA 384.
14	At [79].
15	At [77]. See further Frater Williams & Co Ltd v Australian Guarantee Corporation (NZ) Ltd
(1994) 2 NZ ConvC 191,873 (CA) at 191,886–191,887.

discretion as in other costs claims. Assessing costs claimed under a contractual entitlement involves the Court considering whether the tasks undertaken were reasonably necessary and were covered by the contract, whether the charge rates were reasonable, and whether any other general contract law principles deny the claimant its prima facie right to judgment.16 As such, the analysis is more strictly in favour of the party claiming indemnity costs. As the Court of Appeal has previously noted:17
Anything less than a full indemnity for costs properly incurred must leave the indemnitee with part of the liability for which the indemnifier is prima facie responsible. In the absence of a contrary indication it is not to be assumed that the parties intended such a result.

[26]	Even applying general costs principles under the High Court Rules, there is a longstanding principle that, unless there are exceptional reasons, costs should follow the result. That is, the loser, and only the loser, pays.18 If a plaintiff loses most of its claims, that can be properly recognised by reducing costs otherwise payable or in some instances ordering costs to lie where they fall.19 The cases where costs are left where they fall, despite a plaintiff’s success, would typically involve situations where only nominal damages were awarded and no important legal right was vindicated,20 or where a party engages in fruitless, uneconomic litigation and has taken an unreasonable approach to settlement.21

[27]	This case does not fit into the category where a successful plaintiff would be disqualified from a costs award, and is certainly not one where costs would be awarded to the defendants.

[28]	The plaintiff is still entitled to costs. The question is whether the award of Faire J, on an indemnity basis, of $335,662 (including GST), should be approached on a different basis, or at least reduced on account of the partially successful appeal and significant reduction in quantum.

16	Black v ASB Bank Ltd [2012] NZCA 384 at [80]; and Watson & Son Ltd v Active Manuka Honey Association [2009] NZCA 595 at [20].
17	Beecher v Mills [1993] MCLR 19 (CA).
18 Shirley v Wairarapa District Health Board  [2006] NZSC  63,  [2006] 3  NZLR  523  at  [19];  Water Guard NZ Ltd v Midgen Enterprises [2017] NZCA 36 at [12]–[13]; and Weaver v Auckland Council [2017] NZCA 330 at [20]–[21].
19	Water Guard NZ Ltd v Midgen Enterprises at [13].
20	See Waihi Mines Ltd v AUAG Resources Ltd (1999) 13 PRNZ 372 (CA).
21	Water Guard NZ Ltd v Midgen Enterprises at [13] and [18]–[19].

[29]	The Court in Black commented that it will normally not be feasible to make a detailed assessment of the reasonableness of the indemnity costs claimed under a contract.22 For this reason, it is open to the Court to make a robust judgment on the reasonableness of a claim.23 The Court of Appeal has noted this does not mean the Court takes the same discretionary approach as it does when assessing party costs in the ordinary way. Rather, the Court merely assesses whether the solicitor-client costs sought are properly attributable to the exercise contemplated in the original contract and are charged for at an acceptable level.24 If, however, the parties desire a more precise assessment of the reasonableness of the costs claimed, then the Court in Black considered they have three options.25 Firstly, a party may ask the Court to make an order for indemnity costs subject to taxation.26 Secondly, the parties could agree to be bound by the decision of a suitably qualified practitioner who vets the reasonableness of the costs. Thirdly, it may be possible to refer the costs invoices to the New Zealand Law Society under the complaints procedure in s 132(2) of the Lawyers and Conveyancers Act 2006.27

[30]	Faire J took a variation on the second option when he determined that a legal expert should be engaged to inform his decision on costs and the parties then agreed on Mr Russell.

[31]	While it is arguably open to me to consider whether costs should be on an indemnity basis in light of the much lower judgment sum and alleged public policy concerns, I did not take Mr Corlett to press that course. I was also provided with no authority to support overriding of the contractual indemnity provision. Further, I note that in ANZ Banking Group (NZ) Ltd v Gibson, the Court of Appeal made it clear that an indemnity clause such as clause 12, which merely regulates the rights of the parties, would not “tend to divert the course of justice”.28

22	Black v ASB Bank Ltd [2012] NZCA 384 at [81].
23	At [81]; and Frater Williams & Co Ltd v Australian Guarantee Corporation (NZ) Ltd  (1994)    2 NZ ConvC 191,873 (CA) at 191,887.
24	Frater Williams & Co Ltd v Australian Guarantee Corporation (NZ) Ltd, at 191,887.
25	Black v ASB Bank Ltd [2012] NZCA 384 at [81]–[99].
26	Under rr 14.8–14.23 of the High Court Rules 2016; a “seldom used” mechanism, according to
McGechan on Procedure (online ed, Thompson Reuters) at HR14.18.01.
27	See the discussion in Black at [84]–[99].
28	ANZ Banking Group (NZ) Ltd v Gibson [1986] 1 NZLR 556 (CA) at 571.

[32]	Both counsel stressed the need for a pragmatic approach, given the long history of this matter, and a wish no doubt to avoid yet further appeals.

[33]	Mr Corlett argued that, were I to still award costs to the plaintiff, then rather than overriding the contractual indemnity clause, I should reduce the indemnity costs award by 70 per cent, being the proportion by which the judgment sum has been reduced. He did not, however, provide authority in support of this approach.

[34]	Mr Patterson says that I can only take the same course as Faire J, which means identifying what further steps (if any) should be removed as having been unnecessary in light of the Court of Appeal judgment. Mr Patterson says there are no such steps. The point on which the defendants succeeded in the Court of Appeal was a subset of the same cause of action on which the plaintiff remained successful. Mr Patterson relies in effect on the principles in Black to say that strictly there should be no deduction.

[35]	Mr Patterson accepts, however, that I could take a robust approach and indicated that I could reduce the quantum by a “modest” percentage, perhaps 10 per cent.

[36]	As noted, Mr Corlett provided little authority as to the basis on which I could, or could not, reduce the indemnity costs. While the exercise can be robust, I agree with Mr Patterson that it should ideally be grounded in the costs judgment of Faire J and the expert’s report. Faire J fixed indemnity costs by removing all steps for which he considered costs should not be recovered. Strictly speaking, I should consider what further steps would logically be removed and why,  which is difficult to answer.     Mr Corlett does not point to any such steps.

[37]	One of the problems in this regard is that six out of the nine hearing days were spent on the defendants’ defence under the Credit Contracts and Consumer Finance Act 2003, which was ultimately unsuccessful and which was still relevant to the final substantive judgment.

[38]	I do not agree that I should reduce the costs to reflect the percentage that the award now bears to the award made by Faire J. Faire J did not take a percentage of success approach in fixing indemnity costs. I can see no principled basis on which I could do as Mr Corlett submits. That is not the approach to costs even under the Rules, let alone in terms of Black.

[39]	However, I do accept Mr Corlett’s point that there should be more than a modest deduction. Although Mr Corlett cannot point to additional cost items that are unnecessary, from a practical perspective removing the now lost argument over the
$650,000 liability from the equation must result in an overall sense in some material cost saving. I accept that would not be anything like 70 per cent, but it should be more than 10 per cent, even though the saving cannot now be proven.

[40]	Looking at the matter in a different way, had the proceeding involved a claim of $291,531, instead of a claim of $5.2 million (and the plaintiff is only entitled to indemnity costs for enforcing “a breach”), I would seriously question whether the plaintiff would have needed to incur costs and disbursements of $335,662 (including GST).29 I balance against that the defendants’ aggressive “fight on every front” approach and refusal to mediate, let alone make settlement offers. I acknowledge the time taken on the defendants’ unsuccessful Credit Contracts and Consumer Finance Act defence. But even still, if the claim had been for $291,531, even the defendants would presumably have been forced to be more economical with their defence.

[41]	I also have to keep firmly in mind the comprehensive assessment conducted by the costs assessor, Mr Russell, and Faire J’s acceptance of that.

[42]	Taking a robust approach as to what a reasonable solicitor/client fee would be in enforcing the sustained breach or breaches, which is really all that is possible, especially in circumstances where I was not the Judge sitting on the trial, I have decided to reduce the costs fixed by Faire J by 30 per cent, so that the total costs award becomes $235,000 (inclusive of disbursements and GST).

29	I acknowledge that the actual costs of the plaintiff were higher still, but my focus is on the effect of the Court of Appeal judgment on the actual indemnity award.

Should the plaintiff have received a costs uplift?

[43]	As to the question of whether the plaintiff was entitled to a 50 per cent uplift, I do not consider I can re-visit the decision of Faire J. The Court of Appeal only made an “observation” in this regard. They did not overturn Faire J on this point, nor make any finding. I cannot sit on appeal on Faire J’s judgment.

[44]	In any event, I consider the decision not to allow an uplift on the assessed solicitor/client costs was correct. I accept that Faire J was wrong to put the matter on the basis that conditional fee arrangements were unenforceable in 2005 (when SH8 was signed), for public policy reasons.30 However, it does seem that an agreement for an uplift payable on success was considered then to be of no effect on the basis the agreement was champertous, in the absence of relief under the Illegal Contracts Act 1960.31 While this would not affect the actual uplift arrangement between the plaintiff and his solicitors because it was entered into much later, it would mean that the parties to SH8 would not have had within their reasonable contemplation a solicitor/client fee under clause 12 that included a costs uplift for success. I consider that is the point to which Faire J was referring and that appears to be correct.32

[45]	Given my view that this point falls outside my jurisdiction in any event, I take it no further.

Should the plaintiff receive interest on the costs award and on what basis?

[46]	Although not a matter arising out of the Court of Appeal judgment, in the part-hearing before me on 26 February 2018, the plaintiff claimed contractual interest at 9.25 per cent on the legal costs, totalling in excess of $99,237 on its own. The claim was made on the basis that such interest was payable under the contingency fee agreement and therefore covered by clause 12 of SH8. A Ms Bragg, legal secretary, attested that Mr Herron had been charged $99,237 interest on outstanding bills.

30	See [17] above.
31	Law Commission Subsidising Litigation (NZLCR R72, 2001) at [12].
32	Interestingly, I am advised by Mr Corlett that there is no better statement of the law  than the Law Commission report which I have cited.

[47]	In a Minute issued prior to the resumed hearing, I pointed out that this was not a matter that was addressed by Faire J. As I understand it, submissions were not made to him (or the expert assessor) on that point. It was not touched on either, of course, by the Court of Appeal. The question would seem to require a separate application to re-call the judgment of Faire J. It would be questionable whether re-call would be appropriate when the matter was not argued in the first place. The plaintiff’s case was that he did not claim interest in the application for costs before Faire J because he did not anticipate the delays that have occurred with the appeals. But even by the time of the costs hearing before Faire J, significant time would have passed since most bills were rendered.

[48]	At the resumed hearing on 23 August 2018, Mr Patterson advised that the claim for interest on the legal costs was not being pursued.

[49]	He seeks instead an order that interest will run on the ultimate costs award, at
5 per  cent  per  annum,  the  rate  under  s  87  of  the  Judicature  Act  1908,33  from 1 December 2016, being the date of Faire J’s costs judgment, and therefore the date the defendants’ liability for costs crystallised.

[50]	Mr Corlett agrees that such an order is appropriate.

[51]	I also consider it to be appropriate and make the order sought.

The additional reserved costs claims

[52]	The plaintiff seeks costs and disbursements (including GST) of $17,577 on the application to vary consent orders, and of $71,711 on the re-call application.

[53]	Mr Corlett argues that the indemnity provision does not apply to these interlocutory applications. However, my view is that the plaintiff’s need to oppose the applications to vary consent orders and the application to re-call the judgment must be part of “enforcing this agreement in the event of any breach” in terms of clause 12 of SH8, in the same way as the costs of obtaining the judgment fall within clause 12. The

33	Judicature (Prescribed Rate of Interest) Order 2011, cl 4.

re-call application related to the entire judgment of Faire J, not just the aspect on which the defendant was successful on appeal.

[54]	There can be no real issue over the $17,577 figure as an appropriate amount on an indemnity basis. It includes GST and disbursements and is not a substantial sum. Having reviewed the detail of the costs incurred, the amount seems reasonable and to have been reasonably incurred.

[55]	On the face of it, the claim for $71,711 on the re-call application appears high. Again, it includes GST and disbursements, so the actual costs figure is $62,191.51.  It was not suggested that, if the point on which the defendants were successful        on appeal were removed, the re-call application would have been materially less time-consuming. The defendants submit that the claim is eight times scale costs; that much of the work could have been undertaken by more junior practitioners; and that there was some duplication of work. They submit reasonable fees would be 25 per cent of that claimed.

[56]	The defendants have not submitted their own costs in order to indicate whether the rate (and overall quantum) is reasonable. Mr Corlett says it is not possible to do this because Chapman Tripp were then the solicitors for the defendants, and now are not. I am not sure how that makes the defendants’ costs unavailable. Presumably the defendants at least have the appropriate fee accounts.

[57]	I do not consider that a deduction of the magnitude sought by the defendants is reasonable. As I have said above, I find that the costs of the re-call judgment do fall under the indemnity. However, following the principles in Black, the solicitor/client costs seem high for a one-day hearing and all associated attendances. I frankly find it difficult to follow the costs schedules and other information that was provided long ago to Faire J, but it does seem that there were three different practitioners involved in this application, charging similar rates. My impression from reviewing the schedules is that there may well have been some duplication of work. I note also that two counsel seem to have appeared at the hearing. Taking again a robust approach, I have reduced the total costs claim again by approximately 30 per cent, bringing the final figure to $50,000, including disbursements and GST.

Conclusion

[58]	I fix costs and disbursements in this Court on the substantive proceeding in the sum of $235,000, including GST.

[59]	The plaintiff is entitled to interest at the Judicature Act rate on the sum of
$235,000 from 1 December 2016 to the date of payment.

[60]	I fix costs and disbursements, including GST on the (withdrawn) application to vary consent, in the sum of $17,577, in favour of the plaintiff.

[61]	I fix costs and disbursements, including GST on the application to re-call judgment, in the sum of $50,000.00 in favour of the plaintiff.

Costs on costs

[62]	I am unsure as to whether either party is ultimately seeking costs in respect of the costs arguments dealt with in this judgment. In any event, I consider there should be no further award of costs. Each party has succeeded in part and failed in part. Nor, although it is not material to my decision, do I have any great appetite for another costs argument in this case.

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Hinton J