Houghton v Saunders

• Jurisdiction: New Zealand
• Judge: Dobson J
• Judgment Date: 24 March 2015
• Neutral Citation: [2015] NZHC 548
• Docket Number: CIV-2008-409-348
• Court: High Court
• Date: 24 March 2015

Between

Eric Meserve Houghton

Plaintiff

and

Timothy Ernest Corbett Saunders, Samuel John Magill, John Michael Feeney, Craig Edgeworth Horrocks, Peter David Hunter, Peter Thomas and Joan Withers

First Defendants

Credit Suisse Private Equity Inc (Formerly Credit Suisse First Boston Private Equity Inc)

Second Defendant

Credit Suisse First Boston Asian Merchant Partners LP

Third Defendant

First New Zealand Capital

Fourth Defendant

Forsyth Barr Limited

Fifth Defendant

[2015] NZHC 548

CIV-2008-409-348

IN THE HIGH COURT OF NEW ZEALAND

WELLINGTON REGISTRY

Application for costs — the substantive decision was a representative action for a losses suffered by investors flowing from allegedly misleading content in, or omissions from, a prospectus — the High Court had found in favour of the defendants — the proceedings had been funded by two litigation funders — defendants sought increased costs — defendants argued that the funding had enabled a very substantial case to be pursued when it was ultimately without merit and that the representative plaintiff's funded status added to the pressure on the defendants — defendants also applied for non-party costs orders against the funders so that they would not have to enforce a costs order against the plaintiff first — whether the funded status justified an entitlement to indemnity costs — whether there should be an order for non-party costs orders against the funders — whether alcoholic beverages consumed by counsel could be recovered as a disbursement — whether the costs of an United States expert could be recovered where suitable New Zealand or Australian experts were available — whether in litigation of this scale, the Court was required to consider every component of the costs claims that had not previously been addressed by interlocutory costs orders.

Counsel:

P A B Mills for plaintiff

D J Cooper and S V A East for first defendants

J B M Smith QC and O E Jaques for second and third defendants

D H McLellan QC and J S Cooper for fourth defendant

A C Challis and D P Turnbull for fifth defendant

K M Paterson for Harbour Litigation Investment Fund LP and Joint Action Funding Limited (the non-parties)

RESERVED JUDGMENT OF Dobson J

(Costs)

Contents

Does the plaintiff's funded status entitle the defendants to indemnity costs?	[5]
The nature of the litigation funders' liability to pay costs orders	[16]
Increased costs	[29]
Indemnity costs	[36]
Varying previous costs categorisation	[44]
Directors' scale costs entitlement	[51]
Directors' claim for increased costs	[66]
Directors' disbursements	[80]
Mr Horrocks' scale costs entitlement	[112]
Mr Horrocks' disbursements	[118]
Credit Suisse scale costs entitlement	[120]
Credit Suisse claim for increased costs	[135]
Credit Suisse disbursements	[136]
FNZC scale costs entitlement	[148]
FNZC claim for increased costs	[152]
FNZC disbursements	[156]
ForBar scale costs entitlement	[158]
ForBar claim for increased costs	[162]
ForBar disbursements	[164]
Another approach: Holdfast not applying to protracted cases	[166]
Costs on the costs application	[174]

1 On 15 September 2014, I delivered judgment in this proceeding which represents a claim by shareholders of Feltex Carpets Limited for losses flowing from allegedly misleading content in, or omissions from, a prospectus issued in May 2004. 1 My judgment was in favour of the defendants on all of numerous causes of action.

2 The plaintiff accepted that costs should follow the event, but disputed various claims for increased or indemnity costs, challenged the category of scale costs claimed for some pre-trial aspects on which costs have not previously been settled, and questioned numerous items of disbursements claimed on behalf of various defendants.

3 With a thoroughness commensurate with the rest of the proceedings, counsel spoke to detailed written submissions over two full days, with contrasting final positions on a substantial number of the components of relevant costs claims.

4 Before addressing the contested aspects of the claims for each defendant, it is appropriate to determine various issues that have broader relevance.

Does the plaintiff's funded status entitle the defendants to indemnity costs?

5 Mr Smith QC for the second and third defendants (Credit Suisse) took the lead on an argument that because the proceedings had been pursued by litigation funders acting in pursuit of a substantial profit, defendants successfully opposing the action should be entitled to indemnity costs. The essence of Mr Smith's argument was that causes of action open to subscribers in the Feltex float had been used by litigation funders as a means of pursuing litigation for profit. 2 He argued that, whatever the niceties of the arrangements put in place to run the litigation for the shareholders, the commercial reality was that he who paid the piper, called the tune. Therefore it would be naïve of the Court to treat the proceeding as being run other than by the litigation funders.

6 Mr Smith submitted that the costs consequences of failure should be assessed from a different perspective when those driving the litigation had not suffered any loss or damage as a result of the alleged wrongdoing of the defendants. Rather, they were pursuing the litigation as a commercial venture to invest in the claims of others (the investors) who were notionally the ones seeking vindication of their rights.

7 Mr Smith sought support for his argument from observations in the judgment of the Court of Appeal on an interlocutory appeal that addressed the status of the funded representative action. 3 That judgment included the following: 4

The making of orders for both representation and admission of a funder substantially alters the balance between plaintiffs and defendants. We consider that the change is so radical as to justify the High Court, in exercise of its inherent jurisdiction under s 16 of the Judicature Act, to consider ordering security as a term of such orders, even where numerous natural persons are among the plaintiffs, as the price of the privilege to employ such a procedure. That is in order to protect a defendant against the effect of a procedure which could otherwise be oppressive. The facts that the funder has no personal right at stake, that it takes part of the proceeds of any claim, and that it is motivated by the financial considerations that gave rise to the common law prohibition of champerty point to the need for the funder to provide security for costs in most cases. Arkin v Borchard Lines Ltd [2005] 1 WLR 3055 (CA) applied to a litigation funder Lord Denning MR's dictum in Hill v Archbold [1968] 1 QB 686 (CA) at 695 that maintenance “[is] lawful, provided always that the one who supports the litigation, if it fails, pays the costs of the other side”.

8 Mr Smith submitted that the three risks recognised by the Court of Appeal in the above judgment as potentially arising in funded representative proceedings had ensued in this case. First, that the funding enabled a very substantial case to be pursued when it was ultimately without merit. Secondly, that the representative plaintiff's funded status added to the pressure on the defendants. The plaintiff characterised the proceedings as seeking up to $185 million damages and interest, and in both reputational and financial respects the diverse claims simply had to be taken seriously by all of the defendants. The third risk contended by Mr Smith to have manifested in the proceeding was that the funders had enjoyed considerable influence over the way the proceeding ran.

9 Further, Mr Smith argued that the potential advantages of representative proceedings had not been realised in this case. A first potential advantage is the efficient and economic resolution of class actions, and secondly the deterrence of misconduct that would otherwise persist. 5 Credit Suisse disputed that the case had been efficiently and economically resolved, and also denied that the proceeding had identified and deterred any relevant misconduct.

10 It followed, on Mr Smith's argument, that facilitation of the proceeding for financial gain when the outcome was a complete failure that did not contribute any of the advantages that might accrue in other contexts, ought to require the funders to indemnify the defendants for all reasonable costs they had incurred.

11 For the plaintiff, Ms Mills opposed any notion that the funded status of the representative action justified an entitlement for the defendants to indemnity costs. She emphasised the one advantage acknowledged by the Court of Appeal that had not been addressed by Mr Smith, namely that funding arrangements in cases such as this facilitate access to justice. She characterised that advantage as so important as to outweigh all other considerations that might suggest costs issues ought to be determined on a different basis from a conventionally funded proceeding. In her characterisation, the Feltex shareholders were confronted with the reality of needing to find a substantial funder to pursue claims that had been recognised, in provisional terms, as bona fide and tenable by both the High Court and the Court of Appeal. She urged that, particularly in the absence of settled class action rules, this case ought not to be resolved on a basis that unnecessarily deterred the pursuit of class actions in other cases where a tenable basis for them existed, and claims by individuals or small groups of adversely affected persons without such support were clearly impracticable.

12 In addition, Ms Mills argued that imposing an indemnity costs liability on the funders in this case when there was no precedent, or recognition of a fundamentally different...