Legal Updates

High Court exercises jurisdiction to award non-party costs

A recent decision in the High Court in the case of Minister of Education v H Construction North Island Ltd (in rec and liq) has seen a parent company, uninvolved as a party to the legal proceedings, be ordered to pay non-party costs of over a million dollars.

Non-party costs are only awarded in exceptional circumstances; where it is just to do so and when “something more” about the non-party’s conduct warrants costs.  The need for “something more” to be done for costs to be awarded has been emphasised considerably in New Zealand case law. Without this further element, the rule could extend too far in an economy populated by smaller, closely held companies.

McConnell Ltd (“McConnell”) is the ultimate parent company of H Construction North Island Ltd (“Hawkins”). This decision comes after Hawkins was previously made to pay almost $13.5 million for the botched construction of Botany Downs Secondary School in which numerous buildings leaked from construction defects.

Hawkins’ legal fees in the dispute were initially being funded by Hawkins Group Limited (“HGL”). HGL operated as a “treasury function” for this group of companies. However, HGL began to struggle meeting payments and outlined cash flow issues affecting the whole group.

In February 2018, McConnell provided a guarantee to make payment of all fees “presently unpaid” and payment of all of Hawkins’ “future” legal fees and disbursements. Without such a guarantee, Hawkins would have been unrepresented at trial.

The plaintiffs submitted that the defendants had exploited Hawkins’ inability to settle at a realistic level while funding a “gold-plated defence” and as such should be liable for costs.

The Decision

The High Court found in favour of the plaintiffs for 3 reasons. In summary:

  1. Hawkins was not interested in settling at a realistic level;

  2. Hawkins robustly defended the case at great cost while exploiting its possible insolvency; and

  3. McConnell authorised Hawkins’ approach, at least implicitly, given the commonality of directorships. The defendants knew about the material aspects of the litigation (including previous settlement negotiations, Hawkins’ financial position, and HGL’s payment of legal fees and disbursements) and it was clear that the defendants supported a trial.

Together, the Court found this constitutes the “something other” required for non-party costs to be just. The directors were not found to be personally liable as they did not provide personal funding to support Hawkins’ defence.

This case is a good reminder for those who act on Boards or as Directors of companies with other related and/or subsidiary companies that they may be held liable for costs if the party to proceedings is being operated and controlled by the ultimate parent company they are involved with. It is also a reminder to carefully consider the duties that apply in both a company and/or subsidiary context.

If you have any questions about your rights and obligations in relation to company or director matters, contact Sarah Churstain or Jono Cole.