AAM Limited v Exotica Enterprise Ltd
[2018] NZHC 717
•16 April 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2016-404-2850 [2018] NZHC 717
BETWEEN AAM LIMITED
First Plaintiff
MUMTAJ YUNUS AGARBATTIWALA
Second PlaintiffAND
EXOTICA ENTERPRISE LTD
First Defendant
DARIUS KARANI
Second DefendantMANUKA MASTERS LTD
Third Defendant
Hearing: 16 April 2018 Appearances:
No appearance for the First Plaintiff
M Y Agarbattiwala, the Second Plaintiff in person L Ponniah for the Defendants
Judgment:
16 April 2018
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Corban Revell (Craig Orton), Henderson, Auckland, for the Defendants
Counsel:
Lawrence Ponniah, Auckland, for the Defendants
Copy for:Ms Agarbattiwala, the plaintiff
AAM LIMITED v EXOTICA ENTERPRISE LTD [2018] NZHC 717 [16 April 2018]
[1] The defendants apply for further discovery, further particulars of the statement of claim and security for costs. They filed their application on 14 March 2018. That was only shortly before the close of pleadings date of 31 March 2018. The case has a fixture for four days beginning 11 June 2018.
[2] I will make orders in favour of the defendants on the application for further discovery and for further particulars. Because those orders will require matters to be attended to before there can be a full hearing on the merits, I do not accept that this case can be put into proper shape for hearing on 11 June 2018. Time is required for the plaintiffs to attend to discovery and the particulars, and the defendants need time to respond. That could not be conveniently carried out before 11 June 2018. Accordingly, I will also make an order vacating the fixture for 11 June 2018.
[3] The proceeding has been running since November 2016. Some of the deficiencies in the pleadings and the plaintiffs’ discovery would have been apparent from early 2017. In my view, both sides must take responsibility for the problems that have now arisen. The plaintiffs requisitioned the defendants in a timely way in May 2017 for further discovery. The defendants, on the other hand, did not raise the matter until February 2018. They ought to have done something about the matter much earlier.
[4] Because I regard both sides as carrying responsibility for this unsatisfactory state of affairs, the adjournment has been granted simply to ensure that the case is put into proper shape. If I had regarded the responsibilities as falling solely on one side, I might have taken a different view.
What the case is about
[5] The proceeding arises out of an agreement for sale and purchase of a business in September 2015. The agreement, dated 1 September 2015, describes the vendor as Exotica Enterprise and the purchaser as Ms Agarbattiwala, or nominee. Ms Agarbattiwala is a director and shareholder of AAM Ltd. She nominated it as the purchaser. Mr and Mrs Karani are the shareholders and directors of Exotica Enterprise Ltd. Mrs Karani also holds a 50 per cent shareholding in Manuka Masters Ltd, the
third defendant. The address of the business is given as Unit 3, 1 Bishop Dunn Place, Flat Bush, Auckland. The business to be sold is described as:
“Gift Shop Manuka Honey, Food and Beverage & Wine Products from New Zealand”
The agreement uses the Auckland District Law Society form for an agreement for sale and purchase of a business.1 The settlement date is 13 September 2015. There is a turnover warranty of $1,184,848 (excluding GST) for the period 1 April 2014 to 31 March 2015. The premises were leased for three years ending on 15 October 2016, with a right of renewal. The vendor gave a five year New Zealand-wide restraint of trade. The purchase price was $475,000.
[6] The agreement has additional terms including clauses 20, 21, 22, 23 and 27 which are relevant to the plaintiffs’ causes of action:
20A list of products their retail distribution rights and brand names will be provided and attached to this agreement. The Vendor agrees that he will ensure the continuity of supply and will not compete with the buyer in the retail market in New Zealand for a period of five years.
21The Vendor agrees and undertakes that he will hand over all business contacts buyers and suppliers over a period of 30 days Vendor assistance.
22The Vendor agrees that he will pass on all retail inquiries pertaining to items mentioned in clause 20 on a continuous basis.
23The Vendor agrees to announce before possession date in all his marketing materials printed and online that he has handed over the business of items specified in clause 20 to the buyer.
…
27 All distribution rights (sole, New Zealand wide and overseas) will be documented and signed prior to settlement date.
[7] At the same time, Ms Agarbattiwala and Mr Karani signed a memorandum of understanding:
Mumtaj Agarbattiwala is buying the retail business New From Zealand situated at Unit 3, 1 Bishop Dunn Place, Flat Bush, Auckland, which is a Liquor and Food and Beverage store. Along with that she will also be getting
1 Auckland District Law Society form, 4th ed, 2008(3).
the name, trademarks and intellectual property associated with “New From Zealand”.
She will also have sole distribution rights for all Exotica Enterprise Products in New Zealand and India for a period of 2 years. After that if mutually beneficial to both parties the contract will be renewed.
All intellectual property and the brand Exotica Enterprise Ltd remain the property of Darius Karana. Exotica Enterprise Ltd will continue trading under the Directorship of Darius Karani and no shares or portion of this company is being sold in this transaction.
[8] After settlement, AAM Ltd operated the business under the name “New From Zealand”. Ms Agarbattiwala says that the purchase of the business was a disaster. In the first year, she made a loss of some $133,713 on a turnover of only $363,843.
[9]The statement of claim of 3 November 2006 has 14 causes of action:
1The first is a claim for breach of the restraint of trade. It is alleged that Exotica and Mr Karani failed to hand over all buyers, failed to hand over all retail enquiries, and failed to announce in their advertising material that they had handed the business over to the plaintiffs. The damages are not quantified.
2The second alleges a breach of the agreement in failing to obtain distribution rights which were specified in the agreement. Loss is alleged, but damages are not specified.
3The third alleges a breach of the memorandum of understanding. It is claimed that Exotica and Mr Karani sold Exotica products on the products list to other parties in New Zealand and India. Loss is alleged, but damages are not specified. An injunction is also sought, restraining Exotica and Mr Karani from selling products to other parties in New Zealand and India.
4The fourth alleges a breach of the turnover warranty, although the breach is said to have been proved by the subsequent turnover. Loss is alleged but damages are not quantified.
5The fifth is an allegation that Exotica and Mr Karani did not transfer their website for the business to the plaintiffs on settlement. The plaintiffs had to
set up their own website. While they claim loss, they have not quantified the damages.
6The sixth is under s 9 of the Fair Trading Act 1986. The defendants are said to have breached this section by continuing to include references to the business premises on their websites and in advertising and promotional material, and thereby establishing in the minds of the public a link between the premises and the defendants instead of with the plaintiffs. The plaintiffs seek an order for removal of those references to the premises and monetary relief which is not quantified.
7The seventh is a claim for damages under what is now s 35 of the Contract and Commercial Law Act 2017. The defendants are said to have represented to Ms Agarbattiwala that since 31 March 2015 they had spent considerable funds on the fit-out of premises and the value of the fit-out was $275,000, whereas the accounts show that the actual value of the fixed assets was only $218,00. The plaintiffs claim a loss of $58,000.
8The eighth cause of action is under s 9 of the Fair Trading Act 1986 and repeats the allegations for the seventh.
9In the ninth the plaintiffs say that the vendors failed to transfer all the stock in the business to the plaintiffs on settlement. Stock worth $2,700 (excluding GST) is said to have been retained. Damages in that sum are sought.
10The tenth alleges a failure to transfer a Jaguar motor vehicle, a fixed asset of the business. Damages of $120,000 are claimed.
11The eleventh alleges a breach of clause 6.1(a) of the agreement. This goes to liquor licensing requirements. Before the agreement, the defendants had received a requisition from the District Licensing Committee that the premises had to be physically divided into two shops, but they did not disclose that to the plaintiffs. Loss is alleged, but not quantified.
12The twelfth alleges that the plaintiffs ordered products from the defendants and paid $69,195 (including GST), but those products were not delivered. Damages of $69,195 are sought.
13The thirteenth alleges that the defendants failed to deliver on time stock ordered by the plaintiffs. Loss is alleged but damages are not quantified.
14In the fourteenth, the defendants are alleged to have failed to pay for stock taken by them on consignment and not returned. The value given is $24,217 (including GST).
[10] The defendants deny liability generally. Some of the issues they raise include the following: they say that Ms Agarbattiwala is contending that the business sold to her is wider than the agreement provided; they are entitled to carry on other businesses; Exotica Enterprise Ltd was the sole vendor; Mr Karani is not personally liable; the turnover warranty was for the entire business of Exotica Enterprise Ltd but not for the business actually sold. They have also counterclaimed. They say that they left money in ($250,000) which was to be repaid six months after settlement date but that was not paid. And they sue for $23,000 for stock supplied which has not been paid.
History of the proceeding
[11] The plaintiffs began the proceeding in November 2016. At the outset, they had legal representation. The pleadings were completed by March 2017. At that stage another law firm acted for the defendants. Mr Ponniah had not been instructed. The parties agreed on standard discovery. Both sides filed their affidavits of documents in April 2017. In a joint memorandum in May 2017 the parties proposed trial directions. That memorandum recorded the plaintiffs’ concern that the defendants’ discovery was inadequate. The defendants, on the other hand, did not state that they considered the plaintiffs’ discovery or pleadings to be inadequate.
[12] Associate Judge Doogue gave directions in terms of the memorandum. A fixture of four days beginning on 11 June 2018 was allocated. The setting-down
date was 50 working days before 11 June 2018. The plaintiffs were required to supply their briefs 45 working days before the hearing.
[13] The plaintiffs applied for further discovery by the defendants. Mr Ponniah was instructed in June 2017 but the discovery application was not heard until December 2017 because of his absence overseas. Associate Judge Christiansen ordered the defendants to make further discovery.2 The affidavit of documents does not appear to be on the file but Mr Ponniah assured me that it had been filed on or about 7 February 2018. For good order, in case the affidavit has gone missing in the court, I ask Mr Ponniah to send the court a fresh copy of the signed affidavit.
[14] The defendants did not take up their concerns with the inadequacy of the plaintiffs’ discovery and pleadings until February 2018. The defendants filed this application on 14 March 2018. About the same time, Ms Agarbattiwala withdrew her instructions from her solicitors. She has been running the case by herself since then. She filed the plaintiffs’ notice of opposition and affidavit in opposition.
[15] The application was called before Associate Judge Smith on 27 March 2018. He gave directions for the hearing today but pointed out that Ms Agarbattiwala may appear only on her own behalf. She could not represent AAM Ltd in the High Court. The company needs legal representation for proceedings in this court.
[16] At the same time, Ms Agarbattiwala applied for an adjournment of the substantive fixture. On 11 April Wylie J ruled that the fixture should stand but he reserved the right to Ms Agarbattiwala to apply afresh to vacate the trial, not only because of her son’s health condition but also for “any other good reason” (in paragraph [11] of his minute). As indicated earlier I am adjourning the substantive hearing because I consider that there is good reason to do so.
[17] It is unsatisfactory for the court to deal with interlocutory matters after the close of pleadings date. The purpose of the close of pleadings date is to mark a time by which all interlocutory matters will be completed, including all pleadings, which must include the amounts of any monetary relief. Discovery and inspection of
2 AAM Ltd v Exotica Enterprise Ltd [2017] NZHC 3033.
documents must be completed. After the close of pleadings date both sides should be preparing for hearing, writing statements of evidence, and preparing the common bundle of documents. Time taken to deal with interlocutory applications and to deal with the court’s decisions on those applications disrupts the parties in their preparation for the hearing. In any event, in this case it will not be possible to comply with the directions and still maintain the fixture.
Representation of AAM Ltd
[18] A company can appear in the High Court only through counsel.3 On the other hand in the District Court a company may be represented by its directors.4 If the plaintiffs’ claims were for $350,000 or less, this case could be transferred to the District Court so that Ms Agarbattiwala could appear for the company without a lawyer. As I understand the plaintiffs’ claims, their losses are said to be more than
$350,000 even though they have not been fully calculated at this stage.
[19] Ms Agarbattiwala says that she has been talking to lawyers with a view to their acting for the plaintiffs. The lawyers made it clear that they would not act if the fixture for 11 June were maintained. They did not consider they would have enough time to prepare. As it happens, I am adjourning the matter but I am not adjourning for that reason. I expect Ms Agarbattiwala to have arranged legal representation for the plaintiffs by 30 April 2018 and that, once instructed, the lawyers will move promptly to address my directions for particulars and discovery.
The application for further discovery
3 Re GJ Mannix Ltd [1984] 1 NZLR 309 (CA); Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53, [2013] 2 NZLR 679.
4 District Court Act 2016, s 107(2)(a).
[20] Applications for further discovery are made under r 8.19 of the High Court Rules. In Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd, Asher J set out a four-stage approach in considering applications under the r 8.19:5
(a)Are the documents sought relevant, and if so how important will they be?
(b)Are there grounds for belief that the documents sought exist? This will often be a matter of inference. How strong is that evidence?
(c)Is discovery proportionate, assessing proportionality in accordance with Part 1 of the Discovery Checklist in the High Court Rules?
(d)Weighing and balancing these matters, in the Court’s discretion applying r 8.19, is an order appropriate?
[21] In this case, the defendants point to the plaintiffs’ ongoing duty of discovery, and they refer to the fact that the plaintiffs vacated the premises in Flat Bush from which the business was conducted. That provides them with a foundation for saying that there are documents which would be discoverable under standard discovery and which have not been discovered. They have requisitioned for significant financial records. They have put their documents into three broad categories:
(a)The first is for AAM Ltd, from 21 August 2015 until what they describe as the sale of the New From Zealand business (but which really amounts to the time when the plaintiffs vacated the Flat Bush premises). They seek a wide range of financial records.
(b)The second group is documents for Ms Agarbattiwala from 21 August 2015, again until the date of closure of the premises in Flat Bush.
(c)The third class of documents seeks a similar range of financial records for five named businesses:
(i)Eco-Travel and Remittances;
(ii)Travel Bucket Tours and Travel;
5 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760 at [14].
(iii)Agar Consultancy Ltd;
(iv)NFZ Wine Boutique; and
(v)Mumtaj Agarbattiwala, as a Harcourts Sales Consultant.
Mr Ponniah explained that some financial statements were provided but they offered little useful information and that for the plaintiffs’ claim there must be more extensive financial records. I accept that.
[22] Both sides have accountants assisting them. The plaintiffs have an independent forensic accountant – a Mr Lazelle. He was first engaged by lawyers initially instructed for the plaintiffs. The defendants have an accountant who is known to Mr Ponniah to be independent and was engaged solely for the purpose of this hearing. Apparently he does not otherwise act for the defendants. I expect those accountants to have a good understanding of the financial records they would expect each side to make available to determine financial losses. Each accountant should also be able to ascertain what financial records are held by the party for whom they are instructed. Moreover, the accountants should be able to confer with each other as to documents that are available for discovery and which can be made available. In short, I see benefits in the accountants becoming actively involved in the discovery process to ensure that all relevant documents are produced and that discovery is also proportionate. Rule 8.2 directs co-operation between the parties on discovery. Co- operation can be enhanced in this case if the parties instruct their accountants to liaise with each other as to documents to be collated and made available.
[23] I direct the plaintiffs to make discovery of the documents listed in Schedule A to the defendants’ application. Ms Agarbattiwala was concerned that that would require her to disclose personal bank statements. Mr Ponniah advised me that Associate Judge Christiansen directed similar discovery when the plaintiffs required the defendants to disclose their documents. That was accommodated by a direction he gave in paragraph [36] of his decision, that the income tax returns of Mr and Mrs Karani could be viewed only by the plaintiffs’ accountant, should not otherwise be disclosed to the plaintiffs and were to be returned directly to the defendants’ counsel
when they were no longer required by the accountant. I give similar directions in respect of personal documents of Ms Agarbattiwala including tax returns. I remind all parties that documents disclosed on discovery can be used only for the proceeding and are not to be used for any other purpose or disclosed for any other purpose than this proceeding.
The application for further particulars
[24] Schedule B of the application lists particulars sought for a number of paragraphs in the statement of claim. For a large number of paragraphs the defendants requisition for particulars of loss and damages: paragraphs 27, 29, 31, 34, 37, 41, 60 and 61. Those requisitions are well grounded. As a basic matter, I require the parties to quantify monetary relief before the close of pleadings date. It is unsatisfactory to leave damages to be quantified at or shortly before trial. In a case such as this, the defendants are entitled to know well below the close of pleadings date what losses are claimed, so that their accountant will have the opportunity to examine those losses. I understand that the plaintiffs have still to calculate their losses. Ms Agarbattiwala did not indicate that that information is readily to hand. If the plaintiffs were supplied with that information Ms Agarbattiwala would still be placed in difficulty. If the fixture were maintained, her accountant would be unable to respond in time to enable a brief of evidence to be prepared.
[25] Now for the other particulars. Mr Ponniah accepted after discussion that he no longer sought particulars of paragraph 23 of the statement of claim. The discussion was about clause 7.2 of the agreement for sale and purchase. The clause requires the purchasers to provide a deed of covenant to be executed by the vendors’ directors. The matter can be addressed by evidence as to whether the purchasers’ lawyers did provide a deed of covenant for execution before settlement. More particulars are not required.
[26] For paragraph 22 the defendants seek particulars of clauses (f) and (g) which go to the allegations that the defendants sold products when the plaintiff had bought the business of selling those products. From my discussion with her, it was apparent that Ms Agarbattiwala is aware of the facts which led the lawyers to make those allegations in the statement of claim. Ms Agarbattiwala said that she was still pursuing
further discovery from the defendants. Notwithstanding that, at this stage of the case she should be able to specify what products the defendants continued to sell for which she obtained distribution rights in the agreement for sale and purchase. She instanced, for example, the fact that the defendants continued to show these products on their website. She is accordingly directed to give particulars.
[27] Paragraph 24 of the statement of claim alleges that the defendants failed to hand over all buyers. Again, Ms Agarbattiwala seemed to be aware of the facts that led to that allegation being made. She should specify those facts in particulars for paragraph 24.
[28] The same applies to her allegation in paragraph 25 that the defendants failed to pass on all retail enquiries on a continuous basis. She is required to give those particulars.
[29] Paragraph 26 alleges that the defendants failed to announce in marketing materials that they had handed over the business to the plaintiffs. That suggests that the plaintiffs are aware of marketing material in which the defendants failed to make the announcement within the time required. She should specify what that marketing material is.
[30] Paragraph 30 alleges a breach of the memorandum of understanding. The defendants sold Exotica products to other parties in New Zealand and India in breach of the sole distribution rights given in the memorandum of understanding. The defendants requisition for a description and quantity of Exotica products alleged to have been sold in breach of the memorandum of understanding. The plaintiffs will not be aware of all the quantities and that can be the subject of evidence. But they should specify what those products are.
[31] Paragraph 50 of the statement of claim alleges that the defendants failed to transfer all stock in the business, and retained stock worth $2,700. The plaintiffs should specify what that stock is.
[32] Paragraphs 60 and 61 are allegations that the defendants failed to deliver stock on time. Further particulars are required there. The late deliveries should be specified. The expected dates of delivery should be given; the actual dates of delivery should be given; and the pleadings should make it clear what losses have arisen as a result the delays.
[33] Paragraph 62 in the fourteenth cause of action alleges a failure to pay for stock taken by the defendants on consignment and not returned. More details are required to identify what that stock was, when it was delivered, when payment was due and not made.
[34] I am satisfied, accordingly, that those particulars are required to enable the defendants to know the case against them, so that they can prepare for trial. I direct the plaintiffs to supply those particulars by 28 May 2018.
The security for costs application
[35] The defendants point to conduct of Ms Agarbattiwala which suggests that she is realising assets. The leased premises at Flat Bush have been closed. Ms Agarbattiwala, a real estate agent, has placed her home on the market for sale. They also refer to advertisements by her showing a business for sale. If AAM Ltd were the only plaintiff, I would be concerned and would consider ordering security. I treat corporate plaintiffs and plaintiffs who are “natural persons” differently. If AAM Ltd were the only plaintiff, I accept that there is a reasonable risk that costs will not be paid if the defendants succeed. To all appearances, the business of AAM Ltd appears to be struggling. It has had negligible income. On the other hand, Ms Agarbattiwala is a plaintiff. That changes matters. If the plaintiffs fail, she will have to pay costs of the plaintiffs to the defendants. I consider that she would be well- motivated to pay an order for costs because the alternative for her would be personal bankruptcy. I consider that like other people, she would be strongly motivated to avoid bankruptcy.
[36] Accordingly, there is an appropriate mechanism in place for any concern that costs to the defendants will not be paid. Ms Agarbattiwala is likely to be motivated to
pay the order for costs even if she is unsuccessful. That will only fail if she ceases to be a plaintiff. Accordingly, I make an order that Ms Agarbattiwala is to remain a plaintiff in the proceeding up to and after the hearing and until judgment. This is to ensure that she will remain good for any order for costs that may be made against AAM Ltd as well as herself.
[37]I summarise where this has got to:
(a)I vacate the fixture for 11 June 2018;
(b)I direct a case management conference no earlier than 1 June 2018. That is to be a face-to-face conference with the lawyers. That conference will review compliance with the orders in this decision. It will also give directions towards a hearing in 2019.
(c)I allocate a fixture for this case for 29 April 2019 for five days.
(d)I order the plaintiffs to give particulars by 28 May 2018, in terms of my decision.
(e)I order the plaintiffs to file and serve an affidavit of documents, disclosing the documents in the Schedule to the defendants’ application by 28 May 2018.
(f)I do not make any order on the security for costs application, other than that Ms Agarbattiwala is required to remain a plaintiff in the proceeding.
[38] I expect the plaintiffs to have legal representation by 30 April 2018. If not, the plaintiffs should understand that more rigorous orders may be made against them in the future.
[39] Mr Ponniah seeks costs, saying that the defendants have been successful on the application. Ms Agarbattiwala resists costs being fixed and runs arguments of personal circumstances. My assessment is that the defendants have been successful
on their application for particulars, and successful on their application for discovery, but have generally not succeeded on the application for security for costs. The other matter is that they delayed in making their applications for security for costs, further particulars, and further discovery. The deficiencies in discovery and the pleadings were apparent long ago. It has been inconvenient that the application has been brought so late. That was in contrast to the plaintiffs who did apply in a timely way for discovery. That delay counts against the defendants. I will discount the costs I will order against the plaintiffs. I order costs on a category 2 basis but I discount costs by 25 per cent on account of the delay. I direct the defendants to write to the plaintiffs’ lawyers (once they have been appointed) with a view to the parties agreeing on costs. If agreement cannot be reached I will decide costs on the papers.
……………………………….
Associate Judge R M Bell
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