Baker v Libeau

[2022] NZHC 2826

IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY

I TE KŌTI MATUA O AOTEAROA WAIHŌPAI ROHE

CIV-2021-425-17

[2022] NZHC 2826

BETWEEN

ROBERT DARCY BAKER

Plaintiff

AND

JEAN-MICHEL LIBEAU

First Defendant

LINCSPUN LIMITED
Second Defendant

LIBEAU LIMITED

Third Defendant

Hearing:

19 October 2022

Appearances:

B B Gresson for Plaintiff (via VMR)

N C T Batts and H F K Whitney for Defendants (via VMR)

Judgment:

31 October 2022

JUDGMENT OF ASSOCIATE JUDGE LESTER

BAKER v LIBEAU [2022] NZHC 2826 [31 October 2022]

[1]    Mr Libeau is the director of Lincspun Limited which is in the business of manufacturing and selling yarns and fabrics under the Lincspun trademark. He is the sole director and shareholder of Libeau Limited.

[2]    The plaintiff, Mr Baker, wished to invest in the intellectual property behind Lincspun Ltd’s business.

[3]    On 4 May 2015, Mr Baker and Mr Libeau entered into an agreement which is recorded in an email (the contract). The subject line of the email is: “Investment in new LincSpun Tech company”. A new company was to be formed which:

… will acquire all intellectual property and royalty income of Mr Libeau’s existing Lincspun company. Except royalty income to cover all expenses of running the existing New Zealand and European companies.

[4]    Mr Baker committed to invest USD $150,000 in exchange for 20 per cent of the new Lincspun company (Lincspun Tech Limited). The email recorded the investment will mainly go to pay for patent and company costs to “take the new company through to its next level”.

[5]    The following year, Mr Baker invested a further USD $10,000, increasing his shareholding in Lincspun Tech Limited to 26 per cent. The balance of the shares are held by Libeau Ltd. Libeau Ltd and Mr Libeau between them own 93 per cent of the shares in Lincspun Ltd.

[6]    Mr Baker and Mr Libeau have fallen out.   On 8 March 2021, Mr Baker   gave notice cancelling the contract. In this proceeding, Mr Baker alleges the defendants breached the contract by failing to transfer to Lincspun Tech Ltd all intellectual property and royalty income from Mr Libeau’s other Lincspun companies. Mr Baker also alleges Mr Libeau took for his own benefit the USD $150,000 paid by Mr Baker when the contract refers to those funds being used as set out in [3] and [4] above.

[7]    Mr  Baker  seeks  relief  under  s 43  of  the   Contract   and   Commercial Law Act 2017 (CCL Act) in such sum as the Court thinks fit, and orders under s 174

of the Companies Act 1993 (the Act) that Mr Libeau acquire his shares.  In short,  Mr Baker wants to exit his investment and sever his ties with the defendants.

History of these proceedings

[8]    The  proceeding  was  commenced  in  March  2021.   The  defendants  filed  a counterclaim in December 2021. The close of pleadings date was 30 May 2022.

[9]    On 5 July 2022, counsel then instructed for the defendants sought and subsequently obtained leave to withdraw. Mr Baker says matters disclosed by former counsel, in his application for leave to withdraw, gave Mr Baker for the first time reason to believe the defendants would be unable to pay costs in the event their counterclaims failed. That led to Mr Baker seeking security for costs in respect of the counterclaims, that application being filed 12 August 2022.

[10]   Accordingly, leave is required for that application, it being filed after the close of pleadings date. In addition, Mr Baker sought orders for further discovery. Both applications were heard on 19 October 2022.

Application for security for costs

Leave

[11]   The defendants did not actively oppose the grant of leave, rather they relied on the fact the application for security has come late in the piece. The substantive hearing commences 17 April 2023.

[12]   I consider it appropriate to grant leave. The disclosure said to show the reason to believe the defendants will be unable to pay costs only came to Mr Baker’s knowledge with the application for leave to withdraw. The application for security was filed within a reasonably short time of that disclosure. That said, the issue of delay will be relevant should the threshold for the ordering of security be satisfied.

Threshold for the ordering of security

[13]   Mr Baker, as the counterclaim defendant, says there is reason to believe the counterclaim plaintiffs will be unable to pay adverse costs if their claims are unsuccessful.

[14]   The defendants’ former counsel, in his application to withdraw as counsel, filed an affidavit where the ground advanced for leave was the inability of the defendants to meet his retainer and in particular “the costs which shall be imminently incurred in

… bringing the matter for trial”. In that affidavit, counsel said he had:

… provided Mr Libeau numerous opportunities to put forward a payment plan or alternative proposal as to how … fees are to be met but unfortunately no resolution has been reached on this subject.

[15]   Mr Gresson, counsel for Mr Baker, submitted it is reasonable to infer from this evidence that the defendants were not in a position to pay either their own fees or costs that might be awarded against them.

[16]   In the affidavit of counsel seeking leave to withdraw, sworn 5 July 2022, counsel said he had advised Mr Libeau many months earlier that he was unable to proceed further with trial preparation without satisfactory arrangements being put in place in relation to fees. The affidavit said Mr Libeau had been acting for himself since 11 May 2022 and that counsel had not received instructions to act for the corporate defendants.

[17]   In an affidavit sworn in opposition to the application for security, Mr Libeau says he does not agree with former counsel’s suggestion that he was provided with numerous opportunities to put forward a payment plan or alternative payment proposal as to how fees were to be met.     Mr  Libeau asserts he withheld fees because of      a disagreement:

about some correspondence that was missed, which I thought was vital to the defendants’ claim. It was not because I did not have the money to pay …

[18]   However, Mr Libeau then says he does not wish to waive privilege in relation to his correspondence and discussions with his prior counsel and says he has now paid all outstanding fees.

[19]   The defendants’ new counsel, Mr Batts, says prior counsel’s assertions are untested. Given Mr Libeau has not waived privilege in relation to his communications with prior counsel on this issue, I am not sure how prior counsel’s claims could be tested.

[20]   Mr Batts submitted relying on counsel’s affidavit is problematic as the affidavit was not filed in support of the application for security. Mr Batts suggests, if the affidavit had been filed in support of the application for security; “[i]t is possible that the defendants would have applied for leave to cross-examine him on his evidence”. How that could have been done while Mr Libeau maintained he was not waiving privilege is unclear.

[21]   Mr Batts submitted Mr Libeau has given sworn evidence that fees were not discussed with him and that he withheld fees due to a disagreement. Mr Batts notes there has been no request to cross-examine Mr Libeau on this aspect of his evidence. That may well be because Mr Libeau maintains privilege in respect of these issues.

[22]   Mr Batts then submitted it is questionable whether the affidavit of prior counsel is admissible given that it arguably goes further than was necessary to support his application to withdraw. Mr Batts again notes that Mr Libeau has not waived privilege in respect of communications with former counsel.

[23]   Mr Batts submitted the Court can place no reliance upon the affidavit of former counsel. It would be a serious matter for this Court to dismiss as unreliable a sworn affidavit of counsel. As is required by r 5.41(5) of the High Court Rules 2016 (the Rules), the affidavit of counsel filed in support of the application to withdraw was served on the defendants. No issue was taken at that time by the defendants with the affidavit.

[24]   As noted by Mr Gresson, counsel who sought leave to withdraw expressly said it was on the basis of an inability to pay as opposed to a refusal to pay. Mr Batts submitted the reference to the defendants being unable to pay should be read as “have not met” former counsel’s costs. Mr Batts submitted it is far from uncommon where counsel seek leave to withdraw that they have not been paid. That may well be the case but the affidavit here describes attempts to make suitable arrangements in respect of fees present and future over a period of months. Mr Batts submitted the affidavit could not be equated with an actual investigation of the defendants’ means. Again, so much is true but the threshold is whether there is reason to believe the defendants will be unable to pay costs, not whether such is conclusively established following something akin to an audit of their financial position.

[25]   Mr Batts went so far as to say that it was improper or inappropriate to rely on the affidavit in support of the present application. Mr Batts submitted that it put new counsel into a difficult position in that it may mean new counsel are obliged to disclose their own funding arrangements with the counterclaim plaintiffs in order to rebut the impression created by counsel departing who says they have not been paid. Mr Batts did not explain his funding arrangements here but it was suggested an inference was available from the fact new counsel were acting that suitable fee arrangements have been put in place. I accept that inference is available but, as Mr Gresson submitted in reply, without knowing what those arrangements are, the fact new counsel have been instructed does not take the matter much further.  Security  for  fees  could  have been offered from a non-party, payment made upfront, or some other form of security provided. We simply do not know.1

[26]   Rule 7.32 of the Rules permits an affidavit already filed in a proceeding to be used in the disposal of any application if prior notice of the intention to rely on that earlier affidavit is given. Notice here was given in the application for security for costs, which is good notice pursuant to r 7.32(1)(a) of the Rules. Mr Batts submitted that r 7.32 was aimed at affidavits filed on behalf of a party and that an affidavit filed by counsel in support of an application to withdraw was in quite a different category.

1      In applications to withdraw by counsel on the basis of funding issues, the better practice will be for counsel to seek an order that the affidavit not be made available to other parties.

He characterised it as a non-party affidavit which should not be treated as being caught by r 7.32.

[27]   I do not accept that submission. The Rules provide that counsel seeking leave to withdraw must make an interlocutory application supported by an affidavit giving the grounds for that application.2 That application and affidavit then become part of the Court record subject to any directions that may be made restricting access when the affidavit is filed. I see no reason to read down the scope of r 7.32 in the way suggested by Mr Batts.

[28]   As  to  the  admissibility  of  the  affidavit  in  terms  of  s 53  of  the  Evidence Act 2006,  I  am  satisfied  Mr Libeau  waived  privilege  in  respect  of   the contents of that affidavit. Mr Libeau did not object to the affidavit when it was filed and served upon him.

[29]   On that basis, I have had regard to the affidavit filed by former counsel and consider it provides reason to believe the defendants would be unable to pay costs if their counterclaim is unsuccessful. As Mr Gresson notes, an applicant for security must be able to point to credible or believable evidence of an inability to pay but proof on the balance of probabilities is not required.3

[30]   Even if I am mistaken  in  having  regard  to  the  affidavit  of  counsel,  as  Mr Gresson notes, strict adherence to the usual rules of evidence is not required. The Court can consider any information from which it can reasonably be inferred that the respondent to the application will not be able to pay costs.4

[31]I am satisfied that the threshold under r 5.45(1)(b) is satisfied.

Is counterclaim in substance a defence?

[32]   Mr Gresson  notes  security   has   generally   been   refused   in   respect   of a counterclaim which is in substance only a defence to the plaintiff’s claim.

2      Robert Osborne (ed) McGechan on Procedure (online ed, Thomson Reuters) [HR 5.41.02].

3      Nicon Ltd v Tower Insurance Ltd [2016] NZCA 66, (2016) 23 PRNZ 135 at [18] and [20].

4      Nicon Ltd v Tower Insurance, above n 3, at [18] – [21].

Mr Gresson submits that if the counterclaim goes further than answering the plaintiff’s claim and can be seen as an independent claim of its own then the fact that it is        a counterclaim is not an impediment to security being ordered.5

[33]   Mr Batts’ submissions did not seek to argue the counterclaims were in substance a defence to Mr Baker’s claim.   However, Mr Gresson accepts there is     a degree of interconnectedness between the first counterclaim and Mr Baker’s claim. Nonetheless, Mr Gresson submitted the second and third counterclaims could succeed or fail regardless of Mr Baker’s claim. Mr Batts submitted the counterclaim really completes the background to the plaintiff’s claim which would have to be traversed in any event. Mr Gresson submitted in reply that the counterclaim introduces fresh factual and legal issues that would not have to be traversed in the plaintiff’s claim.    I accept Mr Gresson’s submissions on this point.

Merits of the counterclaims

[34]   As best as possible, given the stage the proceeding has reached, the merits of the counterclaim need to be considered. The weaker the claim of the party from whom security is sought, the more likely it is security will be ordered.

[35]   I note here none of the defendants allege if they are ordered to pay security it will prevent them from pursuing their counterclaims. This is significant. Where an order for security would prevent a claimant being able to have access to justice, it has been said the merits of their claim must be so poor as to meet the strike-out standard before security will be ordered.6

First Counterclaim: wrongful repudiation of contract by Mr Baker

[36]   Mr Libeau pleads that Mr Baker’s purported cancellation of the contract was itself a repudiation of the contract accepted by Mr Libeau. Mr Libeau pleads that as  a result of the repudiation he has suffered or is likely to suffer loss “in a sum to be specified prior to trial”.

5      McCracken v Burt HC Auckland CIV-2006-404-006027, 24 May 2007 at [48] to [57].

6      Robert Osborne (ed), above n 2, at [HR 5.45.03(1)].

[37]   As Mr Gresson notes, Mr Baker’s primary obligation under the contract was to inject funds in exchange for shares, which occurred in 2015. Just what further obligations Mr Baker had under the contract, which he has not satisfied, is not specified.

[38]   This counterclaim appears to be weak on the issue of quantum. Liability will turn on whether Mr Baker was entitled to cancel the contract or not. On my reading of the contract there were no outstanding obligations owed by Mr Baker at the time of cancellation.

[39]   In this counterclaim, as in the others, no particulars of loss are provided. I will deal with that issue in respect of all counterclaims below.

Second counterclaim: breach of contract

[40]   It is not immediately clear from the statement of counterclaim which counterclaim plaintiff/defendant is making this claim. This is an allegation of a breach of what is said to be an express or implied term of the contract that Mr Baker would “Comply with all reasonable respects in ensuring the success of the Company”.

[41]   I have assumed that the above is meant to read “… all reasonable [requests]…” but of that I am not certain. The company is Lincspun Tech Ltd. No such express term exists in the contract. The prospects of such a term meeting the high threshold for an implied term to me appear weak.

[42]The second “express or implied” term relied on is that Mr Baker:

Would do nothing to interfere with the business or rights of the Company, its relationship with its global licensee, the Second Defendant, Lincspun Limited or Lincspun Limited’s relationship with its sub-licensees.

[43]   Lincspun Tech Ltd is not a party to the contract or this proceeding. There is nothing in the 4 May 2015 email recording the agreement which would permit Lincspun Ltd to rely on subpt 1 of the CCL Act to say it was a designated party with the benefit of rights under the contract.   Nor is it pleaded that the  contract was        a pre-incorporation contract on behalf of Lincspun Tech Ltd which was not

incorporated until 21 July 2015. In short, the named defendant, Lincspun Ltd, cannot bring a counterclaim against Mr Baker in contract for obligations it is said are owed to Lincspun Tech Ltd. The second counterclaim appears to be weak as presently pleaded.

Third counterclaim: unlawful interference in contractual relations

[44]   The third counterclaim pleads the economic tort of unlawful interference in contractual relations.

[45]   Lincspun Ltd held a Global Licence Agreement from Lincspun Tech Ltd under which Lincspun Tech Ltd agreed to supply Lincspun Ltd with the right to use and acquire royalty income for all intellectual property associated with the Lincspun trademark.

[46]   The allegation is that Mr Baker interfered directly in Lincspun Ltd’s contractual relationships with a number of licensees thoroughly the world. Details of the licence holders said to have been contracted by Mr Baker are pleaded.

[47]   In respect of this cause of action, it is pleaded that as a result of Mr Baker’s alleged interference:

…loss and damage have has been caused to the First Defendant, the Second Defendant, Lincspun Limited, to the Company and to the shareholders of the said companies including the Third Defendant and to the First Defendant as sole shareholder of the Third Defendant.

[48]   Mr Baker acknowledged he contacted some of the licensees of Lincspun Ltd, but denied interfering in Lincspun Ltd’s contractual relationships. No correspondence from disgruntled clients of Lincspun Ltd has been produced, that is, correspondence from licensees of Lincspun Ltd querying or complaining about contact from Mr Baker. Had Mr Baker’s alleged contact caused licensees to withhold royalty payments or not renew contracts, one would expect some correspondence on those issues.

The loss pleaded

[49]   As noted in respect of all causes of action, no particularised loss has been pleaded. Damages are sought in a sum to be specified prior to trial. It is pleaded that full particulars will be provided following the completion of the defendants’ enquiries, discovery and investigations. The counterclaim filed on 6 December 2021 claimed that as at that date there had been refusals to pay and/or delays in payments of royalties by licensees.

[50]   Mr Libeau claims delay in quantification is a result of the defendants’ accounts not yet being finalised. It is said the accounts can only be finalised once certain tax information is available from overseas.

[51]   This is unconvincing. Lincspun Ltd must be able to identify what royalties it was contractually entitled to and when and which were not been paid and link non-payment to the actions of Mr Baker.

[52]   Given in an application for security for costs the merits of the claim in question are an important consideration, I would have expected Mr Libeau to have provided at least a thumbnail sketch of the losses identified to date, even if such cannot be provided in the type of detail required for a pleading or could only be presented as provisional figures. His unwillingness or inability to do so, in my view, is an indicator of the weakness of the counterclaims particularly when coupled with the absence of direct evidence of complaints from licensees of Lincspun Ltd.

Delay

[53]   Mr Gresson properly  accepts  there  has  been  delay  in  this case.  Delay  is a matter that goes to the exercise of the Court’s discretion.7

[54]   The reason for the delay is explained, that is, the timing of the application to withdraw.

7      Jo v Johnston [2013] NZHC 552 at [25].

[55]   Mr Libeau refers in general terms to the impact that an order for security would have on his budgeting. Again, Mr Libeau does not say that it would be impossible to provide security but his evidence does say that an order for security would place him in a very awkward position in terms of planned expenditure.

[56]   In some ways Mr Libeau’s claim sits uneasily with his assertion Lincspun Ltd has, in terms of the management accounts, enjoyed a net profit of in excess of

$250,000. If anything, Mr Libeau’s claim that an order for security would place the defendants in an awkward position confirms my own view there is reason to believe the defendants will be unable to pay costs.

[57]   I note here that I have not overlooked the financial information provided in relation to Lincspun Ltd. That information does not give me confidence that, by the time of the hearing in April 2023, Lincspun Ltd will be able to pay a costs award. Financial information on behalf of the other defendants has not been provided beyond the assertion that costs could be paid.

[58]   However, there is something in Mr Libeau saying this application was unexpected. In my view, Mr Libeau’s concerns can be met through the timing of security rather than the application being declined.

The quantum of security

[59]   Security is sought in the sum of $39,090. That sum is based on a 2B costs calculation for steps after the filing of the application. It also includes hearing fees payable by Mr Baker said to represent the percentage of the hearing that will be taken up with dealing with the counterclaim as opposed to Mr Baker’s claim. The hearing is set down for seven days with Mr Gresson calculating four days will be required to deal with the counterclaim. That estimate is not disputed. Mr Gresson notes the quantum of security does not include likely expert witness’ disbursements. Mr Batts does not make submissions in relation to the quantum of security.

[60]   I fix security in the sum of $30,000. That is to be paid in two tranches; the first instalment of $15,000 is to be paid by Friday 16 December 2022. If that amount is not paid by that date then the counterclaims will be stayed until it is paid. The

second instalment of $15,000 is to be paid by Friday 3 March 2023. Again, if that amount is not paid by that date the counterclaims will be stayed.

[61]   This staged and delayed payment is to recognise that the application for security has come late in the piece at a time when Mr Libeau was entitled to assume the time for making such an application had passed. The quantum of security is in part to recognise that the counterclaim by the defendants is in essence the other side of the coin of Mr Baker’s claim to have cancelled the contract.

Costs

[62]   There is no reason why costs on this application should not follow the event on a 2B basis, together with disbursements as fixed by the Registrar. The hearing took a quarter-day. I so order.

Mr Baker’s application for further discovery

[63]   By the time of the hearing, the outstanding discovery issues had been significantly narrowed.

[64]   Of the outstanding categories, the first was the end of year financial statements/annual accounts for Lincspun Tech Ltd. (Mr Batts acknowledged these were in the course of preparation and would be provided when they were completed. He was not able to give a date for their completion).

[65]   Category 2 was end of year financial statements/accounts for Lincspun Ltd for the financial year ended 2021. Mr Batts accepted this category is discoverable. He was not sure if the documents existed. If they do not exist then an explanation as to why that is the case should be forthcoming.

[66]   I deal with the next category out of order and that is Category 8 being email correspondence between Mr Libeau and the email address for Mr Baker at Lincspun Tech Ltd relevant to specified paragraphs in the statement of claim. Mr Batts accepted this category was not in issue and the documents would be provided.

[67]   The last category concerns documents from 2015 to the present: “[I]dentifying contracts or deeds between Lincspun Ltd and its clients/licensees, and royalty income paid by those clients/licensees”.

[68]   Mr Batts explained the defendants had concerns Mr Baker would use client details to contact those clients and interfere in the defendants’ business operations. While they accept the documents are relevant, they seek an order the documents be disclosed to Mr Baker’s counsel only.

[69]   Given the counterclaim lists a number of licensees it is alleged Mr Baker contacted, the identity of those licensees is not confidential.

[70]   The interim position reached at the hearing is that the above category of documents are to be discovered and the material provided to Mr Gresson. To the extent that material relates to licensees identified in the counterclaim, it is not confidential and may be provided to Mr Baker. Again, the confidentiality concern was not with the contents of the documents but that making the documents available may identify the names of licensees.

[71]   If licensees, in addition to those named in the counterclaims, are identifiable as a result of the disclosure of this category of documents, the interim position is that those documents are to remain confidential to Mr Gresson. Counsel are then to liaise as to whether  redactions or undertakings can be agreed in respect of that  material.  If agreement cannot be reached then leave is reserved for that issue to be dealt with at a telephone conference.

[72]   Should there be any issue in relation to the provision of the document referred to at [64] and [65], leave is reserved for such to be raised at a telephone conference.

Costs

[73]   Costs in respect of Mr Baker’s discovery application are reserved. If either party wishes to seek costs then memoranda, of not more than five pages, should be filed within five working days of the date of this Judgment. If no memoranda are filed

then the order of the Court in respect of this application is that costs lie where they fall.

[74]   I mentioned to counsel that, with the hearing date approaching, the parties need to finalise the quantum of their respective claims and plead other claimed damages with appropriate detail. That needs to be completed before directions in relation to the exchange of evidence can be finalised. Counsel should also keep in mind that if experts are instructed they will be required to complete a joint expert report.

[75]   There will be a telephone conference with me on 16 November 2022 at 3pm to address progress on these issues. Counsel are to file a (preferably) joint memorandum by 5pm on 14 November 2022.

Associate Judge Lester