Blakeley v Schist Solutions Limited

[2012] NZHC 632

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-7217 [2012] NZHC 632

BETWEEN  RICHARD BRENDAN BLAKELEY, SALLY ANN BLAKELEY AND JENNIFER LINDSAY BLAKELEY Plaintiffs

ANDSCHIST SOLUTIONS LIMITED First Defendant

ANDISLAND STONE NZ LIMITED Second Defendant

ANDPETER JOHN FLINT Third Defendant

ANDMICHELLE KAY HUNTER Fourth Defendant

Hearing:         9 March 2012

(Heard at Auckland)

Counsel:         G. Weir - Counsel for Plaintiff

K. Paterson - Counsel for Defendant

Judgment:      3 April 2012

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This judgment of Associate Judge Gendall is delivered on 3 April 2012 at 4.00 pm under r 11.5 of the High Court Rules.

Solicitors:           D.L.A. Phillips Fox, Solicitors, PO Box 160, Auckland

Buddle Findlay, Solicitors, PO Box 322, Christchurch

RB BLAKELEY, SA BLAKELEY AND JL BLAKELEY V SCHIST SOLUTIONS LIMITED & ORS HC AK CIV-2010-404-7217 [3 April 2012]

Introduction

[1]      This  proceeding  concerns  claims  by  the  plaintiffs,  as  trustees  of  the Chantafex Trust, against the defendants arising from an alleged joint venture for the manufacture and sale of schist cladding between July 2007 and September 2009. Before me is an application by the second to fourth defendants (the applicants) for an order for further and better discovery. The applicants seek discovery of bank statements for all accounts to which one of the plaintiffs, Richard Brendan Blakeley (Mr Blakeley), held or had access for the period 1 July 2007 to 1 October 2008.

[2]      This application is opposed by the plaintiffs.

Background

[3]      Schist Solutions Limited (SSL), the first defendant, is a company involved in the manufacture and sale of lightweight schist cladding. The plaintiff Chantafex Trust is a minority shareholder (45%) in SSL, and the plaintiffs, Mr Blakeley, Sally Blakeley and Jennifer Blakeley are trustees of that trust. Peter John Flint (Mr Flint)

and  Michelle  Kay  Hunter  (Ms  Hunter),  the  3rd   and  4th   defendants,  control  the

remaining 55 % of SSL.  Mr Blakeley, along with the third defendant Mr Flint, was appointed director of SSL, and employed as managing director of SSL between 1

November 2008 and 25 August 2009.

[4]      SSL was formed out of the activities of Island Stone NZ Limited (ISL) the second defendant in 2007. ISL is wholly owned by the 3rd and 4th defendants, and it engaged Mr Blakely as an independent contractor to assist Mr Flint in the development of a new lightweight schist concept. The parties discussed options for an ongoing project, and agreed to establish a separate entity in the form of SSL, with Mr Blakeley or his interests to hold a minority shareholding. ISL then sold part of its business to SSL under an Agreement for Sale and Purchase dated 31 October 2007.

[5]      As the SSL business progressed, disputes arose between Mr Blakeley and Mr Flint while Mr Blakely was managing director of SSL, which led in August 2009 to his dismissal from that role.   The plaintiffs issued these proceedings against the defendants, SSL, ISL, Mr Flint and Ms Hunter, alleging that all were parties to a verbal joint venture agreement, entered into in July 2007, which was breached when

the defendants diverted business away from SSL and failed to account for profits due to SSL.  The plaintiffs also seek relief here from what they claim is oppression as minority shareholders of SSL.

[6]      The defendants deny the plaintiffs’ allegations in their entirety.  They deny that a joint venture was ever in existence, and if they are wrong and it was in existence, deny that its terms were breached.   The defendants maintain that the business of SSL has been conducted entirely properly throughout and in accordance with arrangements agreed between the parties.   The defendants have also filed a counter claim alleging that Mr Blakeley breached his duties as a director and employee of SSL and also his fiduciary duty to avoid any conflict between his personal  interests  and  his  obligations  to  Mr Flint,  SSL and  ISL.    They say he converted property belonging to SSL.  As an example, the defendants claim that Mr Blakeley wrongfully engaged in a personal Biochar project, which involved him using SSL land to cultivate plants and trial an innovative fertiliser product. This use of SSL’s resources for personal benefit is said to be in breach of the duties he owed to SSL. The plaintiffs admit that Mr Blakeley had an interest in the Biochar project, but claim that it was known to all relevant parties and did not conflict with any of Mr Blakeley’s duties to SSL.

[7]      The substantive proceedings are at a preliminary stage. The plaintiffs have not yet quantified their claim.  As I understand the position, however, the defendants have quantified their counterclaim at the sum of $162,958.08.

[8]      As a preliminary matter, the second to fourth defendants bring this present application  seeking  discovery  of  Mr  Blakely’s  bank  account  statements  for  the period  noted  at  [1]  above,  which  are  said  to  be  relevant  to  the  substantive proceeding. Discovery orders in this proceeding were first made on 21 February

2011, and the parties exchanged affidavits of documents. The defendants sought further discovery from the plaintiffs of bank statements for all accounts held by Mr Blakeley, dating back to July 2007. The plaintiffs have provided bank statements as requested from 1 October 2008, and the defendant now seeks bank statements for the earlier period 1 July 2007 to 1 October 2008. The plaintiffs resist this application for discovery on the grounds that  they contend these documents do not relate to a

question in this proceeding and also that they contain personal, private and confidential information.

Rules of discovery

[9]       As a preliminary issue here, there appears to be some confusion between the parties as to the set of discovery rules that governs this present application. As to this, the defendants seem to rely on the former Rule 8.24 High Court Rules which states:

8.24     Order for particular discovery against party after proceeding commenced

If at any stage of the proceeding it appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered, the Judge may order that party—

(a)       to file an affidavit stating—

(i)          whether the documents are or have been in the party's control; and

(ii)        if they have been but are no longer in the party's control, the party's  best  knowledge and  belief  as  to  when  the  documents ceased to be in the party's control, and who now has control of them; and

(b)        to serve the affidavit on any other party.

[10]     The defendants must establish a belief that the party is in possession of a document or class of documents that relate to any matter in the proceeding. The test under this old rule as to whether a document was relevant, in that it related to a question in the proceeding, was an expansive one and was set out in Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co:[1]

It seems to me that every document relates to matters in question in the action which not only would be evidence upon any issue, but also which, it is reasonable to suppose, contains information which may — not which must — either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in the words ‘either directly or indirectly’ because, as it seems to me, a document can properly be said to contain information which may enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary if it is a document which may fairly lead him to a train of inquiry which may have either of those two consequences.

[1] (1882) 11 QBD 55 at 63

[11]     The concept of relevance was more expansive under the former set of rules,[2] in that a document was discoverable if it might be relevant to any matter in question in the proceeding, or if it might fairly commence a chain of enquiry leading to relevant documents. The recent amendments to the High Court Rules, which applied as from 1 February 2012, change the standard test for discovery orders from the Peruvian Guano approach to an “adverse documents test” and direct relevance approach. The four categories of documents that are discoverable under the new r 8.7 of the High Court Rules are:

a.         Documents on which the party relies;

b.        Documents that adversely affect that party’s own case; c.      Documents that adversely affect another party’s case; d.    Documents that support another party’s case.

[2] M v L [1999] 1 NZLR 747 at 750

[12]     If proceedings are filed and discovery orders are in place before 1 February

2012, when the new rules took effect, discovery continues in accordance with the existing discovery order. However, if one of the parties wishes to amend the existing order, pursuant to new r 8.17, the Court has power to determine the application in accordance with the new discovery rules. The defendant claims that the documents sought here fall within the original discovery orders made in February 2011. They say that the present application filed 8 December 2011 is effectively a request to enforce that order as opposed to an amendment or a new request for discovery, and the Peruvian Guano approach applies.  The plaintiffs appear to dispute this.

Relevance

[13]     In any event, I need not necessarily resolve this issue here, as I am not satisfied that the recent changes in the discovery rules materially affect the defendants’ position in this case. Regardless of which of the two tests are applied, for the reasons I will outline below, in my view the documents are sufficiently

relevant  to  the  issues  in  these  proceedings  that  I conclude  that  they should  be discovered.

[14]     The second to fourth defendants allege that the bank statements in question provide assistance to their counterclaim that if a joint venture was entered into in July 2007 (which in any event they deny), Mr Blakeley breached his fiduciary duties as a joint venture partner and as a contractor to ISL, by engaging in conflicting business practices in the Biochar project. The bank statements requested they say would show the extent of Mr Blakeley’s involvement in that project, including any income received. As the plaintiffs’ allegation is that a joint venture was entered into as early as July 2007, bank statements from that date are said to be relevant to the counterclaim. The applicants further state that the bank statements are relevant to their additional claim that Mr Blakeley allegedly generated false invoices in 2009, as they may set off a train of enquiry to show other false invoices issued earlier.

[15]     In response, the plaintiffs contend that the bank statements sought are simply not relevant to any matter at issue in the proceeding. The plaintiffs do concede that Mr Blakeley’s personal finances may be relevant to the counterclaim while he was an employee of SSL which was from 1 November 2008 to 25 August 2009, which is consistent with their earlier voluntary disclosure of bank statements for that time period. However, the plaintiffs argue that Mr Blakeley’s personal finances cannot be relevant during the pre employment period for two reasons. The first is that, although Mr Blakeley may first, have owed fiduciary duties under the alleged joint venture, and secondly, have owed director’s duties by virtue of being appointed a director of SSL, the Biochar project was not in breach of those duties as it did not relate directly to the subject matter of the joint venture. The plaintiffs say that Mr Blakeley did not owe a general duty not to engage in other business, and therefore the bank statements would only be relevant if they related to a matter which conflicted with the subject matter of the joint venture. On this, the plaintiffs rely on the Supreme Court decision in Chirnside v Fay, where joint venture partners were described as being under an obligation of loyalty, and were required to put the interests of the partnership ahead

of their own personal interests in matters that were relevant to the joint venture.[3] The plaintiffs here claim that there was no breach of duty, because any personal interests that Mr Blakeley may have had were with regard to matters completely separate to the joint venture, and could not be said to be relevant to that venture such that it called into question loyalty issues.

[3] Chirnside v Fay [2006] NZSC 68, at [15] and [74].

[16]     The second reason why the plaintiffs contend that the documents sought here are irrelevant is their claim that none of the alleged breaches of duty could have taken place within the period covered by the bank statements. The main breach of duty alleged seems to target Mr Blakeley’s involvement in the Biochar project, in that it is said Mr Blakeley used facilities at SSL’s Cromwell factory site to develop the fertiliser, and then personally benefitted from the resulting income. Therefore, the plaintiffs allege that any breach in respect of these activities must have occurred after the Cromwell factory was established which was not until November 2008. It follows,  according  to  the  plaintiffs,  that  any  income  from  the  development  of Biochar would not appear in bank statements prior to 1 October 2008, and therefore the pre employment bank statements are simply not relevant.

[17]     In response, before me the applicants argued that there can be no doubt in this case that the bank statements at issue may be relevant to this proceeding.   The plaintiffs at para 14 of their Amended Statement of Claim allege that a joint venture was entered into in July 2007.   While the defendants deny that proposition, they contend here that they are entitled to pursue the alternative position that if a joint venture was entered into as alleged, Mr Blakeley breached his consequential duties by engaging in conflicting business enterprises.   They say these are not baseless allegations, nor are they speculative.   They note that Mr Blakeley has admitted involvement with the Biochar project and they contend the defendants should be entitled to assess the extent of that involvement during the period of the alleged joint venture.  A key aspect of that assessment is identifying any income received at the

time.

[18]     The applicant’s position is simply that the plaintiffs cannot have it both ways. If they wish to argue that a joint venture came into being in July 2007 then the defendants say they are entitled to scrutinise Mr Blakeley’s other business interests from that time in order to advance their case for alleged breach of his fiduciary duties.

[19]     In advancing these arguments, the applicants rely on my decision in Bennett v Haven Vehicles Grays Road Limited and Ors,[4]where I ordered discovery of bank statements in an action concerning a disputed joint venture in not dissimilar circumstances to the present case.  In Bennett the joint venture was entered into for the purchase and operation of certain farming properties. The bank account at issue was an account of one of the alleged joint venture partners, and it showed deposits and withdrawals of income relating to the farming operations. Funds from the first defendant, which was set up as a vehicle for the joint venture, were transferred to the

accounts  at  issue,  and  thus  disclosure  of  those  accounts  was  necessary  for  the plaintiff  to  determine  the  movements  of  the  proceeds  from  the  joint  venture operation. The accounts at issue in that case were arguably on their face more central to the issues in dispute than those in the present case.  Notwithstanding this, I am satisfied  that  similar  considerations  should  apply in  the  case  before  me,  as  the breaches of duty alleged may well have involved payments of moneys in or out of Mr Blakeley’s personal bank accounts.

[4] Bennett  v  Haven  Vehicles  Grays  Road  Limited  &  Ors,  HC,  Wellington,  CIV-2009-485-242,

16/10/12.

[20]     The main difference between the situation prevailing in Bennett and that in the present case is that I do not have the bank statements before me for inspection, as I did have in Bennett, so I cannot discern whether the matters contained therein might tend to show that Mr Blakeley was involved in other, conflicting business ventures during the relevant periods. However, I am satisfied that the contents of the bank statements, while Mr Blakeley was a contractor to ISL and in the early stages of the joint venture, may turn out to be directly relevant, or indeed to directly or

indirectly assist the defendant in advancing their counterclaims.   They may also

contain information that leads to a train of enquiry which may reveal more about the nature of Mr Blakeley’s personal business interests during the relevant time.  And, in terms of the adverse documents test, as I see the position, the bank accounts may turn out to support the defendants’ counterclaim, if they show that transactions took place which conflicted with the aims of the joint venture. Therefore, whichever standard of discovery might be applied here, the documents sought in my view are sufficiently relevant and should be discovered.

[21]     The plaintiffs’ opposition to the present application also alleges that the bank statements in question contain information of a personal and confidential nature, and requiring discovery of these by Mr Blakeley would be a significant imposition.  As to this imposition claim, the bank statements sought are for a period of 15 months only, and in my view there is really no question that a requirement to discover these would constitute a significant imposition on the plaintiffs.  And, I am satisfied too that any issue as to confidentiality concerns here can be overcome by redaction.

[22]     On this redaction aspect, as I understand the position here, both parties have already exchanged other bank statements without issue here.  In doing so, the parties have both used a method of redaction which involves blanking out the balance columns  on  the bank  statements  which  takes  the transactions  out  of  context  in relation to the overall financial position of the account holder.  There is no reason as I see it why the statements sought here could not be redacted in the same way.

[23]     The Court also clearly has power to allow redaction of certain discovered documents where appropriate and to order (and later review) sealing up of confidential parts of documents – Marr v Arabco Traders Ltd (1986) 2 PRNZ 72. Orders for redaction on the basis outlined at [22] above or otherwise if considered appropriate are to follow.

[24]     Sealed up or redacted portions of discovered documents may be ordered to be produced for inspection by the Court where objections arise between the parties over the validity of any such redactions.  Leave is reserved for any application along these lines to be brought if required when the further discovery to be ordered here is carried out.

Conclusion

[25]     For  all  the  reasons  I  have  outlined  above,  I  am  satisfied  that  the  bank statements sought are clearly relevant on the basis of the case pleaded here by the plaintiffs and the defendants’ counterclaim.  The present application by the second to fourth defendants therefore succeeds.

[26]     An order is now made that within ten (10) working days of the date of this judgment the plaintiffs are:

(a)      to file and serve by way of further discovery an affidavit listing all bank statements for all accounts held by Mr Blakeley or to which he had access for the period 1 July 2007 to 1 October 2008; and

(b)to provide copies of those bank statements listed in the affidavit to the second to fourth defendants concurrently.

[27] Further orders for redaction of the documents in question as set out at [22] and [23] above are now made. This order is subject to the leave reserved at [24] above (where objection occurs to any such redaction) to require the documents to be produced to this Court for inspection.

[28]     As to costs, the second to fourth defendants have been successful in bringing the present application and I see no reason why they should not be entitled to costs in the usual way.

[29]   Costs are therefore awarded to the second to fourth defendants on this application on a category 2B basis  together with disbursements as fixed by the Registrar.

‘Associate Judge D.I. Gendall’