Blue Water Resort Limited v Linsley HC Palmerston North CIV 2009-454-404

[2010] NZHC 1649

IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY

CIV-2009-454-404

BETWEEN  BLUE WATER RESORT LIMITED Plaintiff

ANDBERNARD LINSLEY AND AMANDA LINSLEY

Defendants

Hearing:         In Wellington on 2 August 2010

Appearances: S. Dwight - Counsel for Plaintiff

G.A. Paine - Counsel for Defendant

Judgment:      2 September 2010 at 3.30 pm

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This judgment was delivered by Associate Judge Gendall on 2 September 2010 at

3.30 pm under r 11.5 of the High Court Rules .

Solicitors:           Cavell Leitch Pringle & Boyle, Solicitors, PO Box 799, Christchurch

Fitzherbert Rowe, Solicitors, Private Bag 11016, Palmerston North

BLUE WATER RESORT LIMITED V B LINSLEY AND A LINSLEY HC PMN CIV-2009-454-404  2

September 2010

[1]      Before the Court are two applications:

(a)An application filed 1 April 2010 by the defendants seeking an order for security for costs against the plaintiff.

(b)An application filed 21 April 2010 by the plaintiff in its capacity as counter-claim  defendant  seeking  an  order  for  security  for  costs against the defendants with regard to their counter-claim.

[2]      In each case the applications are brought pursuant to r 5.45 High Court Rules and are opposed.

Background Facts

[3]      The present proceeding relates to the alleged failure by the defendants as purchasers to settle the purchase of an individual unit in the plaintiff’s residential development  at  Tekapo  known  as  the  Bluewater  Resort.    The  Agreement  for Sale  and  Purchase  (“the  Agreement”)  of  the  unit  in  question  was  entered  into between the parties on 4 May 2006 and provided for a purchase price of $479,000.00 (GST exclusive).  It appears that the Agreement became unconditional on or about 8

December 2008 (although this is notionally denied in the defendants’ statement of defence).

[4]      The defendants essentially allege that they have cancelled the Agreement based on misrepresentation on the part of the plaintiff together with certain other affirmative defences including issues with a “sunset clause” in the Agreement.   In addition, the defendants have counter-claimed for return of the deposit of $47,900.00 which they had paid.

[5]      In the plaintiff’s proceeding, it seeks specific performance of the contract between the parties relying upon the Agreement on its face.

[6]      The defendants are in receipt of a grant of legal aid for this proceeding.

[7]      As I have noted above, there are two applications for security for costs before the Court.  It is appropriate to consider first the defendants’ application.  I will turn to address this application shortly.

[8]      The power to make an order for security for costs is contained in r 5.45 of the

High Court Rules. It provides in part:

5.45 Order for security of costs

(1)     Subclause  (2)  applies  if  a  Judge  is  satisfied,  on  the  application  of  a defendant,—

…

(b) that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff's proceeding.

(2)     A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.

(3)     An order under subclause (2)—

(a)     requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient—

(i)  by paying that sum into court; or

(ii) by giving, to the satisfaction of the Judge or the Registrar, security for that sum; and

(b)     may stay the proceeding until the sum is paid or the security given.

[9]      The Court of Appeal provided a useful summary of the general approach to be applied in such applications in A S McLachlan Ltd v MEL Network Ltd (2002) 16

PRNZ 747:

[13]     Rule 60(1)(b) High Court rules provides that where the court is satisfied, on the application of a  defendant, that there is reason to believe that the plaintiff will be unable to pay costs if unsuccessful, “the court may, if it thinks fit in all the circumstances, order the giving of security for costs”. Whether or not to order security and, if so, the quantum are discretionary. They  are  matters  for  the  Judge  if  he  or  she  thinks  fit  in  all  the circumstances. The discretion is not to be fettered by constructing “principles” from the facts of previous cases.

[14]      While collections of authorities such as that in the judgment of Master Williams in

Nikau  Holdings Ltd  v  Bank  of  New  Zealand (1992)  5  PRNZ 430,  can  be  of

assistance, they cannot substitute for a careful assessment of the circumstances of the particular case. It is not a matter of going through a check list of so-called principles. That creates a risk that a factor accorded weight in a particular case will be given disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.

[15]     The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim.  An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success.  Access to the Courts for a genuine plaintiff is not lightly to be denied.

[16]     Of  course,  the  interests  of  defendants  must  also  be  weighed.    They  must  be protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.

Defendants’ Application

[10]     The plaintiff opposes the defendants’ application on the basis that the Court should exercise its discretion to dismiss the application as the plaintiffs have a bona fide claim and it is in the interests of justice to allow it to proceed without the requirement of security for costs.  In addition, the plaintiff contends that the majority of trial time here will be occupied by the defendants’ counter-claims.

[11]     Rule 5.45 provides for a threshold requirement which is to the effect that the plaintiff is impecunious. In the absence of a concession as to impecuniosity, the defendants must adduce credible evidence of surrounding circumstances from which it may be reasonably inferred that the plaintiff if unsuccessful will not be able to pay the defendants’ costs.

[12]     As I have noted above, the defendants here are legally aided.  Although that is no prohibition on bringing an application for security for costs, McGechan on Procedure at para HR5.45.14(2) notes with respect to legally aided defendants:

HR5.45.14         Party legally aided ......

(2)        Defendant

Grants of legal aid, now strictly limited, are generally well below costs fixed in

accordance with Part 14. As an award of costs should not exceed costs incurred (r

14.2(f)), security should be fixed against the defendant’s likely actual costs (ie the total legal aid grant(s) plus the defendant’s personal contribution), not against an estimate of costs if fixed under rr 14.2-14.10: Harris v Davies 27/8/04, Wild J, HC Wellington CIV-2003-435-21.

In Brownjohn & Howard (Exports) Ltd v Morrhall (1992) 6 NZCLC 68,024, Master

Williams QC viewed the fact that the defendant applicant for security was legally aided as relevant in three ways: it was unprotected for its costs beyond the legal aid

grant, while the plaintiff had almost no protection for its costs if successful; the defendant had an obligation to preserve its position as far as Crown charges were concerned; if the defendant succeeded, the costs of trying to enforce any costs order would fall on the Legal Services Agency (particularly relevant if the plaintiff was resident overseas, as in Brownjohn).

[13]     In addressing the defendants’ present application, at the outset before me Ms Dwight, counsel for the plaintiff, acknowledged that the first stage of the two stage security  for  costs  test,  the  threshold  impecuniosity  test  is  satisfied  here.    She accepted that it was only the second stage of the test being the exercise of the Court’s discretion that falls to be considered by the Court.

[14]     Amongst the factors that are generally taken into account in considering the exercise of the Court’s discretion in cases such as the present are the merits of the claim, the nature of any counter-claims and affirmative defences and whether the impecuniosity of the plaintiff was caused or contributed to by the actions of the defendants.  (Delay in bringing the application has not been raised by the plaintiff as a factor here).

[15]     On these matters, Mr Paine for the defendants, referred me directly to what is in effect companion litigation brought by the plaintiff in the High Court at Christchurch against various other defendants who were also purchasers of units at the time in the plaintiff’s Tekapo development.  Those Christchurch claims, which I understand have been consolidated, all bear a close resemblance to the plaintiff’s present claim in that they involve an application by the plaintiff for specific performance  under  corresponding  sale  agreements,  similar  defences  to  those advanced here including misrepresentation allegations on the part of the plaintiff and a counter-claim by each defendant for refund of the 10% deposit paid.

[16]     Before me, Mr Paine drew my attention to the fact that in those Christchurch proceedings on 14 May 2010 and 26 May 2010 Associate Judge Doherty made a global order for security for costs on the application of the defendants for the sum of

$50,000.00 to be paid by the plaintiff and a further order was made staying the proceedings until such time as this security had been provided.

[17]     In Mr Paine’s submission, this  Court should without more follow the lead established by Associate Judge Doherty in the Christchurch proceedings and make an order for security for costs against the plaintiff.

[18]     Although to some extent there is some outward attraction in adopting this approach, it is clear that the present application before this Court is brought in a separate proceeding relating to the separate Agreement between these parties and as such it must be considered on its own merits.  I now proceed on that basis.

Causes of Plaintiff’s Impecuniosity

[19]     In  considering  the  matters  which  the  Court  can  take  into  account  in exercising its discretion in a case such as the present, at the outset it is clear that the plaintiff here does not purport to argue that the position of the defendants in failing to complete settlement of the purchase under the Agreement has per se caused the impecuniosity of the plaintiff.

Merits

[20]     The next factor to be considered relates to the merits of the plaintiff’s claim and indeed the counter-claim from the defendants.  Here, both parties contend that they have a strong claim against the other.  The plaintiff appears to rely on the fact that  there is  a validly executed agreement  for  sale and purchase of the unit  in question which it maintains is unconditional and on which a deposit has been paid. The plaintiff contends it is entitled to the benefit of that contract and thus an order for specific performance.

[21]     In response the defendants argue that pre-contractual misrepresentations were made by or on behalf of the plaintiff as to the ultimate format and quality of the resort in which the unit forms part.   The defendants’ general contention is that fundamentally the plaintiff has not provided for them what was contracted.   In response the plaintiff also refers to an “entire agreement clause” in the Agreement itself.

[22]     In  endeavouring  to  assess  the  merits  and  prospects  of  success  of  the plaintiff’s claim, it must be acknowledged that there is a very real limit as to how far such an enquiry can be made particularly at this early stage of the proceeding – Meates v Taylor (1992) 5 PRNZ 524 (CA).

[23]     In my view, at this stage, the merits in this case appear to be reasonably balanced and I need say no more than that at this point.

Counter-Claim

[24]     In  the  present  case,  it  is  said  that  a  significant  factor  here  must  be  the existence of the affirmative defence as advanced by the defendants and their counter- claim against the plaintiff.  On this it was argued by Ms Dwight for the plaintiff that these affirmative defences and the counter-claim here will occupy a disproportionate time at trial.  The plaintiff’s position is that its claim is a simple one seeking specific performance of the Agreement which the defendants have failed to perform.   The plaintiff says that the defendants’ affirmative defences and counter-claims conceivably could take up to at least three quarters of the trial time here.   With respect, that confuses the issue in my view.  The affirmative defences raised by the defendants, as Associate Judge Doherty noted in his 14 May 2010 judgment in Blue Water Resort Limited v Spellman & Ors, HC Christchurch, CIV-2009-409-911, are separate legal consequences which arise from the same set of facts.  Effectively the major component of the defendants’ counter-claim is intrinsic to the subject matter of the plaintiff’s present claim.  That counter-claim relates solely to the deposit paid and its success will depend entirely upon whether the defendants are successful in their defence of the plaintiff’s claim.  The counter-claim is merely a consequence of the defence to the plaintiff’s claim.

Balancing Parties’ Interests

[25]     Finally, in considering security for costs applications, the Court in exercising its discretion is required to balance the interests of the plaintiff and the defendants – AS McLachlan Limited v MEL Network Limited.

[26]     An order for substantial security made at this point in the current proceeding it is said might result in the plaintiff being prevented from pursuing its claim against the defendants.

[27]     This is to be balanced against the interests of the defendants who should be protected against being drawn into unjustified litigation at considerable expense with no or little to no likelihood of recovery of costs in the event that the defendants are successful – Oraka Technologies Ltd v Geostel Vision Limited, HC Hamilton, CIV-

2005-419-809, Associate Judge Faire, 13/12/07.

[28]     Weighing up all these matters, I conclude that the proper balancing of the interests  of  the  plaintiff  and  the  defendants  here  must  fall  on  the  side  of  the defendants who should not be out of pocket because of the impecuniosity of the plaintiff in facing the present claim.  And I note too that the defendants here quite properly have an obligation to preserve their position as far as the Crown charge may be concerned on their grant of legal aid.

[29]     Finally, there was a suggestion made to me at the hearing of this matter that the present proceeding may be the subject of an application for consolidation with the  Christchurch  proceedings  noted  above.    That  is  a  matter  for  another  day, however.  In my view, it is in the interests of justice here that the plaintiff provides security for costs in favour of the defendants.  The defendants’ application succeeds.

[30]     I now turn to the question of quantum.

Quantum

[31]     As  to  the  quantum  of  security  sought,  Mr  Paine  stated  that  here  the defendants seek an order for $60,000.00 in total.   Ms Dwight for the plaintiff in response contended that this was grossly excessive.   She said that without consolidation, this matter would require only a 2 or 3 day trial and a maximum award of security under $30,000.00 is all that should be contemplated.  And, on this she noted that the plaintiff’s own application sought security on a 2B scale basis alone of $22,000.00.

The amount of security is equally in the Court’s discretion.  It is not necessarily to be fixed by reference to likely costs awards. Rather, it is to be what the Court thinks fit in all the circumstances:   A S McLachlan Ltd v MEL Network Ltd (2002) 16

PRNZ 747 (CA).

Those circumstances include the:

(a)        Amount or nature of the relief claimed;

(b)        Nature of the proceeding, including the complexity and novelty of the issues, and therefore the likely extent of interlocutories;

(c)        Estimated duration of trial; and

(d)Probable costs payable if the plaintiff is unsuccessful, and perhaps also the defendant’s estimated actual (ie solicitor and client) costs.

Insofar as past awards of security are a legitimate guide, they generally represent some discount on the likely award of costs as calculated under Schedule 3.

[33]     As I have noted, the defendants here are legally aided.  As Wild J noted (at para 20) in somewhat similar circumstances in Harris v Davies, HC, Wellington, CIV-2003-435-21, 27/8/04 where a defendant applicant for security was also legally aided:

...........   Whereas the purpose of that (legal aid) grant is to help the defendants defend the plaintiff’s claim, the legal aid grant effectively makes it easier for the plaintiff to pursue his claim against the defendants because it lowers the barrier represented by security for costs.

And Wild J also reflected that security is to fixed against the defendants’ probable actual costs, rather than against costs if fixed according to the scale. In addition, he noted that security awards have conventionally represented only a proportion of a defendant’s probable costs in the event a plaintiff’s claim fails.

[34]     Accordingly and bearing all these factors in mind, I consider that security for costs should be fixed here against a probable award of costs to the defendants of not more than $30,000.00 if the plaintiff’s claim fails.  On that basis, I consider security is appropriately fixed in a relatively modest amount at the sum of $15,000.00.

[35]     The  defendants’  application  for  security  for  costs  against  the  plaintiff therefore succeeds.

[36]     An order is now made that the plaintiff is to give security for costs to the defendants in the total sum of $15,000.00 by paying this sum into Court or by giving to the satisfaction of the Registrar proper security for this amount.

[37]     The additional order sought by the defendants for stay is appropriate here. An order is now made staying this proceeding until such time as security for costs as outlined above has been given.

Plaintiff’s Application

[38]     The second application before me was one brought by the plaintiff in its capacity as counter-claim defendant seeking an order for security for costs against the defendants with respect to their counter-claim.

[39]     Although  it  is  clear  there  is  no  statutory  bar  to  ordering  legally  aided plaintiffs (and the defendants are effectively counter-claim plaintiffs here) to give security for costs, the plaintiff as applicant here would need to show exceptional circumstances before costs exceeding the legally aided plaintiffs’ personal contribution will be ordered – see McGechan para HR5.45.14.

[40]     As I understand the position the defendants’ legal aid contribution here is negligible if anything.

[41]     In  addition,  in  my  view,  the  plaintiff  here  has  been  unable  to  show exceptional circumstances in the terms set out at para HR5.45.14(1)(c) of McGechan or otherwise to justify security for costs being ordered against the defendants as counter-claim plaintiff.

[42]     The application by the plaintiff for security against the defendants therefore fails.

[43]     Notwithstanding this, I need to record the concession made before me by Mr Paine as counsel for the defendants that the defendants consent to their counter- claims here (as well as the plaintiff’s claim) also being stayed until payment by the plaintiff of the security for costs noted at paras [36] and [37] above.  This order is to remain until further order of this Court is made.

[44]     Ordinarily costs on the applications before me would follow the event in the usual way.   I see no reason here why that principle should not be followed.   The defendants are entitled to costs on the applications before the Court on a category 2B basis plus disbursements as fixed by the Registrar.

‘Associate Judge D.I. Gendall’