Cares Appliances Limited v Smiths City (Southern) Limited

[2013] NZHC 1210

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2012-409-002451 [2013] NZHC 1210

BETWEEN	CARES APPLIANCES LIMITED Plaintiff
AND	SMITHS CITY (SOUTHERN) LIMITED Defendant

Hearing:	23 May 2013
Appearances:	A M Dollimore for Plaintiff W J Hamilton for Defendant
Judgment:	28 May 2013

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

[1]      Cares  Appliances  Limited  (“Cares”)  retails  used  household  appliances. Smiths City (Southern) Limited (“Smiths”) sells new appliances.   In the course of doing so it receives trade-ins.  On 14 April 2008 the companies entered a contract whereby Smiths would sell to Cares all its trade-ins and items repossessed from defaulting purchasers, on certain terms.  The supply contract was for four years and five months, and Cares had an option to renew it for a further two periods of three years each.

[2]      On  8  May  2012  Smiths  wrote  to  Cares,  cancelling  the  agreement  with immediate effect.  Smiths alleged breaches by Cares of its obligations to pay for appliances uplifted from Smiths within the terms of the contract.

[3]      In this proceeding Cares says this was a breach of contract and it does not accept the cancellation.  It alleges this has caused Cares damage, and initially it sought an order by way of specific performance requiring Smiths to perform its

obligations under the agreement, together with damages.

CARES APPLIANCES LIMITED v SMITHS CITY (SOUTHERN) LIMITED [2013] NZHC 1210 [28 May

2013]

[4]      Subsequently the solicitors for Cares have withdrawn the application for an order by way of specific performance.   In this application Smiths seeks an order under r 5.45 High Court Rules directing Cares to give security for costs.

[5]      Rule 5.45 provides that if a judge is satisfied that there is reason to believe that a plaintiff will be unable to pay the defendant’s costs if the plaintiff is unsuccessful in a proceeding, the Court may order it to give security against the prospect of an adverse costs award.  In this case, Cares accepts that this threshold test is met but says that the Court should exercise its discretion against directing it to give security for costs, saying that if the plaintiff is unable to pay an adverse award of costs this has occurred because of the actions of Smiths.

[6]      In A S McLachlan Ltd v MEL Network Ltd1 the Court of Appeal described the discretion given to the Court by this rule as “unfettered”, and as Kós J said in Highgate on Broadway Ltd v Devine:2

The applicant for security for costs may have crossed the threshold; it is another question as to whether it is invited to stay.

Principles on which the discretion is to be exercised are not to be constructed from the facts of previous cases3 and the task of the Court is to make a broad overall assessment of the position.4   In Highgate on Broadway Ltd Kós J identified a number of factors which courts find it helpful to consider when exercising the discretion on a principled basis.  It is common ground between counsel in the present case that two

factors in particular require consideration.   These are the merits of the plaintiff’s case, and whether the plaintiff’s claim that it is impecunious (and if security were ordered would in all likelihood be prevented from proceeding with this case) has resulted  from  the  actions  of  the  defendant.    Both  were  discussed  by  Kós  J  in

Highgate on Broadway Ltd.

1      A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA).

2      Highgate on Broadway Ltd v Devine [2012] NZHC 2288 at [19].

3      A S McLachlan Ltd v MEL Network Ltd above, n1.

4      Hamilton v Papakura District Council (1997) 11 PRNZ 333 (HC).

[22] ...

(c)     Is the plaintiff’s substantive claim prima facie unmeritorious?   While it is not appropriate that a Court predetermine the question of merits or form more than “an impression” (McLachlan at [21]), if a prima facie case can be established that the respondent’s claim is unmeritorious that will be a factor in favour of security. The position is not in New Zealand as absolute as that suggested by Clarke LJ in Ali v Hudson [2003] EWCA Civ 1793 at [40], i.e. that the weakness of a party’s case will ordinarily be relevant only where it has “no real prospect of succeeding.” In New Zealand a prima facie lack of merit will be weighed in the balance; the less apparently meritorious, then the more likely security is.

[8]      On the latter his Honour said:

[23] ...

(a)    Is it reasonably probable that impecuniosity was caused by the defendant?   Where it is reasonably probable that the defendant’s actions the subject of a cause of action caused the plaintiff’s impecuniosity,   that   is   a   strong   consideration   against   awarding security.  The Court will already have formed a view as to whether the cause of action has potential merit.  The question then is whether it is reasonably probable that it caused the plaintiff’s financial embarrassment.   A question of linkage, rather than any further examination of the merits.

[9]      In addition Cares says that there is a real likelihood that ordering security would deprive it of the ability to pursue this case.  On this issue, Kós J said:

[23] ...

(b)     Would  ordering  security  deprive  the  plaintiff  of  the  capacity  to advance a prima facie meritorious claim?  Access to justice is an essential human right.  The cost of exercising that right is the payment of costs in the event of failure.  The right of a successful defendant to costs in that event is arguably subordinate to the plaintiff’s right to be heard.  Strong social policy considerations favour the use of Courts as an accessible forum for the resolution of disputes and grievances of almost all kinds.  Only where a clear impression can be formed that the plaintiff’s claim is altogether without merit – so that in the alternative it would be amenable to being struck out – would it be right for security to be ordered where to do so would bring the plaintiff’s claim to a dead halt.  In cases where the claim is being seriously misconducted (with undue complexity or expense), security orders short of effective termination of the claim may be appropriate. As the Court of Appeal said in McLachlan, “access to the Courts for a genuine plaintiff is not lightly to be denied”.

Merits of the claim

[11]     The contract related to all trade-ins and repossessed items of a certain quality. Cares agreed to uplift the appliances from Smiths’ premises on a regular weekly basis  or as  required,  ideally at  the rate of 25  units  per visit.   Clause 6  of the agreement required Cares to make payment for the goods on its account by the 20th of the month following uplift of them.

[12]     It seems that throughout the time the contract operated Cares fell into arrears with payments from time to time.  I cannot describe this in any more detail as neither side produced in evidence a printout of the account.  Rather, Smiths produced a document described as an “AR Account Inquiry” (without telling the Court what “AR” stands for) which showed the imposition and then the reversing of a range of credit limits on various dates.  It also showed “stop credits” being imposed on a number of occasions in 2009 and 2010, though Mr Delis, the “Group OSH, Fleet, and Distribution and Clearance Centre Manager” for Smiths, referred to only four of these occasions as being because the credit limit was breached.   He does not say what he means by credit limit, so I do not know whether it is a pre-set limit in amount, or whether it means the amount owing at each date.

[13]     On 28 May 2010 Mr Delis wrote to Mr Carpenter of Cares, referring to having spoken a number of times about late payments.  He said the position had reached the point where it was a serious concern to Smiths, and then said:

The purpose of this letter is to formally record that Smiths City will be obliged to consider terminating the contract if future payments not (sic) made by the agreed 20th of the month following uplift.

[14]     After that the AR Account Inquiry shows that stop credits were not imposed again until March and April 2011, and that no further stop credits were imposed before the contract was terminated on 8 May 2012.

[15]     In the letter of 8 May a Mr Simcock, the general manager of Smiths, noted that  Cares  was  in  breach  of  the  agreement  by  late  payment  of  sums  due.

Mr Simcock  said  that  because  of  regular  failure  to  make  payments  within  the requisite timeframe Smiths had decided that it now wished to cancel the contract. He  then  cancelled  it  with  immediate  effect,  and  demanded  payment  of  the outstanding balance of $2,802.50.

[16]     Mr Carpenter accepts that payments were made later than required under the contract but gives three reasons.  First, he says Smiths often required goods to be uplifted at the end of the month, giving a limited time for payment.  Secondly, there was a significant variation in the number of goods being uplifted, putting some strain on the ability of Cares to pay for larger numbers before they were sold.  Thirdly, he says that the practice, whereby a representative of Smiths would inspect the goods which had been uplifted by Cares but found to be of substandard quality, was not undertaken promptly, resulting in late processing of credits to which Cares  was found to be entitled.   Thus payments became due for some of the goods before credits for them were passed.

[17]     On the third argument, Mr Hamilton says that no specific instances of this are identified by reference to the dates of late payments on which Smiths relies.  Given that Smiths has not produced any material from which these dates can be drawn it can scarcely blame Cares for not responding more specifically.   No doubt with discovery and suitable analysis of relevant documents a much more clear picture would emerge.

[18]    Mr Dollimore says that Smiths did not have a right to cancel under the Contractual Remedies Act 1979 because the parties had not expressly or impliedly agreed that the performance of the term requiring payment by the 20th of the month following uplifting of the goods was essential to Smiths.  Further, he says that the letter of 28 May 2010 did not make time of the essence; it merely recorded that Smiths would be obliged to consider terminating the contract if future payments were not made by the agreed date.   He relies on ANZ Bank v Holt:5 the three requirements for making time of the essence (reasonable time for compliance, a statement of what is required to be done, and advice that if this is not done within the

stated time for compliance, cancellation will result) were not satisfied.

5      ANZ Bank v Holt [2013] NZHC 923 at [70]-[73].

[19]     Mr Dollimore also says that s 12 of the Sale of Goods Act applies, and provides that unless a different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to be the essence of a contract of sale.

[20]     Mr Hamilton says s 12 does not apply.  He says that Smiths does not rely on the letter of 28 May 2010 as making time of the essence of the contract.  It simply relies on there being numerous breaches of this clause of the contract, which he says are admitted.  It was not necessary to make time of the essence.

[21]     I do not accept Smiths’ contention that on the material before me I can form the view that Cares’ claim is unmeritorious.  The material is, of course, extremely limited and I can do no more than form an impression.   The impression I have is certainly not  that  the  plaintiff’s  case  has  no  real  prospect  of  succeeding.    The contract was for a fixed term which has not expired.  It was not expressly agreed at the time of the contract that payment by due date was essential, nor am I satisfied that this was implicitly agreed.   The letter sent on 28 May 2010 did not alter this position.  And the letter failed to satisfy three requirements of a notice making time for compliance of the essence, set out above, [18].

Has Cares’ financial position resulted from Smiths’ actions?

[22]     Mr Carpenter says that as at 8 May 2012 Cares was trading consistently from four stores in the Christchurch area.  The second-hand appliance market had been strong but it had become more difficult after the earthquakes, which were in late

2010 and 2011.  However, Cares does not yet have accounts to 31 March 2012, or

31 March 2013.  It cannot afford to have them completed.

[23]     Mr Carpenter says that a dramatic change to the plaintiff’s business was caused by trading conditions coupled with the decision of Smiths to cancel the agreement.  Although trading conditions deteriorated as a result of the earthquakes, Mr Carpenter says that Smiths’ conduct has “tipped the balance and the plaintiff is now struggling”.  It is trading at a loss and has been forced to reduce from operating out of four stores to one store.  At the time of cancellation Cares employed 13 staff

but now it employs only four.  In addition it has to source stock at a price of at least

$300 per unit, whereas an estimated 60 per cent of its stock was sourced from Smiths at approximately $200 per unit.  Cares has difficulty sourcing the same quantity of stock.   As a result of these factors the plaintiff’s turnover has decreased by some

$50,000 in the year to 31 March 2013.  The best estimate Mr Carpenter can make until  the  accounts  are  completed  is  that  expenses  have  increased  by  around

$150,000, including the cost of employing a stock buyer, which was not required when the contract with Smiths provided a ready source of stock.

[24]     Mr Hamilton says that the payment record of Cares demonstrates that it was not trading satisfactorily before the cancellation.

[25]     Mr Hamilton then notes that Mr Carpenter acknowledges that the earthquakes in Christchurch had an adverse effect on trading conditions.  That is correct, but the unchallenged evidence of Mr Carpenter is that the present relatively parlous state of Cares’ financial position has been substantially contributed to, if not entirely caused by,  Smiths’  actions.    I  note  that  between  the  swearing  of  Mr  Carpenter’s  first affidavit on 25 February 2013, and his third on 20 May 2013, two more shops had been closed and staff numbers reduced further.   I also note that the only “stop credits” applied to Cares’ account in the period after the earthquake in February

2011 were in March and April of that year but the company traded for another year before Smiths terminated the contract, which suggests that apart from the initial period of a few weeks, the earthquakes were not a major cause of a downturn in Cares’ financial position.   In addition the debt at the date of termination was just

$2,802.50.

[26]     Weighing up all the evidence presented on this issue, there are sound reasons to support the view that the cancellation of the contract has been a very significant, if not the major cause of the present financial position of Cares.

Consideration of the relevant factors

[27]     Given the description I have of the financial position of Cares, which is not established by reference to accounts and is only given in the most general terms,

there is a real prospect that Cares would not be able to meet an adverse costs award should this case proceed, and fail.  Indeed, Cares accepts that to be the present position by acknowledging that the threshold test in r 5.45 is met.

[28]     However, I am equally satisfied, on the evidence as it presently stands, that directing Cares to provide security for costs at this point will prevent it from advancing a case which is, prima facie, with merit.  In this case considerable weight has to be given to the contribution that Smiths’ conduct has made to Cares’ present position.   Quite apart from the evidence to which I have referred, and which I acknowledge to be relatively scant, commonsense dictates that if a business with four retail outlets suddenly loses the source of at least 60 per cent of the product which it resells, the impact on the business will be substantial unless the source of stock can be replaced promptly and on equally advantageous terms.   Why Smiths decided to cancel the contract without, apparently, giving any warning beyond an indication two years previously that if the punctuality of payment did not improve it would have to consider doing so, is unclear, particularly when the indebtedness of Cares at the time was just $2,800.  I must accept that Smiths will have had its own reasons for doing so but given the level of merit which Cares’ case appears to have, the result of this application must favour Cares.   Taking into account all factors I decline to direct Cares to give security for costs at this point.

[29]     After Cares has its accounts prepared, and is then in a position to properly assess the damages it says it has suffered, and after discovery, it is possible that a different position will emerge in relation to the merits of the claim, and in relation to whether an order directing the giving of security would prevent Cares from proceeding with this claim.  I think it fair to Smiths to reserve leave to apply again for security for costs at the time the case is ready to set down for trial.

Outcome

[30]     The application is dismissed.  Cares is entitled to costs on a 2B basis plus disbursements fixed by the Registrar.  I reserve leave to Smiths to reapply for an

order for security for costs when the case is ready to be set down for trial.

J G Matthews

Associate Judge

Solicitors:

Duncan Cotterill, Christchurch.

Cavell Leitch Pringle & Boyle, Christchurch.