Cayman Spectrum (NZ) Co v Spark New Zealand Trading Limited
[2023] NZHC 1063
•8 May 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-2687
[2023] NZHC 1063
BETWEEN CAYMAN SPECTRUM (NZ) CO
First Plaintiff
EVEREST WIRELESS PARTNERS LLP
Second PlaintiffAND
SPARK NEW ZEALAND TRADING LIMITED
Defendant
Hearing: 1 May 2023 Appearances:
F Pilditch KC and M B Wigley for Plaintiffs Z Kennedy and T Leggatt for Defendant
Judgment:
8 May 2023
JUDGMENT OF LANG J
[on application to strike out specific pleadings]
This judgment was delivered by me on 8 May 2023 at 2.30 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date……………
Solicitors:
Wigley and Company, Wellington F Pilditch KC, Auckland
O J Skilton, Barrister, Auckland
CAYMAN SPECTRUM (NZ) CO v SPARK NEW ZEALAND TRADING LTD [2023] NZHC 1063 [8 May 2023]
[1] In this proceeding the plaintiffs seek orders requiring the defendant, Spark New Zealand Trading Ltd (Spark), to disgorge profits it earned after acquiring rights to operate broadband spectrum within the 2500 range. It acquired those rights from the first plaintiff, Cayman Spectrum (NZ) Co (Cayman), through a Network Services Agreement (NSA) and a Guard Band Agreement (GBA). The plaintiffs contend the circumstances in which Spark acquired the rights to the spectrum render it guilty of knowingly assisting Mr Boyd Craig, then one of Cayman’s two directors, to deprive Cayman of those rights in breach of his duties as a director of the company.
[2] Spark has applied for orders striking out aspects of the plaintiffs’ pleadings. It says these pleadings are irrelevant and will add unnecessary delay, expense, and complexity to what will already be a lengthy and complex trial.
The claims
[3] Cayman was a joint venture company that was owned as to 50 per cent by the second plaintiff, Everest Wireless Partners LLP (Everest), and as to the balance by Craig Wireless New Zealand Spectrum Operations Ltd (Craig Wireless). Craig Wireless was a company owned and controlled by Mr Craig.
[4] In addition to the NSA and GBA, Spark also entered into agreements for the sale and purchase (ASP’s) of spectrum in the 2300 range from Craig Wireless and Woosh Wireless Holdings Ltd (Woosh), another company associated with Mr Boyd. It acquired this spectrum in April 2016.
[5]The current version of the statement of claim pleads five causes of action:1
(a)In the first, Cayman alleges that Spark received rights under the NSA and GBA in the knowledge that Mr Craig was breaching the fiduciary and directors’ duties he owed to Cayman by causing it to enter into those agreements;
1 I take the following summary from the submissions filed in support of the application by counsel for Spark. I did not take counsel for the plaintiffs to challenge the correctness of the summary.
(b)In the second, Cayman alleges that Spark dishonestly assisted Mr Craig to breach his fiduciary and directors’ duties to Cayman by entering into the NSA and GBA;
(c)In the third, Cayman seeks a declaration (and related relief) that the NSA, GBA and ASP's constitute in substance either a single agreement or a series of collateral contracts;
(d)The fourth cause of action is the same as the first, but substitutes Everest for Cayman; and
(e)The fifth cause of action is the same as the second, but again substitutes Everest for Cayman.
[6] Although the statement of claim is extremely lengthy and detailed, counsel appear to agree that the Court will be required to determine the following issues:
(a)The NSA, GBA and ASP’s constituted in substance a single agreement or a series of collateral contracts;
(b)Spark received valuable management rights under the NSA and GBA; and
(c)Spark acquired those rights from Cayman in the knowledge that Mr Craig was acting in breach of fiduciary and other duties he owed to Cayman as its director.
[7] The most contentious issue at trial is likely to be whether Spark entered into the NSA and GBA in the knowledge that, in permitting Cayman to enter into these agreements, Mr Craig was acting in breach of fiduciary and directors’ duties that he owed to Cayman. These issues underpin both the first and second causes of action.
[8] The Court will therefore first be required to determine whether Mr Craig acted in breach of his duties to Cayman when he permitted it to enter into the agreements
with Spark. By way of example, the plaintiffs will contend that Mr Boyd did not have the necessary authority to commit Cayman to the arrangements with Spark.
[9] If the plaintiffs can succeed in establishing this element, the Court will be required to determine whether Spark knowingly assisted Mr Boyd to breach his obligations. The plaintiffs will say Spark did this by entering into the three sets of agreements.
[10] This cause of action is sometimes known as providing dishonest assistance. The assistance is generally provided to a person who breaches the terms of a trust or some other form of duty. In Sandman v McKay, the Supreme Court observed:2
[77] In dishonest assistance claims, New Zealand courts have followed the approach of the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan and Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd. The test for dishonesty is an objective one, judged against the background of what the defendant subjectively knew. If a defendant’s mental state would be described as dishonest by ordinary standards, it is irrelevant that the defendant does not consider his or her conduct to be dishonest and/or does not appreciate that, by ordinary standards, it would be regarded as dishonest.
[78] A defendant is dishonest if he or she has actual knowledge that the transaction is one in which the defendant cannot honestly participate. Wilful blindness, which equates in equity with actual knowledge, also suffices. This arises where the defendant strongly suspects a breach of trust but makes a deliberate decision not to inquire in case the inquiry results in actual knowledge. It is “necessary that the strength of the suspicion … makes it dishonest to decide not to make inquiry.”
[11]To similar effect, the Court of Appeal had observed in Sandman:3
[67] … The question is specific to the circumstances. As Lord Nicholls stated in Royal Brunei Airlines Sdn Bhd v Tan:4
[W]hen called upon to decide whether a person was acting honestly, the Court will look at all the circumstances known to the third party at the time. The Court will also have regard to personal attributes of the third party, such as intelligence, and the reason why he acted as he did.
2 Sandman v McKay [2019] NZSC 41, [2019] 1 NZLR 519. Footnotes omitted.
3 McKay v Sandman [2018] NZCA 103, [2018] NZAR 707.
4 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 278 [PC], at 391.
[12] It follows that the focus at trial so far as Spark’s actions are concerned is whether, given the knowledge that it possessed at the time it entered into the agreements, Spark acted as an honest person would do in those circumstances.
[13] Spark’s case will be that it entered into the NSA and GBA at Mr Craig’s request because of the situation Cayman found itself in at the time. Cayman had acquired management rights for broadband spectrum within the 2500 range from the Crown in circumstances where it was required to implement the rights no later than 30 November 2015. It was then required to provide continuous network services until December 2016. If it failed to do so it would lose the rights. When Cayman acquired the rights, it did not have the ability to implement network services by 30 November 2015. This prompted Mr Craig to seek Spark’s assistance. Spark therefore contends Mr Craig caused Cayman to enter into the NSA and GBA to ensure Cayman would not lose the rights to operate the 2500 spectrum. The two agreements enabled Cayman to satisfy the Crown that it could begin providing the required network services by 30 November 2015.
The pleadings to which exception is taken
[14] Spark seeks an order striking out the following paragraphs of the statement of claim:
(a)Paragraphs 82(e), 84, 85, 86(a) and 86(b) – in these paragraphs the plaintiffs contend that, in entering into the three sets of agreements, Spark intended to prevent new entrants from acquiring spectrum within the 2300 and/or 2500 ranges and thereby intended to reduce competition in the telecommunications market.
(b)Paragraph 100 – this paragraph alleges that a meeting took place on 16 December 2015 between representatives of Spark and Mr Malcolm Dick, a director and shareholder of Blue Reach Holdings Limited (Blue Reach), another player in the telecommunications industry. During the meeting Mr Dick communicated his interest in acquiring the 2300 and 2500 spectra. Spark allegedly failed to inform him as to the existence and relevant contents of the NSA.
(c)Paragraph 163 to 179 – these allegations relate to events that began in February 2016. At this time, Spark offered to provide funding to one of its competitors, Two Degrees Mobile Ltd (2degrees), to enable it to acquire the management rights held by Cayman in relation to the 2500 spectrum. This occurred at a time when Spark knew that Mr Dick and his company Blue Reach were interested in acquiring the Cayman 2500 spectrum. The plaintiffs allege Spark intended this arrangement to ensure that management rights within the 2500 spectrum were controlled by the three principal players in the telecommunications market, two of whom were Spark and 2degrees. The effect of the arrangement was to lessen competition within the market and prevent new entrants (specifically Mr Dick and Blue Reach) from acquiring 2500 spectrum.
(d)Paragraphs 184 to 186 – in these paragraphs the plaintiffs contend that Spark’s decision to terminate the NSA in July 2016 was for the purpose of keeping new entrants (including Blue Reach) out of the telecommunications market.
(e)Paragraphs 194 and 195 – in these paragraphs the plaintiffs allege that the purpose of steps taken by Spark following termination of the NSA was to deprive new entrants, including Blue Reach, of the 2500 spectrum.
(f)Paragraph 202 – in this paragraph the plaintiffs allege that the terms of the NSA enabled Spark to control any sale of Cayman’s management rights in relation to the 2500 spectrum and thereby reduce competition to Spark, including competition from new entrants.
Relevant principles
[15]Rule 15.1 of the High Court Rules 2016 provides as follows:
15.1 Dismissing or staying all or part of proceeding
(1)The court may strike out all or part of a pleading if it—
(a)discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or
(b)is likely to cause prejudice or delay; or
(c)is frivolous or vexatious; or
(d)is otherwise an abuse of the process of the court.
(2)If the court strikes out a statement of claim or a counterclaim under subclause (1), it may by the same or a subsequent order dismiss the proceeding or the counterclaim.
(3)Instead of striking out all or part of a pleading under subclause (1), the court may stay all or part of the proceeding on such conditions as are considered just.
(4)This rule does not affect the court’s inherent jurisdiction.
[16] As the wording of the rule demonstrates, the Court has the power to strike out a pleading where it is likely to cause prejudice or delay or is otherwise an abuse of the process of the Court. Pleadings that are irrelevant to the pleaded causes of action obviously have the potential to cause prejudice or delay because they require the opposing party to respond to the pleading when this should not be necessary.
Analysis
[17] As I have already observed, the focus in the present proceeding will be on the circumstances in which Cayman, through Mr Craig, and Spark entered into the three sets of agreements. The parties signed and immediately implemented the NSA and GBA in late November 2015. Spark entered into the ASP’s with Craig Wireless and Woosh between 23 November and 2 December 2015. However, the sales were not completed until April 2016 because Spark was required to obtain clearance of the transactions from the Commerce Commission.
[18] Spark’s knowledge during the period leading up to execution of the agreements will obviously be crucial to determination of the issue of whether it knowingly entered into the transactions in circumstances where an honest person in its position would not have done so. The enquiry will relate to whether Spark’s dealings with Mr Craig during this period led it to conclude, or should have led it to conclude, that he was acting in a manner that breached his duties to Cayman.
[19] During oral argument Mr Wigley submitted that the pleadings that are subject to challenge provide important contextual background and narrative that will assist the Court to understand the central events with which the proceeding is concerned. He also submitted that the evidence to be adduced in support of the pleadings will be circumstantial evidence designed to assist the Court to draw appropriate and logical inferences about Spark’s conduct.
[20] In addition, Mr Wigley contended that the evidence will demonstrate that Spark has a propensity to act in a particular way. The propensity is to act in a manner that prevents new entrants from gaining a foothold in the telecommunications market and thereby reduces competition in that market.
[21] I regard these submissions with considerable caution. It would be wrong in principle to allow hotly contested allegations to be introduced under the guise of background narrative or context unless they are truly relevant to issues the Court will be required to decide. Furthermore, I very much doubt whether propensity reasoning has any role in this case. The focus will be on what Spark knew and did at the time it entered into the agreements rather than what it may have done on other occasions with other parties.
[22] Most of the challenged pleadings relate to allegations that Spark entered into the agreements, and subsequently terminated the NSA, for the purpose of keeping other players out of the telecommunications market. It goes without saying that acquisition by Spark of further spectrum had the potential to reduce competition in the market because it removed the ability of other participants, including new entrants, to acquire that spectrum. Importantly, however, the plaintiffs do not allege that Mr Craig entered into the agreements with the objective of assisting Spark to reduce competition in the market at the plaintiffs’ expense. It follows in my view that as the pleadings currently stand the allegations relating to Spark’s allegedly anti-competitive conduct are unconnected to any alleged breach by Mr Craig of his duties to the plaintiffs. They are also irrelevant to any knowledge Spark may have had about matters suggesting Mr Craig was acting in breach of his duties to the plaintiffs.
[23] This means the pleadings in question raise a concern that the plaintiffs may be attempting to use the present proceeding to mount a general challenge to Spark’s allegedly anti-competitive conduct even though this is not related to whether Spark knowingly assisted Mr Craig to breach his obligations to the plaintiffs. It would be wrong to permit this to occur because it would result in considerable time being devoted to the issue during the trial when it will not assist the Court to determine the core issues relating to the claim as pleaded.
Decision
Paragraphs 82(e), 84, 85, 86(a) and 86(b)
[24] As already foreshadowed, these paragraphs contain general allegations that, in entering into the three sets of agreements, Spark intended to prevent new entrants, and in particular Mr Dick and Blue Reach, from acquiring the right to acquire spectrum. This had the effect of reducing competition in the telecommunications market.
[25] For the reasons already given these pleadings would undoubtedly increase the length and complexity of the trial considerably because they would require Spark to respond to them in considerable detail. They would also undoubtedly be the subject of considerable attention in cross-examination of Spark’s witnesses. This would create unnecessary delay, cost, and unfair prejudice to Spark.
[26] I therefore do not consider Spark should be required to respond to these paragraphs.
Paragraph 100
[27] This paragraph relates to the meeting between Mr Dick and Spark’s representatives that took place on 16 December 2015. The relevance of the meeting is said to lie in the fact that Spark’s representatives failed to advise Mr Dick of the terms of the NSA which by that stage was already operational.
[28] Given the timing of the meeting I do not see what relevance it could have to Spark’s knowledge when it entered into the NSA in November 2015.
[29]Spark should not be required to respond to this paragraph.
Paragraphs 163 to 179
[30] These paragraphs relate to a proposal under which Spark offered to fund the acquisition by 2degrees of Cayman’s management rights for spectrum in the 2500 range. Spark put forward this proposal, which ultimately did not proceed, in February 2016. By this stage the NSA and GBA had already been implemented and Spark was awaiting clearance from the Commerce Commission to the acquisition of the 2300 spectrum it had agreed to purchase from Woosh and Craig Wireless.
[31] The proposal was made approximately three months after Spark had entered into the three sets of agreements with Cayman. It plainly does not constitute information that was within Spark’s knowledge when it entered into those transactions. Nor does it have any connection with them. It could therefore only be led as a form of propensity evidence. For the reasons I have already given, however, propensity reasoning is unlikely to be of assistance in resolving the issues that will need to be determined at trial.
[32] If the allegations relating to the 2degrees proposal are permitted to proceed the trial will be lengthened significantly because they will be the subject of significant evidence and cross-examination. This would create unnecessary expense, delay and complexity given the lack of any link between the 2degrees proposal and the transactions that will be the focus of the trial.
[33] I am therefore satisfied Spark should not be required to respond to the allegations about the 2degrees proposal.
Paragraphs 184 to 186 and 194 to 195
[34] These paragraphs relate to Spark’s decision to terminate the NSA in July 2016 and its actions following termination. The plaintiffs contend Spark acted during this period with the intention of lessening competition within the telecommunications market by keeping new entrants out of the market.
[35] Self-evidently, the events that led to and followed the termination of the NSA in July 2016 cannot be relevant to Spark’s knowledge when it entered into the NSA nine months earlier. Those issues have no relevance to the core issues the Court will be required to decide. Spark should not be required to respond to these allegations.
Paragraph 202
[36] This paragraph alleges that the NSA effectively enabled Spark to control any sale of the 2500 spectrum and thereby enabled it to reduce competition in the telecommunications market. For reasons already given this allegation is irrelevant to the core issues the Court will be required to decide and Spark should not be required to respond to it.
Result
[37] The application is granted. Paragraphs 82(e), 84, 85, 86(a), 86(b), 100, 163- 179, 184-186, 194-195 and 202 in the current version of the statement of claim are struck out.
Costs
[38] My tentative view is that costs should follow the event and be payable by the plaintiffs to Spark on a category 2B basis together with disbursements as fixed by the Registrar. If counsel cannot reach agreement regarding costs, they have leave to file concise memoranda and I will determine the issue on the papers.
Lang J
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