Chongqing Jinzhiran Jiabocheng Building Materials Co Limited v Huang
[2022] NZHC 1035
•13 May 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-000832
[2022] NZHC 1035
BETWEEN CHONGQING JINZHIRAN JIABOCHENG BUILDING MATERIALS CO LIMITED
Plaintiff
AND
YUANCHENG HUANG
First Defendant
SHIHAO HUANG
Second Respondent/Proposed Second Defendant
CIV-2021-404-001097 BETWEEN
SHANGHAI ZHENGTONG VENTURE CAPITAL CO
PlaintiffAND
YUANCHENG HUANG
First Defendant
SHIHAO HUANG
Second Respondent / Proposed Second Defendant
Hearing: 2 May 2022 Appearances:
S M Lowery and D J D van Hout for Plaintiffs
R J Hollyman QC, T P Mullins ands E J Mills for Defendant
Judgment:
13 May 2022
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
This judgment was delivered by Associate Judge Andrew on 13 May 2022 at 3.00 pm pursuant to r 11.5 of the High Court Rules
Registrar / Deputy Registrar – Date: …………………………………
CHONGQING JINZHIRAN JIABOCHENG BUILDING MATERIALS CO LTD v HUANG [2022] NZHC 1035 [13 May 2022]
Introduction
[1]In these two separate, distinct proceedings:
(a)Chongqing Jinzhiran Jiabocheng Building Materials Co Ltd,1 has brought claims against the defendant, Mr Huang, seeking the enforcement of three decisions of the Tongliang District Court in the People’s Republic of China2 and bringing a separate claim for breach of contract; and
(b)Shanghai Zhengtong Venture Capital Co Ltd,3 has brought separate claims against Mr Huang seeking the enforcement of an award made by the Shanghai Arbitration Commission and making a separate claim for breach of contract.
[2] In the context of discussions between the parties about security for costs, the plaintiffs disclosed that a US company, Dessner Investments LLC,4 was funding both plaintiffs’ proceedings. The plaintiffs have subsequently advised that their New York attorneys, DGW Kramer LLP,5 not the plaintiffs themselves, entered into the funding arrangement with Dessner.
[3] In the present interlocutory application, Mr Huang seeks disclosure of the nature and basis of the funding relationship between the plaintiffs, DGW and Dessner. Mr Huang says the disclosure of the terms of the funding arrangements are necessary for the Court to properly assess his application for security for costs against both plaintiffs.
[4] The plaintiffs accept that they should pay security for costs; the only issue is the quantum of the security. The plaintiffs say that further information about the funding arrangements is not relevant to the issue of quantum.
1 Chongqing.
2 PRC.
3 Zhengtong.
4 Dessner.
5 DGW.
[5] The principal issue I must determine is whether the terms of the funding arrangements are relevant to the security for costs application.
Factual background
[6] The plaintiffs seek to recover debts they say are owed by Mr Huang to them and arising from Mr Huang’s business dealings in China.
[7] While the proceedings have the same defendant, they are separate and concern different plaintiffs, different facts and different claims. The proceedings are connected only through their representation and funding arrangements.
[8] Both plaintiffs are companies incorporated in China, with no tangible or realisable assets in New Zealand, and are entirely unrelated.
[9] Both plaintiffs are represented by the same New York law firm, DGW, and they are also represented by the same New Zealand solicitors, Russell Legal.
[10] On 2 December 2021, counsel for Mr Huang wrote to the plaintiffs’ New Zealand solicitors requesting that they put forward a proposal for security for costs in each proceeding.
[11] In their letter of response of 19 January 2022, the plaintiffs disclosed that effective 19 November 2021, Dessner was funding both proceedings. The solicitors advised that Dessner is a “Delaware LLC and a related company to Burford Capital LLC,6 a Delaware corporation listed on the London and New York stock exchanges”.
[12] On 28 January 2022, Mr Huang’s solicitors sent a letter to the plaintiffs’ solicitors requesting that the plaintiffs provide a copy of the litigation funding agreement and related documents. Mr Huang’s solicitors also noted that there was no way of verifying the relationship between Dessner and Burford, and that searches for Dessner yielded no results.
6 Burford.
[13] On 28 January 2022, Mr Huang applied for security for costs in both proceedings. He seeks security of $825,950 per proceeding ($1,651,900 across the two proceedings), to be paid on a staged basis.
[14] The plaintiffs acknowledge that security is appropriate in both proceedings but oppose the quantum sought by Mr Huang. The plaintiffs proposed security in each case of $250,000, with a credit in each case of $50,000 from the $200,000 paid to the Court in July 2021, as security for the plaintiffs’ undertakings as to damages.
[15] This application for disclosure is being held in advance of the application for security for costs.
[16] On 11 February 2022, Mr Rongping Wu, a partner at DGW, filed an affidavit in opposition to Mr Huang’s application for security for costs. In that affidavit, Mr Wu stated that on 19 November 2021 DGW, not the plaintiffs, entered into a funding arrangement with Dessner.
[17] Dessner is described in Mr Wu’s affidavit as a “limited liability company resident in Delaware, United States of America and a related company to Burford Capital LLC”. Mr Wu states further that Burford is listed on the New York stock exchange and London stock exchange and is the world’s largest provider of specialised legal finance.
[18] Mr Wu also states in his affidavit that Dessner is providing funding for “several of DGW’s matters, including Chongqing’s and Zhengtong’s proceedings” and that under the funding arrangement Dessner is not liable for any adverse costs award.
[19] On 16 February 2022, the plaintiffs’ solicitors sent Mr Huang’s solicitors a further letter advising that they refused to provide the funding agreement and related documents. They advised that no further information would be disclosed other than what was already disclosed in Mr Wu’s affidavit.
Relevant legal principles
[20] The leading authority in disclosure of litigation funding arrangements in New Zealand is Waterhouse v Contractors Bonding Ltd.7 In that case, the Court established a number of general principles regarding disclosure of litigation funding arrangements:
(a)It is not the role of the courts to act as general regulators of litigation funding arrangements, nor to give prior approval to such arrangements;
(b)The power of the Court to stay a proceeding for abuse of process (under the High Court Rules 2016 or under its inherent jurisdiction) is not limited to the narrow tort of abuse of process, and it is not an abuse of process for a funder not to provide indemnity for costs to the funded party;
(c)Where proceedings are funded by a third-party, unrelated litigation funder that has no prior interest in the proceedings and whose remuneration is tied to the success of the proceedings, or has some control over the conduct of the proceedings, the identity and location of the third-party funder and its amenability to the jurisdiction of the New Zealand courts must be disclosed; and
(d)Where an application for a stay is made on the grounds of abuse of process, the Court can order disclosure of the litigation funding agreement, subject to redactions relating to confidentiality, and litigation sensitive and privileged matters.
[21] The Supreme Court also identified three particular applications where the existence and terms of a litigation funding agreement may be relevant:8
(i)Applications for a stay on abuse of process grounds;
7 Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91.
8 Waterhouse v Contractors Bonding Ltd , above n 7, at [60].
(ii)Applications for security for costs; and
(iii)Applications for costs.
Analysis and decision
[22] In contending that the terms of the funding agreement are not relevant because the sole matter at issue is the quantum of security for costs, and not whether security should be ordered, Mr Lowery argued as follows. The plaintiffs have complied with their obligations of disclosure in accordance with the Waterhouse principles. Both the identity and location of the funder and its amenability to the New Zealand jurisdiction have been disclosed and nothing further is required. The plaintiffs have agreed to provide significant security in the form of cash and virtually none of the critical factors are in dispute. That includes the fact that the plaintiffs are foreign companies, are not impecunious, that the only application before the Court is an application for security for costs, and the plaintiffs have advised that under the funding arrangements Dessner is not liable for any adverse costs award.
[23] I agree with Mr Lowery’s submission that in accordance with the principles of Waterhouse, it is not “a given” that the terms of the funding agreement are to be disclosed. I also accept his submission that the plaintiffs here have met the minimum requirements of Waterhouse, having disclosed the two critical factors of the identity and location of the funder and its amenability to the New Zealand jurisdiction. The plaintiffs have not disclosed the financial standing or viability of the funder, nor the terms on which funding can be withdrawn and the consequences of withdrawal. However, the Supreme Court, overruling the Court of Appeal, held that there was no obligation in that case to disclose either of those factors.9
[24] In Waterhouse, the Supreme Court clearly left open the possibility that the courts may require disclosure of the relevant terms of a funding agreement in the context of an application for security for costs.10 The key test is clearly relevance which, obviously, is to be determined by reference to what is in dispute.11
9 Waterhouse v Contractors Bonding Ltd, above n 7, at [70] and [71].
10 Waterhouse v Contractors Bonding Ltd above n 7, at [63].
11 See Evidence Act 2006, s 7.
[25] As Mr Hollyman submitted, the exercise of the discretion under r 5.45 of the High Court Rules 2016 (order for security for costs) is a wide one; the discretion extends to both whether security should be ordered and quantum.12 In my view, a funding arrangement may be relevant both to whether security will be ordered and the quantum of such security. In Walker v Forbes,13 a security for costs case, Lang J followed the approach of Dobson J in Houghton v Saunders,14 and held:
[33] I take a similar approach. The existence of a litigation funder in the present case is an important factor that influences the exercise of the discretion for several reasons. The first of these is that the plaintiffs will not be precluded from continuing with their claims if a significant order for security is made. Furthermore, SPF [the funder] stands to receive most, if not all, of the proceeds of any successful claim. It has no interest in the litigation beyond the profit it hopes to derive from what it clearly regards as a commercial venture. Commercial ventures generally require an investor to take risks and to incur expenditure as the price to be paid for the chance of success. SPF should therefore be required, as a matter of policy, to contribute significantly to the defendants’ costs if the claims are unsuccessful.
[26] His Honour took into account the specific terms of the funding agreement in exercising his discretion that security should be provided in the sum of $2,630,000.
[27] In Shanghai Neuhof Trade Company Ltd v Zespri International Ltd, Wylie J held that the terms of any funding agreement should be disclosed where an application is made to which the terms of the agreement could be relevant.15 While his Honour gave as an express example, an application for a non-party costs order, it is clear that he also contemplated that the disclosure of the terms of a funding agreement might be required for an application for security for costs. His Honour held:
[23] The fact that there is a litigation funder and the identity of that funder should be disclosed to the other party or parties when the litigation is commenced, because the existence of the litigation funder can be relevant to applications for security for costs and for costs orders. Further, the terms of any funding agreement should be disclosed where an application is made to which the terms of the agreement could be relevant, for example, where there is an application for a non-party costs order. The Court can require a plaintiff
12 See A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) and Hamilton v Papakura District Council (1997) 11 PRNZ 333 (HC).
13 Walker v Forbes [2017] NZHC 1212 at [33].
14 Houghton v Saunders [2013] NZHC 1824 at [107], where Dobson J held, referring to the NSW Court of Appeal decision Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148, that a “meaningful order” for security for costs should be made.
15 Shanghai Neuhof Trade Company Ltd v Zespri International Ltd [2020] NZHC 987, (2020) 25 PRNZ 319 at [23].
to disclose the identity of a non-party funder, particulars of the funding arrangement, and the amount of funding.
[28] The other cases that Mr Lowery relies upon, namely Patel v Patel16 and White v James Hardie New Zealand,17 are, in my view, of little assistance. Neither case expressly addresses or analyses the critical issue here, namely whether the terms of the funding agreement could be relevant to the issue of quantum of security for costs and the Court’s overall broad exercise of discretion in determining a security for costs application.
[29] I find that the terms of the funding agreement here are relevant to this issue of quantum. I reach that conclusion in the context of a case which contains some unusual features. The first is that the funding arrangements were entered into by the plaintiffs’ New York attorneys, namely DGW. While I accept that they are not the New Zealand based solicitors, r 5.46 of the High Court Rules expressly prohibits a party’s solicitor from being a surety for a security for costs order under r 5.45(2). As Mr Hollyman submitted, even if not a technical breach of r 5.46, the parallels raise concerns which may become serious on any review of the arrangements.
[30] There are further relevant unusual features. All of these factors, when considered together, support a conclusion that there should be disclosure of the terms of the funding agreement. They include:
(a)The funding agreement covers investigative and enforcement funding for “several of DGW’s matters”, which include but are not confined to, the current two proceedings;18
(b)Dessner is not liable under the funding agreement for any adverse costs award but Mr Wu has not addressed the position of DGW or Burford and there is no material evidencing that before the Court;
16 Patel v Patel [2014] NZHC 1744.
17 White v James Hardie New Zealand [2019] NZHC 188, (2019) 24 PRNZ 493.
18 Affidavit of Mr Wu sworn 11 February 2022 at [4].
(c)Both plaintiffs claim not to be impecunious but are still relying on a funding arrangement. The plaintiffs have provided only a very limited explanation for this, namely “a desire to apply working capital to more pressing or higher-yield activities”;19
(d)The two proceedings are connected only through their representation and funding arrangements; the plaintiffs are different, as are the facts and the claims.
[31] The terms of any funding agreement and, in particular, the degree of control that the funder has over the litigation, may be relevant to whether the proceedings constitute an abuse of process. In New Zealand, the assignment of a bare cause of action is not permitted and will amount to an abuse of process.20 In Cain v Mettrick, Paulsen AJ granted a stay of the proceedings on the grounds that it was an abuse of process, principally based on factors relating to the identity of the litigation funder and the terms of the funding arrangement.21 His Honour referred to the relevant principles of Waterhouse summarised by the Court of Appeal in PricewaterhouseCoopers v Walker.22 They include:
(d) The role of the lawyers acting may be relevant in the inquiry into a funding arrangement. Here the Court instanced a representative action in which the plaintiff’s lawyers reported to the funder and in addition to their usual fees took an undisclosed success fee from the funder, conflicting with their duty to act only in their lay clients’ interests. These features exacerbated the majority’s concern that the funder, which had referred plaintiffs to the lawyers, was trafficking in litigation.
[32] I accept that in this case there is no extant application for a stay on the grounds of an abuse of process. However, I agree with Mr Hollyman’s submission that security for costs is a future-looking exercise and if there is an abuse of process or something close to that, because for example of the terms of control by the funder, then the quantum or amount of security required might well be significant. The terms of the funding arrangement, even if not meeting the threshold of an abuse of process, could
19 I note that the defendant challenges the “bare assertions” that the plaintiffs make about them not being impecunious.
20 Waterhouse v Contractors Bonding Ltd, above n 7, at [57].
21 Cain v Mettrick [2020] NZHC 2125.
22 PricewaterhouseCoopers v Walker [2016] NZCA 338, (2016) 23 PRNZ 612 at [14].
have an important bearing on the Court’s exercise of its discretion. Mr Huang seeks security in a sum substantially in excess of that offered to date by the plaintiffs.
[33] I also note that in the present application the defendant has expressly sought leave to bring a further application for a stay of proceedings on the grounds of abuse of process. I reject Mr Lowery’s submission that in this case disclosure should not be made until such time as an abuse of process application is a live issue. Mr Huang has established a proper basis for disclosure to be ordered now. It would be inefficient to proceed otherwise and any concerns about confidentiality can of course be addressed by the making of relevant orders.
[34] I conclude that the terms of the funding arrangements are to be disclosed and the application is accordingly granted.
The terms of the order
[35] It is clear that the essential terms of the funding arrangements, including those relating to the degree of control that the funder has over the litigation, should be disclosed. However, there appears to be some merit to Mr Lowery’s submission that the particular terms of the orders sought at [1] of the defendant’s application of 7 April 2022, are too wide.
[36] I direct that the parties are to confer and address the issue of the terms of the order based on the findings in this judgment. If agreement cannot be reached, then memoranda are to be filed with the Court, in accordance with the timetable set out below.
[37] I decline to grant a stay of proceedings pending receipt of an affidavit from the plaintiff disclosing the relevant information. I see no need for a stay at this stage.
[38] Leave is reserved for the defendant to bring an application for a stay on the grounds of an abuse of process and/or in relation to any failure to disclose the relevant terms of the funding arrangement.
Result
[39]I grant the defendant’s application for disclosure dated 7 April 2022.
[40] The parties are to confer on the particular terms of any order to be made. If agreement cannot be reached, then memoranda (no more than three pages) are to be filed and served by 27 May 2022.
[41] I decline to grant an adjournment of the defendant’s application for security for costs or to stay the proceedings pending receipt of an affidavit from the plaintiffs about the funding arrangements. However, leave is reserved on the terms set out above.
[42] As to costs, I am of the preliminary view that the defendant, having succeeded, should be awarded costs and on a 2B basis.
Associate Judge P J Andrew
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