Commercial Factors Limited v Darlow HC Auckland CIV 2010-404-004555

[2011] NZHC 1661

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2010-404-004555

BETWEEN  COMMERCIAL FACTORS LIMITED Plaintiff

ANDGROVE DARLOW Defendant

ANDJEFFREY PHILLIP MELTZER AND KAREN BETTY MASON

Third Parties

Hearing:         10 November 2011

Appearances: M Smith for the Plaintiff/Respondent

R Scott for the Defendant/Applicant

Judgment:      11 November 2011

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on

11.11.11 at 4:30pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors/Counsel:

R Scott, McElroys, Auckland –  [email protected]

M Smith, Gilbert Walker, Auckland –  [email protected]

COMMERCIAL FACTORS LIMITED V GROVE DARLOW HC AK CIV 2010-404-004555 11 November

2011

[1]      This proceeding is scheduled for a nine day trial beginning 15 October 2012, that trial date having been scheduled on 5 July 2011.  This judgment concerns the defendant’s application filed on 26 August 2011 for a separate question to be tried by which it seeks pre trial determination of its affirmative defence of an agreement by which it is claimed the plaintiff waived any claim against its former lawyers.

Background

[2]      The defendant, Grove Darlow, acted for the plaintiff (CFL) for many years. CFL was the sole secured creditor of Global Print Strategies (Global Print).  When Global  Print  was  put into  liquidation on  28 February 2002,  CFL sought  Grove Darlow’s advice on the liability of the directors of Global Print for breach of their duties.  Grove Darlow advised CFL that the directors of Global Print had breached their duties to Global Print in various respects.

[3]      CFL agreed to fund the liquidators to pursue proceedings against the directors of Global Print.

[4]      On  10 April  2003  the  liquidators  issued  proceedings  against  two  of  the former directors of Global Print.  The liquidators were represented by Grove Darlow. A sum exceeding $2.17M was claimed.   The trial took place in November 2004. Salmon J held liability was not established.  No consideration was given at that time to the quantum of the liquidator’s claim.

[5]      The liquidators appealed to the Court of Appeal.  The appeal was heard on 7

December 2005.  The appeal, on the issue of liability was allowed and the case was remitted to the High Court to determine quantum.  The Court of Appeal identified defects in the liquidators’ pleadings on the issue of quantum.  Specifically reference was made to a concession by Mr Rice of Grove Darlow, CFL’s counsel that a fair sum for which Global Print’s directors could be liable for was $560,000.  The Court of Appeal referred to the pleadings being “positively misleading” because in effect whilst the claim referred to monies owing to unsecured creditors, in the outcome it was likely that only secured creditors would recover anything.

[6]      Noting that in the circumstances it would be inappropriate for the directors to be held liable for more than $560,000 the Court of Appeal referred the matter back to the High Court for a determination as to quantum.

[7]      For the purposes of the remitted hearing in the High Court, the liquidators instructed new solicitors, and new counsel Mr Brian Keene QC.

[8]      In a judgment issued on 1 October 2008 Stevens J directed the directors to pay compensation to the liquidators in the sum of about $1.26M plus costs.   The directors  appealed  and  by  a  judgment  delivered  on  20  July  2009  that  appeal succeeded and reduced the quantum of compensation payable by the directors of Global Print to $560,000.  The Court of Appeal held that it was only fair that the liquidators should not be able to claim on the rehearing more than they had in fact sought on the basis of the existing pleadings and evidence in the Court of Appeal.

[9]      CFL claims to have spent more than $576,000 funding the remitted High

Court hearing and the second appeal.

[10]     In  June 2006  and  following the  Court  of Appeal’s  first  judgment  which remitted the claim to the High Court for determination of quantum, Mr Haydon of CFL and Mr Darlow of Grove Darlow, met.  There was discussion of a claim arising out of Grove Darlow’s capping the liquidators’ claim at $560,000.  After and on 6

July 2006 Grove Darlow wrote offering to reduce its most recent invoice from

$57,675.50  to  $40,000,  and  to  cap  its  fee  for  the  remitted  quantum  hearing  at

$20,000, in exchange for a waiver of any claims against it.

[11]     The offer was not accepted.  The liquidators then applied for a revision of Grove Darlow’s costs for the appeal.  The grounds raised included the claim of an apparent concession by Grove Darlow that $560,000 was an appropriate recovery. Grove Darlow responded asserting that the pleadings, evidence and submissions had been approved by the liquidators and/or CFL prior to filing.

[12]     The reviewer upheld Grove Darlow’s invoices.  The liquidators appealed to the Registrar. That appeal was stayed in September 2007 pending the outcome of the head proceedings between the liquidators and the Global Print directors.

[13]     At the remitted hearing the fees dispute between the liquidators and Grove Darlow  became  an  issue  because  the  liquidators  claimed  those  fees  from  the directors.  Earlier in the hearing Stevens J invited the liquidators and Grove Darlow to resolve the fees issue by negotiation.

[14]     There was a meeting in Mr Keene’s chambers.  According to the liquidators

Grove Darlow agreed to reduce its total fee for the first appeal by about half to

$35,000.  There remains a dispute between the parties about whether the liquidators and CFL also agreed, as a condition of the fee reduction, to settle any claims against Grove Darlow relating to their conduct of the litigation.  It is in connection with that meeting on 30 June 2008 that Grove Darlow’s solicitors applied on 26 August 2011 in this proceeding for the determination of a separate question, namely whether the claim the subject of this proceeding has already been resolved in the outcome of the agreement to accept Grove Darlow’s offer of a fee reduction.

CFL’s claim

[15]     CFL has commenced its proceeding against Grove Darlow alleging a duty of care; that such duty was breached by a concession limiting the claim to $560,000 whereas such claim would have succeeded in the amount of $1.26M as determined by Stevens J before the cap concession of $560,000 was imposed by the Court of Appeal.   Also CFL claims losses of $576,000 plus being the costs paid for the remitted High Court hearing and subsequent appeal.

[16]     Grove Darlow denies it owed CFL a duty of care, in essence because it was not CFL but the liquidators of Global Print that were represented in the proceeding against the former directors.

Grove Darlow’s separate question application

[17]     In response to CFL’s claims Grove Darlow pleads that the claim was settled at the 30 June 2008 meeting.  It asserts that the evidence as to the liability issues will be “complicated and lengthy” and nine days would be required for a combined hearing.  By contrast it believes the trial of the separate question would be brief.

[18]     Counsel for CFL disputes those claims.   It says the accord and satisfaction issue will be highly contentious in part because each of CFL’s witnesses, including its counsel Mr Keene, the liquidator Mr Meltzer and CFL’s Mr Haydon, disagree with aspects of the recollections of Grove Darlow’s representatives, Mr Allen and Mr Rice, about the 30 June 2008 meeting.  In short Grove Darlow’s representatives say a final deal was struck with Mr Keene.  CLF’s representatives say that Mr Keene did not take part in the final negotiations.

[19]     Grove Darlow’s representatives claim the final deal included a waiver of any claims against it.   The liquidators say that the deal concluded with them did not include any waiver.

[20]     CFL’s  position  is  that  the primary issue  at  trial  will  not be whether the pleadings and evidence were defective or whether the concession was made; rather, whether the defects and concession were due to Grove Darlow’s negligence or the result of instructions given by the liquidators and/or CFL against Grove Darlow’s advice.

[21]     Counsel for CFL submits that the Court will derive particular assistance from considering the alleged settlement against the factual background at the time. At the remitted hearing the liquidators were claiming about $1.5m from the directors, but faced a risk because, as they claim, of Grove Darlow’s concession that a cap of

$560,000 might apply.  Further, and even if that cap did not apply CFL had already incurred costs of nearly $165,000 in preparing for the remitted hearing and faced continuing additional costs going forward.   CFL argues it would have made no commercial sense for it to settle a $1m plus claim against Grove Darlow for $35,000

simply to allow the liquidators to claim the remaining $35,000 from the Global Print directors.

[22]     Counsel for CFL submits the Court will need to review the procedural history of the litigation and of the claim against Grove Darlow; that substantially the same background material will require review.   Counsel for CFL estimates a separate hearing of the accord and satisfaction defence would occupy approximately three days, as against six days for the combined hearing of all issues.  Therefore, counsel submits limited benefit is to be derived in pursuing a separate hearing of the accord and satisfaction issue.

Legal Principles

[23]     High Court Rule 10.15 provides that:

The Court may, whether or not the decision will dispose of the proceeding, make orders for –

(a)       The decision of any questions separately from any other question, before, at, or after any trial or further trial in the proceeding; and

(b)      Reformulation of the question for decision and, if thought necessary, the statement of a case.

[24]     The purpose of the Rule is to expedite proceedings by limiting or defining the scope of trial in advance, or obviating the need for a trial together. [1]

[1] Westpac Merchant Finance v Hawkins (1986) 5 PRNZ 561.

[25]     There is a “heavy onus” on an applicant if it wishes to depart from the

assumption that all matters at issue should be disposed of in one substantive trial. [2]

[2] Clear Communications Limited v Telecom Corporation of New Zealand Limited (1998) 12 PRNZ 333 at 334 – 335 per Fisher J.

[26]     The Court must balance the advantages in shortening litigation as against any disadvantages a respondent may assert.  It comes down to a matter of discretion and

judgment for the Court. [3]

[3] Rio Beverages v The Golden Circle Cannery 14/2/92, Barker J HC Auckland CL 30/91.

[27]     Shuttle Petroleum Distribution Limited v Chevron New Zealand [4], summaries the key factors as:

[4] Shuttle Petroleum Distribution Limited v Chevron New Zealand HC CIV 2002-485-826, 5 September 2008.

1.The extent to which there can be a clear separation of the issues for determination, from those remaining to be determined at the substantive proceeding;

2.The extent to which a separate question will shorten or dispose of the substantive proceeding;

3.        The comparable length of one or two proceedings.

4.The factors that the opposing party puts forward as being disadvantageous of a split trial.

[28]    Where there is a clear and obvious demarcation between the issues, no significant evidence overlap and plainly discernable advantages to ordering a split trial, it may be appropriate to make that order. [5]

[5] KPMG NZ v Gemmell 27/3/09, Allan J, HC Auckland CIV 2008-404-4288.

[29]     Case authority repeatedly emphasises that it is only in rare cases that it would be appropriate to order a preliminary trial of separate questions.  Experience shows that perceived savings of time and expense often do not occur, particularly where the factual matters relevant to one issue are relevant also to others and they may overlap.

As Lord Evershed MR stated [6]:

[6] Windsor Refrigerator Co v Branch Nominees [1961] Ch 375 at 396.

... the shortest cut so attempted inevitably turns out to be the longest way round.

The applicant’s case

[30]     Grove Darlow submits the proposed separate question:

(1)      Is a simple, discreet issue which is easily defined;

(2)       Requires  relatively limited  evidence  not  going  much  beyond  the affidavits already filed for the summary judgment application, with any additional cross examination.   No experts are required, only witnesses of fact and in respect of the one meeting on 30 June 2008;

(3)       Offers the opportunity to dispose of the entire proceedings in only one or two days of hearing time.

[31]     Ms Scott submits that by contrast the evidence as to the liability issues is likely to be complicated and lengthy, and the liability of the liquidators (the third parties) will also need to be assessed.

[32]     A nine day trial has been allocated to commence on 15 October 2012.   Ms Scott submits this date allows ample time beforehand to hear the separate question and the trial will not be delayed. Also, the accord and satisfaction issue will not need to be addressed at the second hearing if the result is adverse to Grove Darlow, so the scope and length of the second hearing will be reduced.

[33]     Ms Scott submits extensive evidence will not be necessary to determine the accord and satisfaction defence; that matters of background are adequately covered in affidavits already filed.   Ms Scott submits the background history is not really contentious.

[34]     In the recent decision in Vector Gas Ltd v Bay of Plenty Energy Ltd [7]  the Supreme   Court   considered   commercial   context   an   important   aid   for   the interpretation of the parties’ written agreement.

[7] Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444.

[35]     Ms Scott submits that case can be distinguished for in the present case there is no written contract between the parties; and therefore that commercial context or factual background would serve little purpose to aid interpretation to deal with the accord and satisfaction separate question.

[36]     Ms Scott rejects claims:

(a)       That an agreement to settle Grove Darlow’s fee claim of $70,000 by

the payment of $35,000 was commercially absurd.

(b)That the liability issue is a concise one.  She says CFL’s estimate of losses in excess of $1m was exaggerated and in any event would be subject to critical analysis at trial; that both the liability and the quantum issues are complex.

[37]     Ms Scott considers that expert evidence will have to be brought to assess the duties of Grove Darlow in the advice given to the liquidators and whether that advice was negligent.  Ms Scott submits expert evidence will also be needed to assess the actions of the liquidators; and concerning the issue of loss for which forensic accounting evidence may be required; and in relation to the claim of about $577,000 for costs paid by CFL following delivery of the first Court of Appeal judgment.

[38]     Ms Scott estimates that the evidence of as many as twelve experts may be required if one assumes that all three parties to the proceeding intend to address those complex issues.

The respondent’s case

[39]     For  CFL,  Mr  Smith  submits  it  is  the  evidence  on  liability  that  will  be relatively simple and straightforward and not the other way around; that, upon the accord  and satisfaction  issue, it will be necessary to  go through  the procedural history to set the context.  However, given the Court of Appeal’s findings, Mr Smith submits the primary issue will not be whether the pleadings and evidence were defective or whether the concession (of a $560,000 claim cap) was made.  Rather the issue will be whether the defects and concession were due to Grove Darlow’s negligence or the result of instructions given by the liquidators and/or CFL against Grove Darlow’s advice.

Discussion

Will commercial context assist?

[40]     Clearly the accord and satisfaction issue will be highly contentious.  Messrs

Rice and Allen for Grove Darlow say that an agreement was reached with Mr Keene

by which any and all claims against Grove Darlow were resolved in consideration of which Grove Darlow agreed to accept $35,000 (or about half their outstanding fees claim) in settlement of outstanding invoices.

[41]     The liquidator Mr Meltzer, CFL’s Mr Haydon, and Mr Keene say that Mr Keene did not take part in the final negotiations.  Contrary to the claims of Messrs Rice and Allen that the final deal included a waiver of any claims against Grove Darlow, Messrs Haydon and Meltzer say that the deal concluded with them did not include any waiver.

[42]     My  initial  impression  was  that  the  accord  and  satisfaction  issue  could discreetly be disposed of.  But now I do not consider a trial on the separate question will be confined to the circumstances of a meeting on 1 day where the focus is upon Mr Keene who had been recently instructed by the liquidators’ new solicitors – against a background of concerns involving professional advice previously given by Grove Darlow.

[43]     It is against that background a Court may have to interpret the terms of the agreement and by it the proposition that in consideration of a discount for fees claimed, the liquidators agreed to forego claims of a far larger sum than the amount of the fee discount given.  Undoubtedly the Court will be invited to consider claims of commercial sensibility.

[44]     I agree with Mr Smith that the events of 30 June 2008 will have to be weighed against a review of the procedural history of the litigation and of the claim against Grove Darlow; that substantially the same background material is involved as will be necessary to determine the negligence claim itself.

[45]     Mr Smith estimates a separate hearing would occupy approximately three days as against six days for a combined hearing of all issues.  I consider that estimate to be the more accurate one.

[46]     It follows that two separate hearings would inevitably result in increased overall hearing time and increased costs for both parties.   The principal factual

witnesses on liability are Messrs Meltzer and Haydon and Mr Rice, all of whom will also give evidence on the accord and satisfaction issue.

Whether the remaining issues of liability and quantum are complex, or likely on their own to utilise all of the trial time scheduled?

[47]     I do not agree with the submission for Grove Darlow that the issue of liability or for that matter quantum will be complex or will indeed likely require the calling of expert evidence.  It is clear from the judgments of the High Court and the Court of Appeal that significant attention has already been given to these issues.  Also in the hearing remitted to the High  Court before Stevens J  the learned  Judge made a comprehensive assessment of the quantum of the liquidators’ claims against Global Print’s directors, albeit that exercise was undertaken based upon an assumption that there  was  no  cap  to  the  amount  claimed.    Stevens  J  concluded  the  amount recoverable by the liquidators was in the order of $1.26m.

[48]     Earlier the Court of Appeal had reversed the High Court judgment of Salmon J on the issue of liability.  Salmon J had not addressed quantum issues and hence the Court of Appeal were unable to do so even though quite clearly they would have wished to.  Hence the reasons for the matter having been remitted for consideration by Stevens J.

[49]     When the decision of Stevens J was appealed the Court of Appeal held the liquidators’ claims were limited to $560,000 because that was in effect the extent of losses pleaded and evidence provided in support of their claim.

[50]     Of course it is too early to assess with any degree of certainty the full range of issues or evidence required upon a trial of the present proceeding.   However, through the judgment of Stevens J all parties should be well informed about the extent of losses that could have been recovered in the absence of any cap being applied to those.

[51]     It  is  submitted  for  Grove  Darlow  that  there  may  be  cause  to  critically examine the actions of the liquidators in light of the litigation advice provided by

Grove Darlow.  It is more likely I think that any potential for enquiry in that respect will be limited to the question of whether or not the advice of Grove Darlow was adopted, and much less likely to involve considerations about whether or not the liquidators ought to have questioned that advice.

[52]     I do not see the extent of issues or the amount of time required to deal with those is anything like that contended for on behalf of Grove Darlow.

Will the trial of a separate question put at risk the trial date scheduled for 15

October 2012?

[53]     It  is not uncommon, in  applications of the kind  to this Court, for those applications to be opposed on the grounds that the hearing of any appeal upon the trial outcome of the separate question, could delay the trial of other matters in issue between the parties.

[54]     Although in this case the parties’ trial has been scheduled for October 2012 there is the potential for the risk of delay if any judgment upon a separate question was appealed.  Likely the Court could accommodate a trial of up to three days before June 2012 but there is no certainty beyond that that any appeal would be heard prior to October 2012.

[55]     In the balance of considerations it should not be forgotten that the application for the trial of the separate question was not filed until after the trial date had been allocated whereas it could perhaps have been filed sooner.

Summary

[56]     It is Grove Darlow’s case that a final deal was struck between the parties on

30 June 2008 by which all issues between the parties were concluded.   What is apparent from the affidavits for and against the proposition that a final deal was struck, is that one or more persons have misremembered the occasion.  On the other hand those recalling the position may have had different things or considerations in mind during the course of the negotiations.  In this situation it seems to me that any

objective determination could significantly be assisted by an understanding of the parties’ commercial/professional  dealings.    The  Court  will  want  to  know  what happened at the meeting on 30 June 2008 between the parties.   In this case the context will include:

(a)       That 30 June 2008 was the first day of the remitted hearing before

Stevens J.

(b)That the liquidators had claimed $70,000 from Global Print’s directors on account of the directors having received Grove Darlow’s account for payment of that amount; but in response to which the directors noted the liquidators’ challenged their responsibility to meet payment of fees in that amount.

(c)      That for the purposes of the remitted hearing it was necessary to determine what fees were payable in order for those to be claimed from the directors.

(d)That  failing  an  agreement  being  reached  between  the  parties  in relation to outstanding fees Stevens J would have had to determine the amount properly payable.

(e)      In that outcome save for claims of a final deal struck, agreeing on an amount for fees payable may not have had any impact at all on any of the claims by CFL against Grove Darlow.

[57]     To direct a hearing of a separate question the Court must balance perceived advantages and disadvantages.  In this case the balance of considerations favours the respondents’ opposition to the application.   Key witnesses for the separate issue question are also key witnesses in the trial of CFL’s liability claims.   Rather than shorten the trial time needed to hear both questions, it is likely overall increased hearing time would be required to deal with the two questions separately.   This would mean increased costs for the parties.

Decision

[58]     The application is dismissed.

[59]     Costs are fixed on a 2B basis, to be paid by the applicant.

Associate Judge Christiansen