Coombes v Cheng HC Auckland CIV-2010-404-004977

[2011] NZHC 694

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-004977

BETWEEN  B K COOMBES AND L T GRANT First plaintiffs/First counterclaim defendants

AND  EDEN HOLDINGS LTD

Second plaintiff/Second counterclaim defendant

ANDQUAN LI CHENG Defendant

AND  DEAN WHAITIRI

Third counterclaim defendant

AND  MEGA REALTY LTD

Fourth counterclaim defendant

Hearing:         12 July 2011

Appearances: R Pidgeon for First plaintiffs/First counterclaim defendants and for

Second plaintiff/second counterclaim defendant
K McDonald for Defendant
I Williams for Third and fourth counterclaim Defendants

Judgment:      12 July 2011   

ORAL JUDGMENT OF ASSOCIATE JUDGE BELL

Solicitors/Counsel:

Thorne Thorne White & Clark-Walker, PO Box 140, Shortland Street, Auckland

McDonald Law (S J McDonald), PO Box 28624, Remuera, Auckland

Kevin McDonald & Associates, PO Box 331065, Takapuna, Auckland

I Williams, PO Box 4338, Auckland

B K COOMBES AND L T GRANT V QUAN LI CHENG HC AK CIV-2010-404-004977 12 July 2011

[1]      The substantive proceeding is a claim by vendors under an agreement for sale and  purchase  for  damages  suffered  on  the  resale  of  two  properties,  after  an agreement for sale and purchase was cancelled for failure of the defendant, the purchaser, to pay the deposit after request.  The defendant has filed counterclaims alleging misrepresentation.   His counterclaim is directed against the vendors and against the real estate salesman as third counterclaim defendant and the real estate salesman‘s  employer,  Mega  Realty  Ltd  as  fourth  counterclaim  defendant  under r 5.57.   He says that the salesman made misrepresentations which also amount to misleading  conduct  under  the  Fair  Trading Act.    He  also  says  that  the  fourth counterclaim defendant is vicariously liable for those misrepresentations and that those misrepresentations were made within the authority given by the vendors.

[2]      To keep the identity of everyone clear, I will refer to the first and second counterclaim defendants as the vendors and the third and fourth counterclaim defendants as the land agents.

[3]      The matters before the Court today are separate applications by the vendors and by the land agents for security for costs.  While Mr Cheng is defendant in the proceeding, security for costs is being sought against him as counterclaim plaintiff. Both applications are made under r 5.45, which provides:

5.45     Order for security of costs

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

(a)       that a plaintiff—

(i)        is resident out of New Zealand; or

(ii)       is a corporation incorporated outside New Zealand;

or

(iii)       is a subsidiary (within the meaning of section  5 of the Companies Act 1993) of a corporation incorporated outside New Zealand; or

(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.

(4)       A Judge may treat a plaintiff as being resident out of New Zealand even though the plaintiff is temporarily resident in New Zealand.

(5)       A  Judge  may  make  an  order  under  subclause   (2)  even  if  the defendant has taken a step in the proceeding before applying for security.

(6)       References in this rule to a plaintiff and defendant are references to the person (however described on the record) who, because of a document filed in the proceeding (for example, a counterclaim), is in the position of plaintiff or defendant.

[4]      An application under r 5.45 follows these steps:

[5]      Has the applicant satisfied the Court of the threshold under r 5.45(1)? [6]     How should the Court exercise its discretion under r 5.45(2)?

[7]      What amount should security for costs be fixed at? [8]           Should a stay be ordered?

The background to the litigation

[9]      The first plaintiffs are the executors of the estate of the late Mervyn Frederick Coombes.  The estate owned a property at 18 View Road, Mt Eden, Auckland.  The second plaintiff, which was associated with the late Mr Coombes,  was the owner of a property next door at 16 View Road, Mt Eden, Auckland.  Together, the plaintiffs listed the properties with Mega Realty Ltd to sell together on the basis that the purchase of both properties might be attractive to a developer.  The buildings on each site were generally run down and in a poor condition.  The vendors‘ case is that the

defendant entered into an agreement for sale and purchase dated 2 November 2009 to buy both properties for a purchase price of $2,588,888, inclusive of GST.  The provisions for deposit was that 5% of the purchase price was payable on acceptance by both parties and a further 5% of the purchase price was payable on or before 1

February 2010. The possession date was 26 April 2010.  The agreement was in the

ADLS form, 8th edition, with some hand-written terms added.

[10]     The  vendors  say  that  the  agreement  became  unconditional.    The  agents pressed the defendant for payment of the initial 5% deposit.  The defendant did not pay.   The vendors gave a notice under clause 2 of the general conditions of sale requiring payment of the deposit within the three days.  When the deposit was not paid, the vendors cancelled the agreement under clause 2.   They then put the properties on the market again and resold them separately.  They sue for a shortfall on the resales, plus the costs of resale.  The first plaintiffs say they made a loss of

$228,880 on the resale, and the second plaintiff says it made a loss of $50,000 on the sale. They also claim legal and real estate agent‘s expenses.

[11]     In  his  statement  of  defence,  the  defendant  raises  a  number  of  technical defences.  They are the kind of defences which tend to be raised only by defaulting purchasers, that is, technical points taken as to whether an agreement for sale and purchase  was  truly  entered  into.  My  general  impression,  having  reviewed  the affidavit evidence given by the plaintiffs, is that there does not seem to be much in these technical defences.  Further, Mr Cheng alleges misrepresentations, and they are pleaded in paragraphs 42 and 46 of the counterclaim:

42.While being shown through 16 and 18 View Road, the Third Counterclaim Defendant made the following representations to the counterclaim Plaintiff in the presence of the Counterclaim Plaintiff‘s wife:

(a)      That  the  boarding  house  had  16  residents,  each  paying

$438.00 per week, which was paid by the Government;

(b)      That the cost of food on a weekly basis for the residents was

$600.00;

(c)       That  the  boarding  house  was  licensed  to  take  up  to  31 residents  and  there  was  an  opportunity  to  increase  the income generated from the boarding house;

(d)       That the boarding house was a stable business which had been operating for some 20 years so that the purchaser could rely on the income from the 16 residents;

(e)       That the owner of the boarding house had a contract with the Government to house the residents living at the boarding house;

(f)      The  Third  Counterclaim  Defendant  handwrote  the representations referred to in paragraph 42(a) and (b) above on a piece of paper which he handed the First Counterclaim Plaintiff:

Particulars

“Income – Boarding House

$6000 per week

16 People – pay $438 (govt)

-        Cook $426 (per week)

-        Food $600   “    “

-        Rates $6500 p/a

-        People $60 p/w (pocket money)”

…

46.During the meeting referred to in paragraph 43 above, the Third Counterclaim Defendant made the following representations to the Counterclaim Plaintiff in the presence of the Counterclaim Plaintiff‘s wife:

(a)       That  there  were  a  number  of  people  making  offers  to purchase 16 and 18 View Road and any contract made by the Counterclaim Plaintiff had to be an unconditional contract;

(b)       The properties, in particular, 18 View Road, were in good condition and that, the foundations of the dwellings were in good and solid condition;

(c)       That the Third Counterclaim Defendant knew the house very well  and  he  ‗personally  guaranteed‘ that  the  foundations were in good condition and would present no problems;  and

(d)      All that was needed was for both houses to be painted.

[12]     The land agents admit to providing a hand-written memorandum containing some of the information alleged in paragraph 42 of the counterclaim, but otherwise generally deny the allegations of misrepresentation.  The points they make are that it was contemplated that the villa at 18 View Road would be removed by the purchaser. They say that that points against any relevance of any representations as to the foundations. They say that as regards 16 View Road, that was being used as a boarding house. They say that it was the land was being sold, not the business.

[13]     As far as the counterclaim is concerned, the causes of action Mr Cheng raises against the vendors are under the Contractual Remedies Act 1979.  A declaration is sought that the contract is at an end.  That is pleaded as though it were a claim in rescission but it is properly to be understood as a claim for cancellation under the Contractual Remedies Act.   There is a claim for $30,000 for general damages and an unspecified claim for damages.

[14]     There is also a claim made against the land agents under the Contractual Remedies Act, but that claim is clearly misconceived because there is no contractual relationship between Mr Cheng as purchaser and the land agents who were acting only as agents of the vendor and were not acting as agents of Mr Cheng.  In addition, the defendant also pleads breaches of the Fair Trading Act against the land agents.

[15]      The vendors have adduced evidence that Mr Cheng has disposed of assets. In particular, they have shown that he was formerly the owner of a property at 42A The Drive, Epsom, Auckland.   That property has now been transferred to a third party.

[16]     Mr Cheng has filed a notice of opposition to the applications for security for costs, but he has not given any evidence in opposition.  I would have been assisted in evaluating the merits of the case if Mr Cheng had sworn an affidavit setting out his case for misrepresentation. At the moment, I have only his pleading, unsupported by any evidence.

The threshold

[17]     For Mr Cheng, Mr McDonald accepts that the threshold has been satisfied, that is, in terms of r 5.45(1)(b), there is reason to believe that Mr Cheng will be unable to pay the costs of the defendants if Mr Cheng is unsuccessful in his claim against the defendants.  There is some support for that in Mr Cheng‘s inability to pay the deposit.  The evidence is that when called upon to pay the deposit, Mr Cheng indicated an inability to fund the deposit, saying he was waiting for funds to come from China.  When he was pressed for payment of the deposit, he simply said he did not have the funds to pay. His later actions in moving assets out of his name and into

the names of others also indicate that he is seemingly trying to make himself judgment proof, which is the very matter which an application for security for costs is intended to address.

The exercise of the discretion

[18]     On the exercise of the discretion, it is normal to have regard to the decision of the Court of Appeal in  A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ

747.  In particular, paragraphs [13] to [16]:

[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 BNZ (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 checklist 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.

[19]     I remind myself that there must be a balancing between the interests of the counterclaim   defendants   being   drawn   into   unjustified   litigation   against   a counterclaim plaintiff ‘s interest in having access to the Courts.

The merits

[20]     At the stage of a security for costs application, the Court can only come to a broad view. I am hampered in coming to a clearer view as to the merits of the claims of the claims  for misrepresentation  because  there is  no  affidavit  evidence  from Mr Cheng.    In  effect,  as  I understand  the case,  I am  being invited to  read  the pleadings as matters that are capable of proof.   That might be appropriate in considering a strike-out application, but in an application for security for costs, the Court needs to have regard to the evidence to assess just how sustainable the claim is.  As it is, I have evidence from the vendors and the land agents that attacks Mr Cheng‘s claim of misrepresentation.

[21]     Mr Williams has pointed to aspects of Mr Cheng‘s claims that suggest that there are at least some aspects of his claim that are implausible.   One of the misrepresentations that Mr Cheng raises is that the land agent personally guaranteed the soundness of the foundations of the villa.   Mr Williams points out that land agents do not give personal warranties as to the soundness of buildings generally and land agents can hardly be expected to vouch for the soundness of foundations. That is not something they would be expected to have close personal knowledge of. Particularly in today‘s climate of claims made in respect of representations about buildings generally, particularly as to water-tightness, I would expect any land agent to be on his guard against making representations as to building quality.  But to cap it off, it was contemplated in the agreement that this building would be moved, and if the building was to be moved, then the soundness of the foundations was simply immaterial.

[22]     Mr Williams also points out that Mr Cheng was seemingly an experienced businessman, not a person likely to be swayed simply by general remarks made by a land agent. He points out that Mr Cheng alleges that he was relying on these statements as to business income to be obtained from the boarding house as a basis on which Mr Cheng could obtain finance.  Commonsense would have suggested that as  an  experienced  businessman,  Mr  Cheng  would  have  the  wit  to  make  his agreement conditional on finance, something for which provision can be made in the standard form Auckland District Law Society agreement for sale and purchase.

[23]     Mr Williams also makes the point that, following discovery, there are no documents showing any effort by Mr Cheng to obtain finance.

[24]     Mr Williams also developed submissions along the lines that the land agent was acting solely as a conduit.  I do not necessarily accept those submissions in full as this stage. Those matters are more of a trial issue.  I am not to be understood to be accepting that part of his submissions at present.

[25]     It is a serious matter to refuse to comply with an agreement alleging that you have been induced to enter into it as a result of a misrepresentation.  Too often these allegations can be thrown up relatively easily.  If Mr Cheng wanted the Court to take his claim seriously as having some merit, I would have expected these points raised by the vendors and land agents to be answered in some manner.  His silence casts doubt on the strength of his claim.  My overall assessment is that his claim is weak.

[26]     An added aspect to his claim is the relief he is seeking.  This is particularly relevant as regards the claim against the land agents.   Mr Cheng is seeking relief under which he is not required to perform under the agreement for sale and purchase so that he cannot be held liable for not performing the agreement and liable to make good the shortfall on the resales.  For that he relies on his misrepresentations against the vendors.  To the extent that he succeeds in that defence against the vendors, it seems to me that he can hardly have a claim against the land agents for relief above and beyond whatever he might be given against the vendors, except perhaps some claim for costs.   Mr McDonald submitted that it was conceivable that the representations were made by the land agents alone with the consequence that the vendors were not bound by them so that the vendors would be able to succeed in their claim against Mr Cheng and he would have an independent claim against the land agents.

[27]     At this stage, on the evidence, there is nothing to suggest that that possibility is a reasonable prospect.  I have had regard to the pleadings.  If the vendors were taking the position that, if the land agents made the representations alleged, they were not bound by them, they ought surely to have pleaded them.  I was directed to the land agent‘s cross-claim against the vendors and the vendors‘ defence to the

cross-claim.  There is nothing there that suggests that that is any more an issue as between vendors and land agents than it is between Mr Cheng and the vendors and land agents.

[28]     My overall impression then is that, win or lose in his defence, it is unlikely that Mr Cheng has any significant claim against the land agents.

Delay

[29]     In his notice of opposition, Mr Cheng raised the issue of delay. Mr Williams put to me that he had raised the issue of security for costs with Mr McDonald in February this year.  He says that was approximately four months after his clients had been joined in the proceeding.  The hearing of this application has been timed so as to  take  place  after  the  parties  held  a  judicial  settlement  conference.    That  is consistent with a practice which is designed to encourage parties to try and settle their differences by way of a settlement conference if possible.  Security for costs applications can sometimes stifle litigation.  Requiring security for costs applications to be heard before settlement conferences can get in the way of giving the parties a fair chance to resolve differences by negotiation.  It is therefore understandable that this matter has been heard after the settlement conference.

[30]     The case is set down for hearing in the week beginning 19 September.  There is still ample time to deal with the security for costs issue before the start of the trial. I do not regard the timing of this application as a factor that counts against the grant of security for costs.  I note in particular that r 5.45(5) contemplates that applications for security for costs can be taken after statements of defence and similar steps have been taken.

Counterclaim is really a defence

[31]     The  other  ground  of  opposition  raised  by  Mr  Cheng  in  his  notice  of opposition is that the counterclaim arises out of the same matter as the plaintiffs‘ claim and the counterclaim is really in the nature of Mr Cheng‘s defence to the plaintiffs‘ claim.  There is sound authority for this ground of opposition.  Its origins

are a decision of the English Court of Appeal in Neck v Taylor.1    At 562, Lord Esher

MR said:

The rule laid down by the cases seems to be as follows.   Where the counterclaim was put forward in respect of a matter wholly distinct from the claim and the person putting it forward is a foreigner resident out of the jurisdiction the case may be treated as if that person were a plaintiff and only a plaintiff and an order for security for costs may be made accordingly in the absence of anything to the contrary.  Where however the counterclaim is not in respect of a wholly distinct matter but arises in respect of the same matter or transaction upon which the claim is founded, the Court will not merely because the party counterclaiming is resident out of the jurisdiction or to seek for security for costs; it will in that case consider whether the counterclaim is not the substance put forward as a defence to the claim, whatever form and point of strict law or of pleading it may take, and if so, what under all the circumstances will be just and fair as between the parties and will act accordingly.

[32]     In the same decision, Lindley LJ said:

The matters set out in the counterclaim appear to me to be of such a nature and so closely connected with the cause of action that, whatever according to legal technicalities they may be called, they are, in substance, in the nature of a defence to the action. ...

[33]     And Lopes LJ said:

In cases of this kind we ought, I think, to have regard, not so much to the record, construed according to the strict rules of pleading, but as to the substantial position of the parties to the record.

[34]     That  decision  has  been  followed  in  New Zealand  in  Onop  Properties  v Falloon Properties.2   Barker J made the point that the foundation for this approach is that defendants cannot be required to give security for costs and therefore when counterclaims are in the nature of a defence, security cannot be required as that is tantamount to requiring security for costs from a defendant.   Mr McDonald also referred to the decision of Clifford J in Oceania Furniture v Debonaire Products Ltd.3

[35]     This ground of opposition applies between Mr Cheng and the vendors. As

Neck v Taylor makes clear, the matter does not turn on the technicalities of pleading,

1 [1893] 1 QB 560.

2   (1988) 1 PRNZ 261.

3   HC Auckland CIV-2008-484-1701, 24 April 2009, Clifford J.

but whether the matters raised really go to defence.  Technically, a counterclaim is a sword, not a shield, but swords can be used defensively to parry lunges from an adversary.  In this case, the matters Mr Cheng raises in his counterclaim are part and parcel of his defence to the vendors‘ claim.  In particular, his counterclaim claims a declaration that the contract is at an end.  That is something he could as effectively include in his statement of defence, along with the plea of misrepresentation, as he could include in his counterclaim.  Likewise his claim for damages is in substance a means of trying to argue for a diminution of any sum that he might be required to pay if found liable.

[36]     I am satisfied that requiring Mr Cheng to put up security for his counterclaim against the vendors would be tantamount to making him provide security for his defence – something that is not permissible under the rules.  I follow the approach in the Neck v Taylor line of cases in this case.   Accordingly, the application by the vendors for security for costs is dismissed.

[37]     The matter is different for the land agents.  They do not have a claim of their own against Mr Cheng.   Mr Cheng is running his own independent claim against them.    The  land  agents  have  independent  representation.  They  have  different interests to protect from the vendors. While there is overlap in the position of the vendors and the land agents, they are not identical.  I note in particular that the land agents have issued a cross-claim against the vendors and it is equally possible that the  vendors  might  themselves  seek  recourse  against  the  land  agents  if  adverse findings are made against the land agents on account of representations made by the land agents.  Therefore, because they have separate interests, I reject Mr McDonald‘s invitation to treat land agents and vendors as one and the same and as being intertwined.  The land agents do not have a claim of their own against Mr Cheng. Effectively, they are in the position of third parties.   They are not sued on the same cause of action as is being alleged against the vendors.  Third parties are entitled to apply for security for costs.  That is apparent from r 5.45(6).  I see no reason why added counterclaim defendants cannot in a similar vein apply for security for costs when they are not themselves asserting a claim against the defendant.

[38]     Accordingly, the Neck v Taylor approach does not apply to the land agents.

That means that Mr Cheng‘s ground of opposition against the land agents fails.

[39]     Weighing matters overall, this is a case where the discretion ought to be exercised in favour of the land agents. At this stage, my assessment is that they have defences to Mr Cheng‘s claim against them and they face a real risk that, unless Mr Cheng provides security, any costs judgment they might obtain against him would be barren. They are entitled to have some form of security.

What amount should security for costs be fixed at?

[40]     The land agents provided a schedule showing likely costs if the case goes to trial for three days calculated on a 2B basis.  The calculation suggests that total  time commitment would be 28.7 days on the B band, and at $1880 that would result in a total amount of $53,956.    There would also be approximately $900 for disbursements.  I do not accept the calculation in its entirety.  There has been some duplication because the land agents have claimed under both item 7, which are costs of preparation when the case does not go to hearing, and item 8, which is preparation when a case does go to hearing.  Claims under those heads are alternative.  The land agents have arguably also over-claimed on the 2B scale for cross-notices and lists of documents.    Those  are  not  lengthy  documents  and  the  A scale  may  be  more appropriate.   Taking the matter overall, a more likely allowance is about 20 days rather than 28 days.  Making an allowance for disbursements, a likely order for costs is going to be something like $40,000.   It is normal to allow some discount.   Mr Williams urged me not to allow a discount in this case.   I might be persuaded to refuse a discount if I were convinced that Mr Cheng‘s case has been an abuse of procedure.  While I think his claim is weak, this is not a case where I think security should be given for the full amount of likely costs.  The sum I fix for security for costs is $30,000.

Should a stay be ordered?

[41]     Time should be fixed within which Mr Cheng should provide security for costs.  A reasonable period within which he should be able to pay the security for

costs into Court is three weeks from the date of this order.  If he does not provide security for costs in the sum of $30,000 by 5 August 2011, his claim against the land agents will be stayed.  In addition, the third and fourth counterclaim defendants will be entitled to apply to the Court to have the claim against them struck out. I will give directions for this matter to be included in a Chambers list for any such applications to be considered.

[42]     It is also necessary to record other case management directions.  In the course of the hearing there was discussion as to timetabling because there had been slippage in the delivery of evidence.   The plaintiffs exchanged their evidence on 27 May

2011.  Mr Cheng has not exchanged his evidence yet.  He is to send copies of his evidence to the other parties by 29 July 2011.  The land agents are to send copies of their evidence to the other parties no later than 2 September 2011.  The land agents have that rather long period of time because they are presently out of the country and are due to return to New Zealand at about the end of August 2011.

[43]     So far, Associate Judge Abbott has been case managing this case.  This case should be called in his next Chambers list after 5 August 2011 to consider any other applications that might be made and any other trial directions that should be made.

[44]     I record the orders I am making:

(a)      I dismiss the application for security for costs by the first and second counterclaim defendants;

(b)I grant the application for security for costs by the third and fourth counterclaim defendants.   I fix the amount of security for costs at

$30,000;

(c)      Security  is  to  be  provided  by  5  August  2011.    In  default,  the defendant‘s claim against the third and fourth counterclaim defendants is stayed and the third and fourth counterclaim defendants may apply for an order striking out the claim against him.

Costs

[45]     The  land  agents  have  succeeded  and  are  entitled  to  costs  against  the defendant.  There is an order for costs in their favour in the sum of $5,000, inclusive of disbursements.  Mr Cheng has been successful in his opposition to the vendor‘s application for costs.   He is entitled to costs against the vendors in the sum of

$5,000, inclusive of disbursements.   I reserve leave to the parties following the hearing of the case to ask the trial judge to revisit this costs order if the outcome of that proceeding shows that the parties were in fact vindicated in the positions they

have taken, albeit they may have been unsuccessful today.

R M Bell

Associate Judge