Coote v Murray

[2012] NZHC 3399

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

CIV-2011-442-000122 [2012] NZHC 3399

BETWEEN  COLIN  HOWARD COOTE First Plaintiff

ANDKATE LARA COOTE Second Plaintiff

ANDKATCOL INVESTMENTS LIMITED Third Plaintiff

ANDJOHN NOEL MURRAY First Defendant

ANDCHRISTOPHER JOHN ROYDS Second Defendant

ANDGENE  EDWARD COOPER Third Defendant

ANDDANIEL JOHN WILLIAM HUNT Fourth Defendant

ANDWEST YATES Fifth Defendant

ANDFLETCHER VAUTIER MOORE TRUSTEES LIMITED

Sixth Defendant

Hearing:         28 November 2012 (Heard at Nelson)

Appearances: D Kalderimis for Plaintiffs/Respondents

K Harkess for Second and Sixth Defendants/Applicants

(other counsel excused) Judgment:      13 December 2012

JUDGMENT OF ASSOCIATE JUDGE OSBORNE [as to particular discovery]

COOTE V MURRAY HC NEL CIV-2011-442-000122 [13 December 2012]

Introduction

[1]      This case is for trial on 29 April 2013. Apart from an application for security for costs which I also heard on 28 November 2012 (and dismissed), this is the last interlocutory application in the proceeding.  The second and sixth defendants seek discovery of what I will refer to as the “plaintiffs’ financials” (the full scope of their application being set out in a Schedule which I reproduce as the Schedule to this judgment).

[2]      The proceeding concerns a loss of principal (and other losses) which the plaintiffs say they sustained as a result of investments made on the advice of the various defendants.

[3]      Two sets of defendants (the second and sixth and the first and fifth defendants respectively) have by their statements of defence asserted that the plaintiffs’ calculations of the quantum of loss have failed to take account of taxation benefits which ought to be accounted for.

[4]      In particular, the second and sixth defendants say:

... Mr and Mrs Coote have benefitted from any losses of the [Tetley Brook joint venture] in that they have/may offset those losses against personal income tax that they would otherwise have to pay.

I will call this the “quantum defence”.

[5]      The first and fifth defendants made an identical allegation in their amended pleading filed in December 2011.

[6]      The chartered accountant retained by the defendants to advise in relation to the value of any benefit which Mr and Mrs Coote have received through the losses suffered by related entities has deposed as to how tax losses can be conceptually valued.  He has stated that for completion of an assessment of the benefit to Mr and Mrs Coote in this case there are categories of information which an accountant forming an assessment of the benefit of the tax losses would need.  It is clear from

that evidence that further information is required before any meaningful opinion as to the Cootes’ tax position could be formulated.

[7]      The application is opposed by the plaintiffs. They say that: (a)          there should be no discovery order at all; and

(b)if there is to be a discovery order it should be much more limited than that sought;  and

(c)       there should be an order transferring the costs of any discovery under

High Court Rule 8.22(1).

Approach to this application

[8]      The application falls to be determined, as it has been brought, under r 8.19, which deals with orders for particular discovery.  That Rule is to be approached in the context of the altered approach to discovery which has been in place since 1

February 2012.

The Court’s approach

[9]      The application of all High Court Rules is guided by the objective stated in r

1.2, namely to secure the just, speedy, and inexpensive determination of the proceeding and indeed, of the interlocutory application itself.

Preliminary issue – leave

[10]     In applying for particular discovery, the defendants also ask for leave to file the application in the first place.  Leave is required because the Court, by its 25 June

2012 minute giving final directions before trial, required that all interlocutory applications whether for discovery or otherwise were to be filed within 20 working days. The discovery application was filed late.

[11]     The plaintiffs formally opposed the granting of leave but Mr Kalderimis responsibly focussed his submissions on the substance of the discovery application rather than on the leave application.

[12]     The June timetable was made in the light of the possibility that a trial could be allocated as early as February 2013. The trial is now scheduled to commence on

29 April 2013.  Due to the way counsel have cooperated to bring the interlocutory application on for hearing, it has been possible to deal with it substantively well before trial and in a way, with some amendment to the timetable for briefs, which will enable the case to be ready for trial without any prejudice to any party.

[13]     I accordingly grant leave to the late filing of the discovery application.

The defendants’ right to run their defence

[14]     Ms Harkess, in support of the application, and Mr Kalderimis (opposing) each addressed in a detailed and thoughtful manner matters of law concerning issues of causation and the liability for damages for negligent provision of advice.  I was referred to numerous authorities both from this jurisdiction and from the United Kingdom.  I was referred to learned commentaries.  In a sense, each counsel sought to satisfy me that the correct approach to calculation of damage in this case could be assigned to a particular legal pigeon-hole and that, as it happened, the selection of the correct pigeon-hole meant that his or her client would inevitably succeed on the quantum defence.

[15]     Put in that way, as became increasingly clear in the course of the hearing, the plaintiffs’ response to the discovery application was in fact in the nature of a cross- application  to  strike out that  part  of the defendants’ pleadings  which  raises  the quantum defence (as could be done under r 15.1(1)(a).  But the plaintiffs have not brought a strike out application.

[16]     The extent to which Mr Kalderimis’s submission focussed on the proposition that the quantum defence was not tenable or reasonably arguable is captured in the following paragraphs from his written synopsis:

29.Particular discovery is alleged to be required because the applicants contend that Alleged Collateral Benefits need to be offset against the plaintiffs’ damages claim.  This assertion is, however, untenable in view of:

29.1the Court of Appeal’s recent unanimous decision in Jones, which affirmed that, as a matter of law, an innocent party claiming compensation for loss as a result of professional negligence is not required to surrender a benefit separately promised by the wrongdoer; and

29.2the consistent rejection by New Zealand and English courts of  the  applicants’ contention  that  alleged  benefits can  be offset solely on the basis of a “but for”  causal link between an  alleged  breach  of  duties  and  subsequent  transaction giving rise to a benefit.

30.It is respectfully submitted that Jones presents a roadblock to the applicants’ “quantum defence”.  On this basis, the Court has before it all that is necessary to determine whether the Documents sought could affect the result in the proceedings.

(footnotes omitted)

[17]     Mr Kalderimis referred to the judgment of Chilwell J in AMP Society v Architectural Windows Ltd1  in support of the proposition that the Court could and should conclude that quantum defence was untenable.  Chilwell J, in responding to a submission that the applicant in AMP Society was doing no more than “fishing”, stated:2

... an applicant is fishing when he seeks to obtain information or documents by  interrogatories  or  discovery  in  order  to  discover  a  cause  of  action different from that pleaded or in order to discover circumstances which may or may not support a baseless or speculative cause of action.

I accept (as was implicit in Mr Kalderimis’s submission) that such observation may also be applied to an affirmative defence or positive allegation.

[18]     On the other hand, the conclusion which Chilwell J ultimately reached in AMP Society with regard to the suggestion of “fishing” is equally instructive and, in my judgment, can be applied in this case.  His Honour concluded:3

In the present case the pleadings and the affidavit evidence define the issues with some precision.   The documents sought relate to those issues to a

1      AMP Society v Architectural Windows Ltd [1986] 2 NZLR 190 (HC).

2      Ibid, at 196.

3      Ibid.

degree which, in my opinion, saves them from an imputation of fishing.  Nor can it be said that the allegation of agency is baseless or speculative.   I cannot hold that the plaintiff is casting his net merely in the hope of catching something worthwhile.

[19]     As is reflected in the judgment of Chilwell J, relevance was and continues to be determined by matters in issue as identified in pleadings: see also New Zealand Rail Ltd v Port Marlborough New Zealand Ltd, in which Richardson J, (with whom the other members of the Court of Appeal agreed) said:4

The general principles governing discovery are well settled. Parties are required to discover only those documents which are relevant to a matter in question in the proceedings ...  Relevance is determined by the pleadings and an order is not to be made unless the Court is satisfied that it is reasonably necessary.

(While the approach to relevance under Peruvian Guano5 has altered with effect from

1 February 2012, the centrality of pleadings in the definition of issues remains).

[20]     Relevance is also to be determined in accordance with s 7(3) Evidence Act

2006 which provides:

7         Fundamental principle that relevant evidence admissible

…

(3)       Evidence is relevant in a proceeding if it has a tendency to prove or disprove anything that is of consequence to the determination of the proceeding.

The absence of a strike out application

[21]     The  absence  of  a  strike  out  application  is  of  central  importance  in  my judgment.  There will now be no strike out application heard in this proceeding as the plaintiffs have clearly elected not to pursue such and the time for such has now passed.

[22]     At trial the parties will be entitled to adduce evidence and to cross-examine in terms of the issues as defined by the pleadings.  One of the defined issues relates to

the relevance of taxation benefits to the quantum of the plaintiffs’ alleged damages.

4      New Zealand Rail Ltd v Port Marlborough New Zealand Ltd [1993] 2 NZLR 641 (CA) at 644.

5      Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co (1882) 11 QBD 55.

[23]     The very able arguments advanced by Ms Harkess and Mr Kalderimis as to the correct assessment of damages in cases such as this at the hearing were the precursor to what will be complex arguments of mixed fact and law at trial.  One of the articles cited by counsel was that of Professor David McLauchlan entitled “Some Issues  in  the  Assessment  of  Expectation  Damages”.6    Professor  McLauchlan’s abstract indicates that a part of that article:

... analyzes the various strands of the difficult case law, largely neglected by academic commentators, concerning the distinction between compensating advantages that reduce the damages recoverable by the plaintiff and so- called “collateral benefits”, which do not.

[24]     The article addresses some of the issues on which submissions were made to me but by no means all.   What it does underscore is the extent to which the trial Judge will be applying to the facts of the case principles of legal approach which are conceptually difficult and at least arguably unsettled.

[25]     The parties will be entitled at trial to adduce evidence relevant to the issues as defined by the pleadings.   Witnesses will similarly be cross-examined upon those issues.  At the conclusion of the evidence, counsel on the competing sides will seek to establish whether and to what extent the evidence of taxation benefits falls to be taken into account in the assessment of any damages.

[26]     Were  I  to  accept  Mr  Kalderimis’s  invitation  to  find  that  the  present application  should  be  refused  because  the  defendants’ underlying  pleading  of  a quantum defence is untenable, the defendants would still be entitled to and would run that defence at trial.  No issue estoppel would arise precisely because there has been no strike out application in relation to that pleading.   The evidence for the defendants is that their expert would require documentary records relevant to the plaintiffs’ financial circumstances in order to be able to provide expert opinion on taxation benefits.  It is difficult to envisage how counsel for the defendants would be able to  present  and  pursue their case on  the issue of  quantum  defence  without

discovery as to the plaintiffs’ relevant financial records.

6      David McLauchlan Some Issues in the Assessment of Expectation Damages [2007] NZ L Rev

563.

[27]     This is not a case where the defendants are “casting their net merely in the hope of catching something worthwhile”.7    They have pleaded their assertion.  The pleading stands.   The defendants’ advisors should have access to such financial information as the Court accepts to be necessary for the purposes of the presentation of the defendants’ case as to taxation benefits.

Lateness of the application

[28]     I have referred to the late nature of this application in my discussion on the granting of leave.  The lateness of the application was raised also by the plaintiffs in opposition to the substantive application as to discovery.   Having regard to the importance to the parties and the Court of having available the information relevant to taxation benefits, the lateness of the application cannot be a factor in this case. Adequate time remains before trial to ensure that no party is prejudiced by discovery and inspection being dealt with at this point.

Confidentiality of the plaintiffs’ financial information

[29]     As a second ground of opposition, the plaintiffs asserted that the application (and the supporting evidence) had been founded upon the plaintiffs’ confidential tax returns, which had been passed directly from the plaintiffs’ accountants (the first and fifth defendants) to the solicitors for the applicants (the second and sixth defendants), without being produced in the discovery process and without the parties being informed or waiving their right to assert confidentiality in respect of those returns. The plaintiffs assert that the Court should refuse to grant an indulgence or to make the discovery orders sought because the application is based on irregularly obtained documents.

[30]     The  concern  of  the   plaintiffs  to  protect  and  to  have  respected  the confidentiality of financial information is understandable.  However, it also needs to be put in context.  The plaintiffs themselves are suing in relation to their financial

affairs.  When the time comes for evidence and cross-examination at the trial, all the

7      Per Chilwell J in AMP Society v Architectural Windows Ltd, above n 1, at 196.

parties who have received the financial information to date will be entitled to be present in Court.  The financial information provided to date takes matters only as far as the  year ending 31 March 2008.   To that extent, it is  already somewhat historical.   Furthermore, to the extent it has been provided in the context of this litigation through a process of informal discovery as between some of the parties only, it remains information discovered in the proceeding and is limited to being used in this proceeding.

[31]     Mr Kalderimis responsibly did not place significant emphasis on this ground of  opposition  in  the  oral  submissions  he  presented.    The  way  in  which  the information came to be provided to the applicant’s advisors was understandable even if there is an argument open to the plaintiffs that those providing the information to the applicants breached their confidence.   The fact is that I find it to be relevant evidence of a kind of which the Court would have ordered discovery if asked.  I am also not persuaded that the plaintiffs’ financial records for the period up to 31 March

2008 would have needed to be protected by a confidentiality order or arrangement. Parties coming to Court in relation to matters concerning their financial affairs must appreciate that justice must generally be seen to be done in public.  While the Court will and frequently does deal sympathetically with the confidentiality of current financial information relating to parties, parties and their legal advisors need to be realistic when information reaches a point where it may be seen as historical.  Every confidentiality order or arrangement restricts the ease and freedom with which the various parties to this litigation can be involved in and discuss their cases with their advisors.   Unnecessary restrictions on the freedom of legitimate discussion in the course of litigation are to be avoided.

[32]     There are, for the plaintiffs, legitimate concerns as to the confidentiality of their very recent and current financial circumstances which the Court can and will protect by the orders it makes.  The fact that older financial information has been already disclosed without discussion of confidentiality is not a ground in itself for refusing this application.

An “oppressive, vague and overbroad” application?

[33]     The plaintiffs additionally opposed the application upon the basis that it is oppressive, vague and overbroad.  In their notice of opposition they asserted that if the application were granted, it would result in the plaintiffs’ being put to significant time, expense and embarrassment, as well as requiring an additional chapter to the timetable for the exchange of evidence and requiring significant time at trial.

[34]     The plaintiffs have provided no evidence of any assessment of the time that would reasonably be required to locate documents relevant to their taxation situation. I accept the thrust of Ms Harkess’s submission that it is not for the Court, absent such evidence, to speculate that relevant records will have been kept in such a state that substantial time is taken to retrieve them.  The history of matters – indicating the plaintiffs’ use of professional advisors – would suggest that it is likely that there will be some reasonable orderliness to the plaintiffs’ record keeping.

[35]     Counsel accepted (notwithstanding that discovery initially commenced under the former discovery regime) that the completion of discovery in relation to the subject matter of this application should be governed by the proportionality requirements which have been in place under the High Court Rules from 1 February

2012.

[36]     When the applicants’ schedule of requested documents (reproduced as the Schedule to this judgment) is considered, the categories of documents numbered in [1]-[2] can immediately be seen as documents which will not be so extensive as to be oppressive or burdensome.  Mr Kalderimis did not develop oral submissions to the contrary.

[37]   On first consideration, the documents identified in [3] of the Schedule, particularly as they apply to future financial entitlements, might appear to be burdensome.  But when one focuses on the discovery nature of this exercise, relating to documents which already exist, I am on reflection not satisfied that the request would be burdensome, particularly if the documents in [3] are limited, as I will

direct, to documents relating to current investments owned or controlled by any of the plaintiffs.

[38]     The documents covered by [4] of the schedule attract a similar observation to that for [3] save that they do not require a rider in relation to current investments. They are already limited to existing financial statements.

[39]     That leaves, in the Schedule, a fifth category of documents which reflects the adverse documents regime applying to standard discovery under r 8.7.   The accountant who gave evidence for the defendants in support of their discovery application did not himself suggest that additional categories of documents be sought upon the basis of an adverse documents regime. The inclusion of [5] appears to have come about through counsel’s drafting.  The concept of a standard discovery order, as [5] would be, is in fact contrary to the submissions which Ms Harkess made on behalf of the defendants in which she stated that Mr Royds and Fletcher Vautier Moore seek tailored discovery.

[40]     Tailored discovery is provided for in r 8.8. The Rule expressly requires that it must be ordered when the interests of justice require an order involving more or less discovery than standard discovery would involve.  I am satisfied, having regard to the specific area of information which the defendants’ accountant pursues, that the interests of justice require tailored discovery in this case.  I therefore will not include an order along the lines of [5] of the Schedule.

The time needed for discovery

[41]     In light of the possibility that I might order some degree of discovery, I discussed with counsel how long might reasonably be required by the plaintiffs to comply.   Mr Kalderimis anticipated that five working days for discovery should suffice.  The Court needs to allow some additional time for inspection.  I have since the hearing of this application, pursuant to a telephone conference with all counsel, authorised an extension of the time for the filing of any expert evidence by the defendants on the taxation setoff issue to 31 January 2013. Appropriate deadlines for

discovery and inspection will therefore be 10 December 2012 (discovery) and 17

December 2012 (inspection).

[42]     I also  discussed  with  counsel  whether,  having  regard to  the principle  of proportionality and particularly having regard to the context in which the present discovery order will be made (a time when the parties are in the midst of finalising and exchanging briefs of evidence), the Court might order that the plaintiffs and/or their advisors are not required to spend more than a set number of hours identifying and assembling documents for inclusion in a supplementary affidavit.   I am not aware of a case in which such an order has been made.   Counsel, equally, were unable to  refer me to  any case.    It  appears to  me that  in  an  appropriate case, particularly where the integrity of the intended deponent is accepted, a time limit on the expectation upon the intended deponent might accord with the principle of proportionality and might constitute a just order.   On the evidence in this case, however, I have decided to refrain from such an order.   The plaintiffs themselves have not given evidence as to any particular difficulty in locating documents or of the time that might be involved.  I infer from the circumstances and with regard to the somewhat limited order I will be making, that the information ordered will be promptly accessible by the plaintiffs and their financial advisors and will not in fact involve a great deal of time in the context of this litigation.

Costs of discovery

[43]     In his written submissions, Mr Kalderimis, in the alternative to the central proposition that the discovery application should be dismissed, submitted that this would be an appropriate case for an order under r 8.22 requiring the defendants to meet the costs of discovery.

[44]     In particular, r 8.22(1) permits an order for the transfer of costs only where it is manifestly unjust for a party to have to meet the costs of complying with an order under sub-part 1 of Part 8 of the High Court Rules.

[45]     I  do  not  find  anything  in  the  circumstances  of  this  case  to  justify  the conclusion that it would be manifestly unjust for the plaintiffs to have to carry the

costs of discovery of the particular documents of which I will be ordering discovery. The plaintiffs allege that their financial circumstances have been damaged by the defendants.    The  defendants  assert  that  the  quantum  of  the  plaintiffs’ claim  is excessive because the plaintiffs have not taken into account tax losses.   Particular discovery of documents relevant to the taxation off-set issue is being ordered precisely because it is an issue which arises on the pleadings.

[46]     I decline to make an order under r 8.22(1).

The costs of this application

[47]     This  is  an  interlocutory  application  in  which  the  applicants  have  been successful.  Costs should normally follow the event.

[48]     Mr Kalderimis submits that in the somewhat unusual circumstances of this case, costs should lie where they fall.  He refers to the late nature of the application. He refers also to his more fundamental proposition that the material  which the defendants seek will ultimately have no relevance to the assessment of quantum at trial, a proposition which I have already found must ultimately be for trial.

[49]     In the circumstances, I am satisfied that the normal incidence of costs should apply.

Consequences of the discovery order

[50]     I have already noted that the timetable for interlocutory applications  has expired and that trial is pending.  As a result of the discovery orders to be made for the  purpose  of  having  all  relevant  evidence  available  for  trial,  the  defendants’ counsel and financial advisors will come to learn more about the finances of the plaintiffs.   None of the defendants is to anticipate that the Court will favourably entertain  any  further  application  for  security  for  costs  arising  from  perceptions driven by the additional discovery.

Orders

[51]     I order:

(a)      The  plaintiffs  are  to  file  and  serve  by  20  December  2012  a supplementary verified list of additional documents in their control belonging to the following categories:

(i)The plaintiffs’ financial  statements,  income tax  returns,  tax summaries and tax return details for the financial years up to and including 31 March 2012 (except to the extent already discovered);

(ii)The correspondence of the plaintiffs and/or their agents with the  Inland  Revenue  Department  regarding  the  plaintiffs’ income  tax  positions  including  statements  of  account  and return acknowledgments for the financial years up to and including 31 March 2012 (except to the extent already discovered);

(iii)Documents relating to the plaintiffs’ current and anticipated income on investments which they have owned since 2006 or currently own, including interest, salaries, wages, superannuation schemes or pensions or other income to which the plaintiffs are or are likely to become entitled through such investments;

(iv)Financial statements for any other entities owned or controlled by the plaintiffs which have or are likely in the future to create taxable income or suffer losses which can be used to off-set the plaintiffs’ income tax liability;

(b)      The plaintiffs are to make available for inspection by 24 December

2012 the documents discovered pursuant to (a) above;

(c)      Such inspection is to be limited to the legal and any expert accounting advisors retained by the defendants, who shall keep confidential all copies of such documents and information in such documents, save to the extent it is reasonably required to be incorporated in a brief of evidence or referred to in cross-examination.

(d)The plaintiffs are to pay to the second and sixth defendants jointly the costs of this application on a 2B basis together with disbursements to be fixed by the Registrar, with a certificate for the reasonable costs of counsel’s travel and accommodation.

Associate Judge Osborne

Solicitors:

Chapman Tripp, PO Box 993, Wellington 6140

McElroys, PO 835, Auckland 1140

SCHEDULE