Diamond Aquaculture (2000) Limited v Franklin
[2012] NZHC 2107
•20 August 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2011-404-008198 [2012] NZHC 2107
BETWEEN DIAMOND AQUACULTURE (2000) LIMITED
Plaintiff
ANDNICHOLAS CRAIG FRANKLIN AND CHRISTINA JOANNA ROGERSON First Defendants
ANDDIAMOND AQUACULTURE (2008) LIMITED
Second Defendant
ANDDIAMOND AQUACULTURE TRUSTEES LIMITED
Third Defendant
Hearing: 20 August 2012
Appearances: A E Malone for plaintiff
J M Carruthers for defendants
Judgment: 20 August 2012
ORAL JUDGMENT OF ASSOCIATE JUDGE ABBOTT
Solicitors:
A E Malone, Duncan Cotterill, PO Box 5326, Auckland
J N Carruthers, Smith & Partners, PO Box 104-065, Lincoln North, Auckland
DIAMOND AQUACULTURE (2000) LIMITED V NICHOLAS CRAIG FRANKLIN AND CHRISTINA JOANNA ROGERSON HC AK CIV 2011-404-008198 [20 August 2012]
[1] This case concerns a dispute over arrangements made between the principals of the corporate parties to assist a company of which the first defendants were directors and shareholders (Diamond Aquaculture Ltd (now in liquidation)) to continue trading through a period of financial difficulty.
[2] The matter is before the Court on an application by the defendants for an order that the plaintiff provide security for their costs.
Background
[3] The plaintiff contends that its director, Mr Greg Magness, entered into an agreement with the first defendants to fund Diamond Aquaculture Ltd’s business in exchange for receiving the profits from that business. The business was the manufacture of a rope specifically for use in aquaculture. It was manufactured using a machine designed by the first defendant, Mr Nicholas Franklin. The plaintiff also contends that the agreement provided for it to be formed as the vehicle for funding the business and for the first defendants to continue to work in the business, with Mr Franklin continuing to develop and build new versions of the machine.
[4] The defendants have a different view of the arrangements. They say that Mr Magness was assisting Diamond Aquaculture Ltd as a mentor with a legal dispute. They say that this led to agreements under which Diamond Aquaculture Ltd used its equipment to produce marine product for the plaintiff for a fee (the services agreement) and under which the business assets of Diamond Aquaculture Ltd were to be transferred to the plaintiff but ownership was to remain with Diamond Aquaculture Ltd, and all intellectual property in the manufacturing machinery was to remain with Mr Franklin (the background agreement).
[5] The second and third defendants were formed around the same time. The defendants contend the assets of Diamond Aquaculture Ltd were to be transferred to the third defendant.
[6] It appears that none of these agreements was recorded in writing at the time (although subsequently a services agreement was signed between Diamond Aquaculture Ltd and the plaintiff, and an employment agreement was signed between the plaintiff and Mr Franklin), but a working relationship was established between the parties which continued until approximately May 2010. There is no written agreement dealing explicitly with plant and equipment that the plaintiff now claims.
[7] The original company, Diamond Aquaculture Ltd, was put into liquidation by shareholders’ resolution on or about 27 April 2011. By that time the relationship between Mr Magness and the plaintiff (on the one hand) and Mr Franklin and Ms Rogerson (on the other) had ended, and a number of disputes had arisen. There was ongoing correspondence between the parties and their solicitors. This proceeding was issued in December 2011.
The proceeding
[8] The plaintiff pleads three causes of action:
(a) Against the first defendants it contends that they are in breach of an agreement to account for the profits from the business in exchange for funding of the business operations.
(b)Against all defendants it contends that they have converted its property in plant and equipment, which it alleges have been transferred to the second and third defendants.
(c) Against the second and third defendants it contends that they knowingly received its plant and equipment, knowing that it was the true owner.
[9] The defendants have filed a joint statement of defence and counterclaim, under which they deny the plaintiff’s contentions as to the arrangement between them (particularly the arrangements as between Mr Magness/Diamond Aquaculture
(2000) Ltd and the first defendants/Diamond Aquaculture Ltd). They contest the plaintiff’s claims that it has funded the business that was operated through Diamond Aquaculture Ltd, and say that the only plant and equipment that has been transferred to any of the defendants was owned solely by Diamond Aquaculture Ltd. They also say that if there was any agreement of the nature contended for by the plaintiff, it was between the plaintiff and Diamond Aquaculture Ltd.
[10] In a counterclaim, the first defendants say that it was an implied term of their employment with the plaintiff that in addition to stipulated wages they would be remunerated for the total number of hours worked. They claim unpaid entitlement in the sum of $177,435. In addition, the first defendants contend that the plaintiff has converted an external computer hard drive belonging to Diamond Aquaculture Ltd, and seek return of that computer hard drive to themselves (the plaintiff has taken issue with the fact that this appears to be a claim belonging to the company in liquidation rather than the first defendant).
The application for security
[11] The defendants seek an order that the plaintiff provide security for their costs, and that the proceeding be stayed pending provision of that security. The application was originally opposed by the plaintiff on the grounds that it was able to pay the defendants’ costs if the plaintiff was unsuccessful, and that an order was inappropriate in light of the merits of the plaintiff’s claim and on the grounds that any inability to pay was a result of the conduct of the defendants. In other words, the notice of opposition put in issue the Court’s jurisdiction to make an order, as well as contending that the Court should not exercise its discretion in any event.
[12] Over the past week or so the parties have been endeavouring to resolve the matter. Late last week counsel for the plaintiff advised the Court that, purely for pragmatic reasons, the plaintiff had decided that it would make an offer for security (and it has done so), and the only issues would be as to the quantum of security and the costs of the application.
[13] Counsel for the plaintiff was asked at the start of the hearing to confirm the plaintiff’s position. I record that position as being that the plaintiff concedes for the purposes of the present application, but without prejudice to costs (this concession being made for jurisdiction purposes), that there is reason to believe the plaintiff may be unable to meet costs and that the plaintiff is willing to pay security, so that the only issues are as to the quantum of security to be paid and as to costs on the application.
Principles
[14] Counsel were agreed as to the principles that the Court applies when considering these applications.
[15] The application is brought under r 5.45 of the High Court Rules. It is common ground that the Court can make an order if there is reason to believe the plaintiff will be unable to meet the costs of the defendant if the plaintiff is unsuccessful (the threshold test for jurisdiction), and that the Court has a discretion both as to whether to order security and as to the quantum to be ordered.
[16] Counsel were agreed that the general approach to these applications is that set out by the Court of Appeal in A S McLachlan Ltd v MEL Network Ltd:[1]
[1] A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [13]-[14].
[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.
[17] As I understand it, it is also common ground that although the Court has an unfettered discretion, to be decided on the facts of the instant case, factors that can be taken into account will include matters such as the amount at stake, the complexity of the proceeding, and the potential effect that an award may have. Ultimately, in relation to quantum, however, one of the significant issues is how much time will be required for trial and what award of costs may be given. The Court will take the ultimate award into account, but the quantum will not necessarily equate with it.
Counsel’s arguments
[18] The defendants seek an award of $50,000. Counsel for the defendants said that this sum was based on an assessment that the costs that would be awarded to each defendant on a scale 2B basis would be $31,800 on the basis of an agreed two days for trial. Counsel acknowledged that the two day trial time included time required for the counterclaim, and submitted that the award should be discounted to reflect that. He also acknowledged that there was some overlap between the position of the defendants on the facts, and for that reason some further discounting should be applied (in the latter respect he relied on the decision of this Court in Apatu v
Apatu).[2]
[2] Apatu v Apatu HC Napier CIV 2007-441-823, 3 November 2011.
[19] The plaintiff challenges the defendants’ contention that costs should be awarded for each defendant. Counsel for the plaintiff relied on r 14.15, and argued that there was no good reason advanced for allowing for an award of costs for each defendant. She submitted the same individuals (the first defendants) were the guiding parties behind the two corporate defendants. She also submitted that it was a fundamental principle that a party should not benefit from costs and that there was no evidence to show what actual costs would be, either in respect of costs incurred to date or overall costs. As to the counterclaim, she argued that it was appropriate that a discount should be given, and that a third was an appropriate adjustment.
[20] Counsel for the plaintiff said that the plaintiff had offered to provide security of $25,000 (and that remained its position) on the basis that this was a defence run in
common by all defendants, and that an appropriate discount for the counterclaim brought the award down to the $25,000 sum offered.
Application to the facts
[21] I accept the point made by counsel for the defendants that slightly different considerations apply to the relief being sought against the various defendants. However, it cannot be doubted that the factual aspects of all three causes of action are common, and that the differing relief sought will first require a consideration of the nature of the arrangements (and agreements) between the parties, and particularly what has happened to the plant and equipment that lies at the heart of the second and third causes of action.
[22] Although there may be some issues arising with respect to the second and third defendants solely, they do not in my view justify a separate award of costs. The Court that ultimately determines costs may come to a different view, but that is the position that I take at this time on the evidence before the Court. I also note that this approach reflects the fact that all defendants are represented by the same solicitors and counsel, they have filed and served a joint statement of defence and counterclaim (although the counterclaim is only brought by the first defendants), and they have not each sought a separate provision for security (the security is sought globally).
[23] I have no doubt that the defences will be run together. Any evidence being given by or on behalf of the second and third defendants will be given by one or other of the first defendants: the first defendants are the directors and shareholders of the second and third defendants.
[24] I also accept that there should be some discounting in respect of the counterclaim, although I have some doubt as to whether the counterclaim will take as much as a third of the trial time that counsel for the plaintiff has suggested. The first counterclaim (for additional remuneration) will traverse the same factual ground as the claims regarding the terms under which the first defendants provided their services to the plaintiff and the nature of those services. The second counterclaim
(for conversion of the hard drive) will involve the same consideration as the claims as to what plant or equipment the plaintiff acquired under the arrangements. An allowance of about 25% of the amount of time is probably the most that could be expected.
[25] Weighing all of the above, I consider that the sum offered by the plaintiff ($25,000) is an appropriate amount in the circumstances of the case. I have come to this view on the basis that this is a case that will be completed within two days. The position may be different if any circumstances arise which cause the estimate of time to be increased significantly (by which I mean moving into a third day or more). In that event, I reserve leave for the parties to come back to the Court to seek further provision. Having said that, I accept that on the information put before me that the two day estimate is a realistic one.
Costs of this application
[26] This leads me to the last point, namely costs. Counsel for the defendants argued that even if I was to accept the plaintiff’s position on quantum, an award of costs should still be made in favour of the defendants as the plaintiff’s offer was made very late (long after the application was filed, and after delivery of the defendants’ synopsis).
[27] In response, counsel for the plaintiff contended that an award should be made in its favour as this hearing should not have been necessary given the offer that was made or, alternatively, that costs should lie where they fall.
[28] There is some merit to each party’s position. The defendants could have been more specific as to the grounds on which they were seeking security prior to bringing their application. Having said that, I have no reason to believe that the plaintiff would necessarily have made the offer prior to the filing of the application even if grounds had been spelt out more specifically. I also take into account that there was a four month gap between filing the application and making the offer (during which time the plaintiff filed notice of opposition, taking issue on all points). However, I consider that the defendants have been “blinded” by the view that they
should be entitled to a separate award for each party (appropriately discounted), and this hearing could have been avoided had they accepted the degree of commonality on the claims and hence the likely restriction on the award.
[29] In all the circumstances, I consider that the appropriate outcome is to let costs lie where they fall.
Addendum – orders
[30] Since giving the above decision in Court, I have realised that I did not specifically address the orders to be made.
[31] I order the plaintiff to provide security for the costs of the defendants in the amount of $25,000. Security is to be given by payment into Court, to be held in an interest bearing account pending further order of the Court.
[32] The proceeding is stayed pending the payment into Court. There is no order as to costs.
Associate Judge Abbott
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