Elvidge v ASB Bank Limited
[2012] NZHC 2674
•12 October 2012
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2011-441-000811 [2012] NZHC 2674
BETWEEN ROBERT ELVIDGE AND JOHN RICHARD TOWNSEND GIFFORD Plaintiffs
ANDASB BANK LIMITED Defendant
Hearing: 20 September 2012 (Heard at Napier)
Appearances: M J Tingey and N F D Moffatt for Applicant/Defendant
M E J Macfarlane for Respondent/Plaintiff
Judgment: 12 October 2012
JUDGMENT OF ASSOCIATE JUDGE OSBORNE [as to security for costs and other matters]
Introduction
[1] Banking transactions at the centre of this litigation have been the subject of two earlier judgments of this Court.1
[2] The history to the litigation was aptly introduced by Kós J in the second case
– Jojaro Investments Ltd v ASB Bank Ltd:
A senior insurance company employee steals capital the company [Pioneer] has set aside to maintain its credit rating. He does this by transferring the capital into the principal trading account maintained by the company at the ASB Bank in Napier. Then he draws cheques on that account. Over a period of 20 months, he embezzles nearly $4 million. No one notices. Not the directors, not the auditors, and not the bank.
1 Gifford v ASB Bank Ltd HC Napier CIV-2008-441-000713, 16 December 2008 (Simon France
J); Jojaro Investments Ltd v ASB Bank Ltd [2012] NZHC 980 (Kós J).
ELVIDGE V ASB BANK LIMITED HC NAP CIV-2011-441-000811 [12 October 2012]
The fraud ruins the shareholders of the insurance company. They cannot afford to replenish the stolen capital. So they sell their shares to a third party for a nominal consideration. The new owner will recapitalise the business. Most importantly, it will keep the employees in work. In due course the company, newly owned, sues the auditors and former directors. That case is settled. The company does not sue the bank. There is an issue over whether the fraudster was entitled to operate the trading account. But the new owners are not interested in pursuing that claim.
Now the former shareholders say the bank is liable to them, as the shareholders, funders and indirect guarantors of the company. They say there is an implied term in the agreements they have with the bank (contracts of loan and guarantee) and a duty of care (the content of which is substantially the same) that the bank not permit the fraudster to operate the trading account in breach of the mandate given by the company.
The bank applies to strike out those claims against it. Alternatively it seeks summary judgment at this early stage of the case. Failing all that it seeks security for its costs. That is because, as a result of the fraud, the plaintiffs now have very little money.2
[3] Kós J granted the bank’s application to strike out the plaintiffs’ claims. The
Court held that the claims belonged to Pioneer and not to its former shareholders.
[4] Kós J concluded:
Happily, as I have already noted, Messrs Elvidge and Gifford have secured an assignment of Pioneer’s rights of action against the bank. Thus fortified, they have issued separate proceedings in the High Court at Napier. That action may proceed. This one may not.
[5] This present proceeding is the “separate proceedings” to which Kós J
referred.
[6] Messrs Elvidge and Gifford (shareholders of Pioneer) sue the bank for breach of contract. In their statement of claim they assert that their damages from such breach amount to $4,853,030.
The bank’s interlocutory application
[7] The bank seeks three sets of orders, namely:
(a) further particulars of the plaintiffs’ damages;
2 Jojaro Investments Ltd v ASB Bank Ltd [2012] NZHC 980 (Kós J) at [1]–[4].
(b)provision of an unredacted version of the deed by which the plaintiffs took an assignment of the company’s cause of action in this litigation; and
(c) security for costs.
Further particulars
[8] The figures identified as damages in the statement of claim (13 December
2011) are out of date. The plaintiffs accept that some aspects of the pleaded gross loss to the company are overstated. The statement of claim stands in need of amendment in relation to the particulars of gross loss.
[9] However, the gross loss is irrelevant for the purposes of the present application. The bank’s focus in the present application is upon the plaintiffs’ failure to identify or otherwise bring into account the mitigation achieved by the company through subsequent recoveries.
[10] As Kós J’s introduction indicates, Pioneer has previously sued its auditors and former directors in litigation which was settled. The published annual report of Pioneer shows that it received a “legal settlement” of $1,350,000 in the year ended
30 June 2010. In the following financial year, a “legal settlement expense” of
$332,000 is recorded.
[11] That is the extent of information available to the bank and its lawyers. As I
have said, the statement of claim gives no indication of recoveries.
[12] The bank’s solicitors wrote to the plaintiffs’ solicitors seeking further particulars as to recoveries in December 2011.
[13] The plaintiffs’ solicitor’s response in January 2012 did not provide particulars
and instead gave this explanation for not providing particulars:
Proceedings issued by Pioneer against the former directors of Pioneer and
against Pioneer’s auditors were settled at a mediation conference held in
early 2008. Our clients were not a party to that settlement. Our clients understand that the settlement agreement contains a confidentiality clause. They have written to Pioneer asking whether the information you have requested may be made available for the purpose of this litigation but have received no response.
As far as the plaintiffs are aware, Pioneer has not recovered any monies from
Mr Fitzsimons [the fraudster].
[14] In opposition to the particulars application, the first-named plaintiff, Robert Elvidge, has essentially confirmed what was said in his solicitors’ letter and has deposed additionally:
I am aware that [Pioneer’s] recovery included a settlement of related litigation not involving the defendant or the losses caused by the frauds which are the subject of the plaintiffs’ claims. The cost of legal advice in respect of the total recoveries meant the net recovery for Pioneer was very small. I believe that some was from the auditors of Pioneer and reflected some of the losses sued on. It is not possible to say from the annual report how much was recovered in respect of the defendant ASB.
[15] There is no reason to doubt the genuineness of the plaintiffs’ assertions that they have been unable to obtain the relevant recoveries information from Pioneer which assigned the cause of action to them. That said, it is plainly unsatisfactory that the plaintiffs, who by right of assignment issue a very substantial claim, have left themselves for the time being unable to particularise in this Court the value of mitigation which their assignor had already achieved before assigning the cause of action. Both assignor and assignees, with or without the advice of counsel, must have appreciated when the assignment was completed that they would need to find a way, sooner rather than later, of freeing themselves from any obligations of confidentiality to others which the assignor may have taken on. The assignees at some point had to be allowed to complete their obligations of disclosure to this Court and to the defendant.
[16] The plaintiffs leave the Court with something of a chicken and an egg. It may be relatively pointless to direct the plaintiffs to provide particulars when, rightly or wrongly, they still do not possess the necessary information. That said, the bank is clearly entitled to the particulars and the making of an order should simply be a matter of timing.
[17] For that reason, I indicated to counsel in the course of argument that I viewed an order for non-party discovery should appropriately be pursued first. Mr Tingey then made such an application orally. Mr Macfarlane, for the plaintiffs, neither consented to nor opposed the application. The non-party discovery aspect was then the subject of a separate minute which I have issued since the hearing.
[18] I accordingly adjourn this aspect of the bank’s application for further particulars, with the likelihood that formal orders will be made in favour of the bank upon completion of non-party discovery, unless the plaintiffs have (after such discovery) promptly amended their pleading.
Application for production of an unredacted document
Introduction
[19] The plaintiffs’ took their assignment of the right to sue this defendant in
relation to the fraudulent withdrawals through a deed dated 13 December 2011. [20] The deed is expressly pleaded in paragraph [7] of the statement of claim.
[21] A copy of the deed has been provided by the plaintiffs to the bank, but with one clause partially redacted.
[22] The clause in question, as redacted, reads:
[4] In any successful proceeding taken by Rob and John they shall pay from the clear funds recovered xxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxx
[The redacted portion is shown above with crosses but was produced in the redacted version fully blacked out.]
The basis of the application
[23] The grounds asserted by the bank in support of its application for production of an unredacted version of the deed were:
(a) The bank has made a request pursuant to the former r 8. 23 of the
High Court Rules for a copy of the Deed.
(b)The plaintiffs have only provided a copy of the Deed with the financial arrangements between the plaintiffs and Pioneer redacted and refused to provide an unredacted copy.
(c) Without this information, the defendant is unable to determine whether the assignment of Pioneer’s rights of action is legitimate or not, including whether such assignment offends the torts of champerty and maintenance.
[24] Additionally, the bank relied on evidence of its national manager, Peter
Robinson. Mr Robinson deposed:
(a) the only version of the deed provided by the plaintiffs has been the redacted version; and
(b)when the bank’s solicitors requested a copy of an unredacted version, the plaintiffs’ solicitors responded that the plaintiffs claimed confidentiality pursuant to r 8.23.
The plaintiffs’ opposition
[25] The plaintiffs’ notice of opposition repeated the assertion that redaction is justified by confidentiality (with reference to r 8.23) and added that the omitted words are irrelevant to champerty or maintenance.
Confidentiality
[26] There was an understandable focus in submissions on the provisions of the former r 8.23 and on confidentiality under that rule. Because both counsel addressed submissions to former r 8.23, I will also briefly deal with it although there is also a broader way of looking at the issue, producing the same result.
[27] The former r 8.23 was repealed with effect from 1 February 2012. This litigation had been previously commenced and inspection obtained under that rule.
[28] Rule 8.23 expressly made the requirement to produce subject to any claim by the producing party to privilege or to confidentiality: r 8.23(3).
[29] There is nothing surprising in the plaintiffs’ claim for confidentiality in relation to the redacted part of cl 4 of the assignment deed. The plaintiffs do not claim it is privileged material. Rather, they assert that it is by its nature confidential or, put another way, commercially sensitive for the parties to the deed. It is understandable that the plaintiffs would view information about what proportion of recovered funds they have to give to Pioneer as commercially sensitive.
[30] I find the claim to confidentiality in accordance with the plaintiffs’ entitlement under r 8.23(3). That is not the end of the Court’s involvement. Such a claim under former r 8.23 was in turn subject to the Court’s supervisory rule under what was then r 8.31 (now r 8.25).
[31] The present application purports to invoke the former r 8.23 and does not refer to r 8.25 (or the equivalent former r 8.31) at all. But the substance of the application is that it seeks an order which in effect sets aside the claim to confidentiality and then directs production of an unredacted version, both powers open to the Court under r 8.31(3)(a) and (d). The appropriate route for the Court on this application is to treat the application as one under r 8.31(3) and not to consider further whether the Court has jurisdiction to make some supplementary order in relation to the former r 8.23, as if it had continued to exist when this application was made and at the time of this hearing.
[32] I am satisfied that the appropriate way in which to respect commercial sensitivity in this case is a direction restricting the access to and use of redacted material to counsels and solicitors. As in New Zealand Railways Corporation v Auckland Regional Council,3 this is not a case where the requesting party itself needs
itself (personally) to consider the documents. For the purposes which Mr Tingey
3 New Zealand Railways Corporation v Auckland Regional Council (1990) 3 PRNZ 332 (CA).
most focused on in his submissions (possible issues of champerty or maintenance) such consideration can be exclusively undertaken by counsel. It need not involve the bank.
[33] Where an assignment is completed through a deed such as in the present case, it is appropriate in the interests of justice that those advising the other party have full access to the deed of assignment so as to understand and comprehend it in its entirety. The plaintiffs and their legal advisors virtually conceded as much (implicitly) by making available a full copy of all six recitals in the deed and the complete form of all other 10 operative clauses in the deed. The partial redaction of cl 4 was self-evidently not specifically for reasons of irrelevance but for reasons of confidentiality or commercial sensitivity.
[34] I therefore now refer only briefly to the further submissions developed by Mr Tingey and responded to by Mr Macfarlane in relation to possible relevance. The bank’s notice of application gave the torts of champerty and maintenance as arguments which may be available to the bank depending upon the wording of the redacted part of cl 4. This led to some detailed submissions on each side as to the current legal approach to the torts of champerty and maintenance. I do not consider it necessary, or appropriate, to identify how a champerty and maintenance argument might evolve depending on the precise wording of cl 4 or to determine whether there is potential for the bank to plead an invalid assignment by reason of observations in
cases such as Trendtex Trading Corporation v Credit Suisse4 as referred to by Mr
Tingey.
Conclusion
[35] In the interests of justice, counsel for the bank should have access to the full version of the deed of assignment. In this way, the bank as defendant can be satisfied that its legal advisers have been able to consider all legal arguments which may properly be available to the bank in relation to the deed of assignment. In an area of law which arguably remains unsettled it is appropriate that the judgement as
to whether a party has good arguments flowing from the deed of assignment should
4 Trendtex Trading Corporation v Credit Suisse [1982] AC 679.
be made by its counsel on full information and not by this Court in a summary context.
[36] Accordingly, the bank is entitled to an order as to the provision of an unredacted copy of the deed albeit on a restricted basis.
Security for costs
The application
[37] The bank applies for an order that the plaintiffs pay the bank $115,172 as security for costs. (The figure is arrived at through a 2B calculation to the end of trial (assuming a ten day trial) with allowance for disbursements and expert’s fee).
[38] The plaintiffs accept that they would be unable to pay the bank’s costs if the plaintiffs are unsuccessful in this proceeding. The threshold, under r 5.45(1)(b) for an order of security is therefore established. The Judge’s discretion under r 5.45(2) is engaged.
The opposition
[39] Refreshingly, the plaintiffs in their notice of opposition asserted a single ground of opposition namely:
That no order should be made as the cause of the plaintiffs’ impecuniosity is the Bank’s fault.
The legal principles applicable
[40] I adopt the statement of the applicable principles of law set out in the judgment of Davison CJ in Bell-Booth Group Ltd v Attorney-General:5
1.The ordering of security for costs is discretionary. See s 467 and r 60.
5 Bell-Booth Group Ltd v Attorney-General (1986) 1 PRNZ 457 (HC) at 460–461, appeal subsequently dismissed: (1986) 3 NZCLC 99,774.
2.There is no burden one way or the other. It is a discretion to be exercised in all the circumstances of the case. See Parkinson & Co Ltd v Triplan Ltd; National Bank of NZ Ltd v Donald Export Trading Ltd.
3.In the exercise of the discretion there is no predisposition one way or the other. See National Bank case (ante).
4.The interests of both the plaintiff and the defendant should be considered. The Court should not allow the rule to be used oppressively to shut out a genuine claim by a plaintiff of limited means. On the other hand, an impecunious plaintiff must not be allowed to use its inability to pay costs as a means of putting unfair pressure upon a defendant. It is inherent in the whole concept of security, however, that the Court has the power to order a plaintiff to do what it is likely to find difficulty in doing, namely, to provide security for costs which ex hypothesi it is unable to pay. See Pearson v Naydler which was approved by our Court of Appeal in the National Bank case. See, too, Pacific Acceptance Corp Ltd v Forsyth.
[Case references omitted]
[41] Having set out those principles, the Chief Justice went on to identify a number of factors to be taken into account in exercising the discretion including:6
(a) The merits and bona fides of the plaintiff's case should be considered even though it is difficult to assess merits at an interlocutory stage. The Court should consider whether the action of the plaintiff has reasonable prospects of success. See A-G v Transport Control Systems; Parkinson & Co Ltd v Triplan Ltd (ante) at p 626.
(b) Any “reasonable probability” that the impecuniosity of the plaintiff had been caused by the very acts of the defendant on which the action has been brought is a matter sometimes of importance to be taken into account. See A-G v Transport Control Systems (ante) at p
20. This is especially so if an order for security might result in a denial of justice. See G Richardson Ltd v Tuakau Sands Ltd.
...
[42] Having thus stated the principles and relevant factors, the Chief Justice observed in relation to the quantum of security:7
(a) The amount of any security is not intended as a pre-estimate of the actual amount of party and party costs that might become payable should the case go to Court and the defence succeed. See National Bank v Donald Export Trading Ltd (ante).
6 At 461.
7 At 462.
(b) Security should be fixed at an amount which is appropriate in the interests of justice and such requires a consideration of all the issues bearing on that matter in a particular case. See Ratepayers and Residents Action Assn (Inc) v Auckland CC unreported.
[Case references omitted]
Impecuniosity caused by the defendant?
The Courts’ usual approach
[43] If a plaintiff’s impecuniosity is a result of the defendant’s acts, particularly those that are the subject of the litigation, and an order of security would prevent the proceedings continuing, security may be refused or reduced: Bell-Booth Group Ltd v Attorney-General.8
[44] The plaintiff should establish on persuasive evidence a reasonable probability that the defendant caused the impecuniosity: Nikau Holdings Ltd v Bank of New Zealand.9
[45] As the plaintiffs’ opposition to this security application was expressly based on the proposition that their impecuniosity has been caused by the bank’s conduct, this consideration will dominate this judgment and I will begin with it.
What is the plaintiffs’ case?
[46] The plaintiffs plead as a single cause of action breach of contract. Their allegations in that regard are two-fold. They allege:
(a) the bank breached Pioneer’s mandate in honouring cheques drawn on
the current account by the fraudster (Mr Fitzsimons); and
(b) the bank breached an implied duty of care and skill in failing to warn
Pioneer of the fraud.
8 Bell-Booth Group Ltd v Attorney-General, above at n 6.
9 Nikau Holdings Ltd v Bank of New Zealand (1992) 5 PRNZ 430 (HC) at 431 (Master Williams, QC).
[47] The plaintiffs say these actions permitted the fraudster, Mr Fitzsimons, to strip over $4 million from Pioneer’s bank account. In the context of this interlocutory hearing, the plaintiffs say they have been rendered impecunious by these events.
Pioneer’s banking mandate
[48] The banking mandate was as central to the judgment of Kós J in Jojaro
Investments Ltd10 as it is to this case.
[49] I accordingly adopt the history of Pioneer’s banking mandate as summarised
by Kós J:
A central feature of this case is the terms of a mandate given by Pioneer to the bank. Account facilities were set up in October 2002. On 14 October
2002 Pioneer completed a mandate to the bank. It named three authorised signatories – Messrs Anderson and Elvidge, and a Mr Haggerty. They were
at that time the three directors of Pioneer. The mandate states:
This authority requires [2] Authorised Signatories to operate the Customer’s
Account and suffix mentioned above.
The account number is 123197002934. That is the “Customer Account”. No suffix is in fact mentioned in the mandate. However it appears to have been treated as establishing a “-00” suffix sub-account. A delay in opening the account ensued while Pioneer was waiting for its credit rating. It was closed by the bank.
In May 2003 an -01 sub-account for the same account number was created. The documentation for that is not before the Court.
More importantly, in October 2003 a further -04 sub-account, again for the same account number, was established. A new mandate was completed. The October 2003 mandate was rather different to the 2002 one. Two authorised signatories were nominated – Mr Gifford and Fitzsimons. Entirely different to those nominated a year earlier.
The 2003 mandate provides:
The Customer requests that ASB Bank Limited (“the Bank”) act as
its Banker and authorise the Bank to:
1.(a) debit to any Customers Accounts (whether or not in credit) all cheques or other payment orders;
10 Jojaro Investments Ltd v ASB Bank Ltd, above n 1.
(b) act upon any request to deal with any property which the Bank may at any time hold on behalf of the Customer;
if signed or initiated electronically in accordance with the method of signing (subject to Business Banking and Rural Banking Terms and Conditions), by any of the Authorised Signatories either listed above, or advised to the Bank at a later date.
AThis authority requires [1] Authorised Signatories to operate the Customers Account mentioned above.
BThis authority applies to all suffixes of the Account, and to all channels of access to the Account, including electronic access.
...
HThis authority to operate supersedes all previous authorities given by the Customer to the Bank with the exception of any outstanding liabilities and instruments executed under a previous authority.
(Emphasis added)
The mandate was signed by Messrs Elvidge and Anderson, directors of
Pioneer at the time.
As a result of the 2003 mandate being executed the bank altered the identities of the authorised signatories (to two) and the number of authorised signatories needed to operate the head 123197002934 account (to one) on 7
October 2003. From that point on Fitzsimons was in a position, in
accordance either with the mandate given by Pioneer or the bank’s interpretation of it, to operate its whole account (all suffixes) and withdraw funds.
[50] In Jojaro Investments Ltd the plaintiffs’ claim, as with the plaintiffs in this case, was that the 2003 mandate applied only to the new -04 sub-account. As Kós J observed, the plaintiffs advanced that submission in the face of the words of the mandate itself. As a consequence, the plaintiffs asserted that the previous 2002 mandate continued to apply to the original -01 sub-account (which was the sub-
account principally affected by Mr Fitzsimons’s frauds).11
[51] The plaintiffs therefore asserted that Messrs Anderson, Elvidge and Haggerty could operate the -01 sub-account jointly. Mr Fitzsimons could not, nor could Mr
Gifford.12
11 Jojaro Investments Ltd v ASB Bank Ltd above n 1 at [17].
12 At [18].
Kós J’s assessment of the merits of the breach of mandate argument
[52] As the first part of an assessment of the merits of the plaintiffs’ breach of mandate argument in Jojaro Investments, Kós J examined how Pioneer had in fact operated the account from 2003. His Honour referred to the evidence which indicated that between May 2004 and April 2007 all but five out of 1,201 cheques drawn on the -01 sub-account were the subject of only one signature. That is to say, only five were jointly signed. The five which were jointly signed were signed by Messrs Elvidge and Fitzsimons when Mr Fitzsimons, on the plaintiffs’ case, was not entitled to be a joint signatory at all. Mr Elvidge, despite his assertion that cheques should always have had a co-signatory, signed 180 of the 1,201 cheques by himself. Mr Gifford signed 52 of the 1,201 cheques himself. Mr Fitzsimons signed himself
879 (“the vast bulk”) of the cheques, which led Mr Gittings of the bank to give evidence that he had had no reason to question the authority of Mr Fitzsimons to deal with the -01 account as Mr Fitzsimons was the person within Pioneer responsible for day-to-day contact with the bank. It had only been in May 2007 – a month before Mr Fitzsimons confessed his frauds – that Pioneer and the plaintiffs started operating the -01 sub-account using joint signatories.
[53] This led Kós J to observe:
It follows that the plaintiffs’ own operation of the -01 sub-account was altogether at odds with what they say should have been happening – and which they say the bank was bound to protect them against.
[54] His Honour went on to observe that, although the bank’s position in relation to the 2003 mandate was that it required the signatures of either Mr Gifford or Mr Fitzsimons, 270 (22 per cent) of the 1,201 cheques were not signed in that way. Of the 270 not so signed, Mr Elvidge had signed 180 (15 per cent of the total). Kós J observed that however that had occurred it did not necessarily follow as a matter of law that the bank had acted in breach of the mandate by honouring cheques signed
by Mr Elvidge alone,13 Kós J referring to London Intercontinental Trust Limited v
Barclays Bank Limited.14
13 At [24].
14 London Intercontinental Trust Limited v Barclays Bank Limited [1980] 1 Lloyd’s Rep 241
(QB) at 249.
[55] Nonetheless, as Kós J recorded, the plaintiffs in Jojaro Investments
challenged the validity of the 2003 mandate.
[56] Mr Elvidge had deposed as to his horror, following the discovery of the Fitzsimons’ fraud, at receiving from the bank a copy of the 2003 mandate providing for signatures by Messrs Gifford or Fitzsimons. He referred to an investigation he then conducted. He traced the events leading to the 2003 mandate to errors in the establishing of an account for CRM, a company associated with Pioneer. Mr Elvidge then deposed in relation to the circumstances in which the 2003 mandate was granted:
I believe that Pioneer was requested by the bank manager Steve Gittings to rectify the error by providing the authority for Messrs Gifford and Fitzsimons for the Pioneer claims account (-004 only). Although unfortunate, this presented very little risk to Pioneer.
(Mr Elvidge did not identify the actual Pioneer person to whom Mr Gittings spoke in relation to the 2003 mandate).
[57] The evidence of another director of Pioneer, John Gifford (not one of the shareholders or plaintiffs in this proceeding), was that Mr Gittings spoke to him in relation to the 2003 mandate. He deposed:
I do not recall the conversation entirely, ...
but went on to indicate that he recalled being satisfied that the instructions were clearly for the claims account (that is to say the -04 account) and could not possibly be inferred to widen the authority. He deposed that Mr Gittings was adamant that this would not prejudice the existing Pioneer instructions but that it was a neat and simple solution to a mistake (rather than reprinting cheques and starting again). He deposed that:
I went with the solution proposed by the Bank, happy because I knew there were full controls on the claims account.
[58] All this evidence (which had initially been adduced for the injunction proceeding before Simon France J15) was also before the Court as evidence when Kós J heard Jojaro Investments.16
[59] Kós J, in relation to the alleged breach of contract argument, observed:17
Mr Elvidge deposes that neither he nor Mr Anderson instructed the bank “either verbally or in writing to carry out any action other than to open a new suffix account for the purpose of a claims account”. Be that as it may, clearly Messrs Elvidge and Anderson signed the 2003 mandate. That leaves the plaintiffs with an argument that the mandate is in its own terms precisely and exactly confined to the -04 sub-account. Such argument is based in part on the fact that the customer’s name set out in the mandate is “Pioneer Insurance Company – Claims Account”. None of that answers the bank’s evidence as to the actual operation of the -01 sub-account by the plaintiffs. That is, that they did so in a way that did not conform to the very 2002 mandate they say applies. So far as it goes the argument raises issues of factual conflict which perhaps may not have been suitable for determination by summary judgment. However, I express no final view on that because the bank’s summary judgment application is moot.
[60] Ultimately, Kós J disposed of the plaintiffs’ claim by striking it out on the
grounds that the proper plaintiff was Pioneer.18
[61] In the event, there was in that related interlocutory proceeding a finding by the Court, on an opposed hearing, that there were very substantial weaknesses in the plaintiffs’ allegations of breach of mandate.
[62] Mr Macfarlane accepts that in the present closely related interlocutory context it is proper for the Court to have regard to the adverse findings in the previous case. His submission is that I am in a position to reach a different view of the merits by reason of additional information which is before me. I now turn to
consider the evidence and submissions in that regard.
15 Gifford v ASB Bank Ltd HC Napier CIV-2008-441-000713, 16 December 2008 (Simon France
J);
16 Jojaro Investments Ltd v ASB Bank Ltd, above n 1.
17 At [77].
18 At [110].
Representations about the effect of the 2003 mandate
The evidence on representations as to the 2003 mandate
[63] Mr Elvidge, in his affidavit evidence filed specifically for this proceeding, has not given any fresh evidence as to any belief as to what Mr Gittings requested Pioneer to do in relation to the 2003 mandate. It appears to be accepted for the plaintiffs that any direct evidence from the plaintiffs’ side on that topic must come from Mr Gifford.
[64] Mr Gifford swore a fresh affidavit in July 2012.
[65] Mr Gifford’s evidence in relation to the execution of the 2003 mandate is
this:
Gittings came to my office in November or early December to say the bank had a problem. I do not recall exactly the date. This occurred once the cheques had begun to be processed. Gittings presented me with a form of operating instruction. The form was partially complete. It had Rob Elvidge’s signature on the form. It had on it in the top, “Pioneer - Claims account”. It was not dated and there was no signatory numbers. There was nothing else on the form.
Gittings told me there was a “stuff up” on the claims account and that he needed to get a new mandate and would I sign where he indicated. I was not a director of Pioneer, had no signing authority and deliberately had no authority with anything to do with Pioneer. I asked for an explanation and Gittings told me that the wrong signatories had “somehow” got onto the Pioneer claims account and that the pre signed cheques are without a proper mandate. The cheques were coming in and the Bank had picked up this fact up. He said he could quickly fix things by putting Fitzsimons and myself on the mandate for the claims account. Gittings said because there were cheques already in circulation the simple solution that was to add the 2 of us to the signatories to the claims account only.
I asked Gittings directly whether there was any impact on any of the other accounts. He said absolutely not – that is why he had written the words “Pioneer – claims account” on the mandate. I told him that the only cheques that would ever come from that account were the pre-signed cheques, which have the two signatories on them. He said he would ensure the 2 signatories would be reflected.
I suspect the crude dash on the document that purports to be “1” was added much later when the bank error was noted. Gittings always wrote the number out in full on all mandates and this document is not in keeping with his practice. It made absolutely no sense to have a mandate reflecting only
one signature needed when there were already 2 signatures printed on the cheques.
I am fully aware it is common practice with all other banks in NZ (and in other jurisdiction I have worked around the world) that splitting signatories across suffixes is common. The ASB is the only bank I have ever struck that say they cannot do this.
Gittings in his affidavit said he warned me this would alter all the account signatories. This is not true. He told me that this was his “neat” solution to a mistake “they” made and would not affect anything else. Gittings had recently come from Westpac who can split signatories to different suffix accounts. Perhaps his knowledge of this banks’ system was not up to speed.
The only document presented to me at this time by Gittings was the single operating instruction document.
I asked Gittings if he had explained what had happened to Rob and he said Rob was busy and all he had done is told him he needed the operating instructions on the claims account signed to “regularise” his paperwork. Gittings admitted he did not alert Rob that the bank made a mistake. I told him he needed to.
[66] Mr Gittings, the bank manager involved with the 2003 mandate, filed an affidavit in reply to the fresh evidence of Messrs Elvidge and Gifford. He had similarly filed evidence in the earlier proceedings, which he now confirmed.
[67] Mr Gittings’ evidence as to the completion of the 2003 mandate is completely at odds with that of Mr Gifford. He notes that Mr Gifford was not a director of Pioneer. He denies telling Mr Gifford or anyone at Pioneer (including Mr Elvidge and Mr Anderson as directors) that the 2003 mandate would not affect any of the other accounts. He says that the 2003 mandate was returned partially completed to the bank by Mr Elvidge and Mr Anderson and signed in his presence at the bank offices on 7 October 2003. He disagrees with a number of other details in Mr Gifford’s evidence.
[68] In this interlocutory context, it is not possible to definitively assess the credibility of the respective versions of events. There are some specific details, such as the documentary record, on which a significant measure of assessment can be carried out to which I will return in more detail. The consideration given by Kós J (in Jojaro Investments) to Pioneer’s almost complete pattern of single signatures is perhaps the most telling point against the plaintiffs’ propositions. But there are others. I will return to those.
Where does the alleged representation lead?
[69] The plaintiffs’ case is first based on the interpretation of the contract (terms contained in the 2003 mandate) and the allegation that the bank has breached the terms of the contract when properly interpreted.
[70] There is no pleading of operative mistake or prayer for rectification or application to the Court to intervene on other such grounds. The plaintiffs’ case is that the bank breached a term of the contract between the bank and Pioneer whereby the 2003 mandate applied to the -04 sub-account only, preserving the requirements of two signatories on all other sub-accounts in terms of the original mandate.
[71] I deliberately refrain from expressing concluded views in relation to the plaintiffs’ case in this regard, given that a trial may await the parties, and therefore limit myself to observing distinct difficulties which lie conceptually in the breach of contract argument (before I return to some detailed facts).
Representations to Mr Gifford?
[72] As their evidence stands, the plaintiffs’ case asserting representation as to the meaning of the contract rests on the evidence of Mr Gifford as to what was said by Mr Gittings to Mr Gifford. But, as Mr Tingey noted, Mr Gifford was at no point a director of Pioneer. He did not execute the 2003 mandate on behalf of Pioneer. The only capacity in which he executed the form was to provide an example of his signature for cheque verification purposes. Neither Mr Anderson, nor Mr Elvidge (nor Mr Gifford) has ever given evidence that the directors, at the time the 2003 mandate was executed, were informed by Mr Gittings of representations made by the bank as to the meaning or effect of the documents.
[73] There would appear to be serious difficulties for the plaintiffs in relating the contractual meaning of the 2003 mandate to something which they assert was said by Mr Gittings to Mr Gifford (assuming that a representation of the nature alleged might in some way alter the correct construction of the contracts).
Express provisions of 2003 mandate
[74] It is necessary also to consider the express provisions of the 2003 mandate. Mr Tingey points (as he did in Jojaro Investments before Kós J) to specific provisions of the 2003 mandate which are inconsistent with the contract terms alleged by the plaintiffs in their statement of claim. Express terms which Mr Tingey identified include:
1.This authority to operate supercedes all previous authorities given by the customer to the bank...;
2. This authority applies to all suffixes of the Account;
3. The bank’s Business Banking and Rural Banking terms and
conditions define “Account” to mean –
“Any account with the same base number, which may have several different suffix numbers”;
5. This Authority requires one Authorised Signatories to operate the
Customer’s Account mentioned above;
6. The Authorised Signatories were John Gifford and Blair Fitzsimons.
[75] Against the background of these express provisions signed by Pioneer’s directors, the plaintiffs face a formidable hurdle in the parol evidence rule. This rule provides for the exclusion of extrinsic evidence to “add to, vary, or contradict” a written document.19 While the rule has been somewhat softened, the current approach is reflected in the judgment of the Court of Appeal in Krukziener v Hanover Finance Ltd in which it was stated (Miller J delivering the reasons of the Court):20
Evidence of what was said in negotiations is not normally admissible to contradict the terms of a written contract (the extrinsic evidence rule, so called because the evidence is extrinsic to the contract): Edwards v O’Connor [1991] 2 NZLR 542 at 548 (CA). That is so because pre-contract negotiations are normally irrelevant, except when used for the limited purpose of ascertaining what objectively observable facts, as opposed to intentions, must have been in the minds of the parties: Eastmond v Bowis [1962] NZLR 954 at 959 – 960 (SC), Potter v Potter [2003] 3 NZLR 145 at [34] (CA).
19 Burrows, Finn & Todd Law of Contract in New Zealand (4th ed, LexisNexis, Wellington, 2012)
at 6.2.1(a).
20 Krukziener v Hanover Finance Ltd [2008] NZCA 187 at [34] and [35].
Extrinsic evidence is admissible to establish a collateral contract, which may supplement or vary the principal agreement in ways that do not contradict its primary purpose: Lysnar v National Bank of New Zealand Ltd [1935] NZLR
129 (PC), A M Bisley & Co Ltd v Thompson [1982] 2 NZLR 696 (CA). In a commercial transaction between experienced parties who are legally
represented, strong and unequivocal evidence is needed to warrant an
inference of a common understanding that was not expressly recorded: Air
New Zealand Ltd v Nippon Credit Bank Ltd [1997] 1 NZLR 218 at 225 (CA).
[76] The Court of Appeal’s observations were directed towards a pleading of collateral contract. There is no such pleading in this case, which is understandable given the lack of any evidence to indicate a prior, direct involvement by the directors of Pioneer in contractual discussions. But what the Court’s observations point to in the present context (the plaintiffs’ contractual interpretation argument) is the difficulty the plaintiffs will face at trial in persuading the Court to read a mandate which expressly supersedes all prior mandates as not superseding those mandates. In the context of a claim which is based on the proposition that the officers of a bank have not properly read and implemented the provisions of a mandate, and that the bank is thereby to be liable for millions of dollars of losses, the rationale of the parol evidence rule might be considered compellingly applicable.
[77] Reconsidered in this way, the plaintiffs’ claim based on the correct construction of the contract, compared to when Pioneer’s claim was before Kós J, appears no stronger
Improbability that plaintiffs’ impecuniosity caused by misrepresentations
[78] The plaintiffs have failed by a significant margin to establish a reasonable probability that their impecuniosity results from unlawful actions of the bank. That is not to say that their evidence at a trial may not be more compelling and to take their case further. However, in the present context, where they wish to defeat what would otherwise be considered a reasonable application for security for costs, they have not in relation to the contractual interpretation argument discharged the evidential burden that is upon them.
[79] Mr Tingey, in relation to other matters of contractual interpretation, submitted that further levels of factual difficulty arise in the plaintiffs’ case. I give one example. For the plaintiffs, evidence has been given, particularly through Mr Gifford, to the effect that the 2003 mandate which has on it the date, 7 October 2003, must have been executed in November or December 2003, with the earlier date inserted by Mr Gittings. Mr Elvidge, in his November 2008 affidavit for the interim injunction proceeding, recognised that the dating of the 2003 mandate as 7 October
2003 made it inconsistent with a belief which he had expressed in his affidavit that the mandate to change came about on or after 4 November 2003 when problems emerged over the CRM signatories. Both Mr Elvidge and Mr Gifford put the signing of the 2003 mandate into November or December 2003. Mr Gittings deposes to the contrary. If Messrs Elvidge and Gifford were found to be incorrect on the date, and the mandate was found to have been executed when dated, the plaintiffs’ case on the evidence would be significantly weakened.
[80] Such factual details are ultimately for resolution at trial. At this point, I record simply that the plaintiffs’ case on contractual interpretation is not strong whether analysed at a broader level or at a level of detail.
The alleged breach of reasonable care and skill
Introduction
[81] The plaintiffs plead and rely upon one contract, comprising the agreements regarding the banking relationship between Pioneer and ASB with particular emphasis on the original mandate and the 2003 mandate.
[82] They plead in relation to that contract that there was an implied term that the bank would exercise reasonable care and skill in executing Pioneer’s instructions. In particular they say:
ASB was obliged to enquire into and, if necessary, to warn Pioneer of the possibility that it was being defrauded and dishonour a cheque where a reasonable and honest banker with knowledge of the relevant facts would consider that there was a serious possibility that the customer was being defrauded or that the funds were being misappropriated.
Particulars
a.The cheques were payable to companies that ASB knew were personal companies of Blair Fitzsimons.
b. The cheques were for large round figures.
c.The capital reserve fund on term deposit was being depleted when the ASB knew it was required for the insurance rating.
[83] The plaintiffs say that the bank breached this implied term by honouring the cheques drawn by the fraudster, Mr Fitzsimons, on the -01 sub-account in circumstances where a reasonable and honest banker would have been put on enquiry by the relevant facts. This breach, they allege, caused Pioneer the loss of funds fraudulently drawn by Mr Fitzsimons.
Breach of the implied term as the cause of the plaintiffs’ impecuniosity
[84] There is a direct parallel in the Court’s consideration of this issue with the already completed consideration of the alleged breaches of the express terms of the contract.
[85] The plaintiffs are likely at trial to resort to reliance on the alleged implied term of the contract only if they have failed to succeed on their primary argument that the bank breached the mandated terms of the contract.
Submissions for the bank
[86] At the time of this hearing, the bank has not been required to file its defence to the statement of claim. There is therefore no pleading as to whether the existence of an implied term of reasonable care and skill is accepted. Such an implied term may be uncontroversial. In any event, Mr Tingey for the bank chose to move past that issue. His submissions focussed on the proposition that there was on the facts nothing to put the bank on reasonable notice of fraudulent activity. In other words, assumptions contained within the particulars of the duty of reasonable care and skill pleaded by the plaintiffs are said to be unsustainable.
[87] Mr Tingey made the following points (which I summarise):
(a) The fact that the cheques were payable to companies associated with Mr Fitzsimons was not sufficient to have put the bank on notice. The payments could have been part of transactions that Pioneer had decided to enter into with Mr Fitzsimons’ companies. Evidence of Peter Robinson (the bank’s national manager) points to substantial payments having been derived from at least one of those companies. That payments flowed the other way is not commercially unusual.
(b)The issuing of substantial cheques for rounded sums could not give a bank actual knowledge that such cheques were not part of authorised business transactions. The concept of cheques for rounded sums is conceptually neutral in this context but, on the facts, the evidence of Peter Robinson indicates other (that is other than involved in fraudulent transactions) large round figures coming to or going from the current account.
(c) The depletion of Pioneer’s term deposit (established to maintain its credit rating) was not itself an indication of fraud. The background is that the arrangement was entered into by Pioneer when it was established and had to set up a reserve capital account to ensure the preservation of its credit rating. The sum required was in the order of
$4,000,000. $500,000 of that was held in Government stock and
$3,500,000 initially on bank term deposit.21 Peter Robinson deposes that the bank deposit had been resorted to by the company and fallen below $4,000,000 well before Mr Fitzsimons’ frauds took place. Mr Robinson identifies a balance of $3,451,016.32 on 28 August 2003 and a still further reduced balance of $2,702,928.91 on 20 May 2004. Only one of the allegedly fraudulent cheques had been presented by
14 December 2005 yet by that date the funds in the term deposit were entirely gone.
[88] Mr Tingey’s submission was that when these matters of evidence are properly
considered none of the pleaded particulars which might give rise to some form of
21 See Jojaro Investments Ltd v ASB Bank Ltd [2012] NZHC 980 (Kós J) at [6].
notice of fraud can be supported. At the very least, he submits that the evidence indicates that the plaintiffs’ case in relation to the implied term, and therefore to damage being caused by the bank, is also weak.
[89] Finally, Mr Tingey submitted that even were the plaintiffs to have a viable claim for breach of the pleaded duty to exercise reasonable care and skill in executing Pioneer’s instructions, a pleading of contributory negligence would be available to the bank and would likely result in a significant reduction of any award of damages. Mr Tingey, in his submissions, recognised that uncertainties exist in this area of the law (contributory negligence in relation to a contractual duty to exercise care and skill) but submitted that there may be a sustainable argument for
the bank to bring itself within one or more of the categories identified in the Vesta22
case.
Submissions for the plaintiffs
[90] Apart from in relation to contributory negligence, Mr Macfarlane’s submissions for the plaintiffs had focussed on the merits in relation to the mandate issues and the first aspect of the plaintiffs’ cause of action. His factual analysis was very much focussed on the affidavit evidence of Mr Elvidge, Mr Gifford and Mrs Atkinson which he submitted corroborated the plaintiffs’ case that the 2003 mandate did not and was never intended to replace the original mandate (in other words, on the first aspect of the plaintiffs’ cause of action).
[91] On the issue of contributory negligence, Mr Macfarlane’s submission was to some extent still based on the proposition that the breach on which the plaintiffs would succeed was the breach of mandate, which he submits can never attract a defence of contributory negligence. But he recognised the potential under New Zealand law for contributory negligence to be pleaded in other Vesta categories, including where the defendant’s liability in contract is the same as his liability in the tort of negligence independently of the existence of any contract (whether pleaded or
not).
22 Forsikringsaktieselskapet Vesta v Butcher and others [1989] AC 852; discussed in Mouat v
Clarke Boyce (No 2) [1992] 2 NZLR 559 (CA).
Discussion
[92] It is convenient to deal with the contributory negligence issue first. The bank’s defence on this limb is not straight forward because the law in this area is not straight-forward. But even in this interlocutory context there is sufficient evidence in the factual background (the relevant background for the duty of care being the same as the background which I have discussed in relation to the breach of mandate arguments) to indicate that the plaintiffs would have a real exposure to a contributory negligence finding if it is available as a matter of law. That said, the Court would then come to an issue of apportionment of blame and it is not possible in the present context to realistically assess how that apportionment would fall. Mr Tingey was correct to note that the plaintiffs’ realistic maximum quantum of claim is already substantially below the $4,853,030 pleaded in the statement of claim (as reductions have to be made for cheques that have since been shown not to be attributable to Mr Fitzsimons’ frauds). Any contributory negligence will therefore be apportioned on a lower starting figure. However, contributory negligence is still unlikely to be found to entirely cancel out an otherwise established claim of the plaintiffs for a breach of some form of duty of care.
[93] A more fundamental difficulty for the plaintiffs is in relation to the particulars on which they rely for the proposition that the bank should have been on notice of fraudulent activity. For the reasons explored by Mr Tingey in his submissions the evidence as it stands at present does not point to a compelling case on the part of the plaintiffs. The bank can point to cogent reasons for not having been put on notice in the way the plaintiffs allege.
[94] The plaintiffs, in opposing an award of security on the basis of impecuniosity caused by the defendant, have the onus of establishing as a probability that it was the defendant which has caused the impecuniosity. I cannot be satisfied on the second aspect of the plaintiffs’ cause of action (any more so than on the first aspect of the cause of action) that the defendant has been legally responsible for the plaintiffs’ impecuniosity.
Balancing of considerations in this case
Introduction
[95] The plaintiffs as their sole pleaded ground of opposition to an order of security said that their impecuniosity was caused by the bank’s action. They have not established that proposition as a probability. The consideration of security from this point should therefore turn on a review of the other features of the case.
Access to justice
[96] Where the effect of an order of security would be to deny the plaintiffs access to the Court, the Court may take that factor into account.23
[97] Mr Macfarlane submitted that the Court should take this into account here. In the bank’s evidence, there had been reference to the plaintiffs’ retention of Queen’s Counsel in the previous proceedings against the bank. Mr Macfarlane has stated to the Court (and Mr Tingey accepts) that actually senior counsel appeared without charge in Jojaro Investments and her involvement in this present proceeding (although she did not appear at this hearing itself) is similarly without charge. Nothing about the plaintiffs’ ability to fund this litigation can be read into senior counsel’s involvement.
[98] On the other hand, Mr Tingey correctly observed there is a lack of evidence from the plaintiffs specifically asserting that they will not be able to proceed if a security is awarded on the sum sought ($115,172). Mr Tingey notes also the plaintiffs’ ability to pursue, in the last four years, the previous High Court proceedings against the bank, and to now bring this proceeding to this point.
[99] In his oral submissions, Mr Macfarlane in effect invited the Court to regard
the plaintiffs’ inability to provide security as self-evident by virtue of the unsatisfied
23 A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [14]; Birnie Capital Property Partnerships Ltd v Birnie HC Auckland CIV 2010-404-003000, 29 October 2010 per Asher J at [29].
judgment of $416,856.99 and $164,407.55 against Mr Elvidge and Mr Gifford respectively. The reality is that they have been financially ruined (as Kós J described their position).
[100] On the evidence before me, I cannot rule out the ability of the plaintiffs’ to find some financial support from elsewhere, be it family or friends. I regard this as a case where a security order might (but not necessarily will) mean that the plaintiffs are no longer able to pursue this claim.
[101] That possible outcome is to be measured against the Courts’ recognition that in some cases, security may be ordered even if the plaintiffs’ proceeding is likely to be thereby halted. Such was recognised by the Court of Appeal in A S McLachlan Ltd v MEL Network Ltd when it was noted:24
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.
[102] The potential for an order of security to halt the plaintiffs’ claim remains a significant factor to be weighed in favour of the plaintiffs in this case.
Simplicity of plaintiffs’ claims
[103] Mr Macfarlane referred to the Court of Appeal’s consideration in A S McLachlan Ltd v MEL Network Ltd, and particularly whether the litigation is “unjustified, over-complicated and unnecessarily protracted litigation”.
[104] He submitted that the present litigation cannot be so described.
[105] I leave aside the specifically merit-based assessment which I have conducted. To the extent that the focus of the McLachlan considerations is specifically upon the
present litigation, I accept the thrust of Mr Macfarlane’s submission. But its force is
24 A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [15] and [16].
weakened in this case by this proceeding’s context as the third of a series of proceedings brought to hold the bank to account. Four years of litigation is protracted litigation. The bank has not been paid its costs and disbursements ($18,736.91) awarded in Jojaro Invesments. The plaintiffs’ pursuit of claims against the bank has not proved simple to date – it has been protracted.
[106] This factor, if it favours either party, favours the bank.
Merits
[107] It has been necessary for me to examine the merits in order to consider the plaintiffs’ specific grounds of opposition in which they asserted that impecuniosity was caused by the bank.
[108] The task of the Court in its consideration of the strengths and weaknesses of the plaintiffs’ claim was identified by the Court of Appeal in Houghton v Saunders25 where it was stated that:
... the court will try as far as possible to assess the merits and prospects even though in a case of any complexity that will be no more than an impression. It must do its best with what is before it.
[109] The Court continued:26
There is a sliding scale: a case with slight merits may warrant a substantial order for security at least for an initial stage and may extend to provide indemnity to the opposing party. An apparently strong case may warrant reduced or no security. There will be cases where an order under r 7.70 for interim payment by the defendant is justified.
[110] For the reasons I have already given, this case at present sits on the Court of
Appeal’s sliding scale as one with slight merits. As such, the consideration of the merits favours the bank and points to a substantial order of security.
25 Houghton v Saunders [2010] 3 NZLR 331 at [37].
26 At [37].
Bringing these considerations together
[111] The bank has a strong case for an award of security. The fact that the plaintiffs were unsuccessfully involved in a previous proceeding in relation to what is essentially the same claim, yet have not paid the costs awarded in that proceeding, is an additional and unusual factor in this case. Any injustice which may be perceived by the plaintiffs if an award of security halts this proceeding is at least balanced by the injustice which the bank may perceive if the court, notwithstanding its security jurisdiction, denies the bank an award of security and leaves it with the likelihood (if its defence is successful) of mounting irrecoverable costs.
[112] There accordingly should be an award of security.
The amount of security
[113] The sum ($115,172) sought by the bank reflects a realistic 2B calculation if one assumes a ten day trial.
[114] I do not consider it appropriate at this early point of litigation to assume that there will be a ten day trial. It will be in the plaintiffs’ interest (as in the bank’s) to limit the evidence needed for trial. For security purposes I regard a five day trial as a more appropriate starting point. To the extent such an assumption may prove inadequate if and when the case is set down for trial, that eventuality can be covered by the reservation for review which I will incorporate.
[115] If the Houghton v Saunders sliding scale is applied, it might suggest an award at, or close, to the full-scale calculation. But such does not automatically follow. Security is commonly awarded at “discounted” levels of say 66%. Practice has been27 that a “full scale” award should not automatically follow.
[116] In this case, however, there are two additional factors which mark out the
plaintiffs’ position as different:
27 Andrew Beck and others McGechan on Procedure (online looseleaf ed, Brookers) at [HR
5.45.07].
(a) It is abundantly clear that if the plaintiffs’ fail in this litigation and are ordered to pay costs, the costs order will be entirely hollow.
(b) The claim which the plaintiffs pursue is really Pioneer’s claim.
Although the plaintiffs, having suffered as shareholders of Pioneer, have understandably taken an assignment of the litigation, this is not a proceeding where the person directly affected by the alleged contractual or tortious wrong, and therefore entitled to sue, has sued. Had Pioneer sued, security is unlikely to have been an issue. The Court cannot ignore this feature of the case. It should impact on the level of security.
[117] Bringing these considerations together, an appropriate sum in this case would be $62,500 representing approximately 80 per cent of a 2B scale estimate based on a five day trial.
Staggered security
[118] Given the early point at which the Court is dealing with security in this case, the case lends itself to staggered payments of security.
[119] Mr Tingey submitted that an order for the staggering of security would be inappropriate in this case. He suggested that the Court must take into account both the extent of likely issues and evidence in the case and the existing financial position of the plaintiffs. There is a substantial risk that, if only staggered security is provided, the bank will be left, in the event of a quite possible discontinuance before trial, with a significant shortfall between the sum that represents staggered security and an appropriate recovery.
[120] I am not persuaded that such concern should preclude staggering security in this case. The Court’s award will have regard to the 2B scale and is not intended to address what may be a significant gap between 80 per cent of a 2B scale and the bank’s solicitor/client costs.
[121] In the circumstances I find this to be a suitable case for security to be staggered, with payments in two tranches. The two tranches will relate to the interlocutory stage of the case and to the point at which preparation for trial commences. Having regard to the make-up of Mr Tingey’s security for costs calculation, the interlocutory stage should attract a security award of $25,000 and the setting down payment should attract an award of $37,500.
Orders
[122] I order:
(a) The defendant’s application for an order for further particulars is adjourned, with leave to either party to have it brought on on three days’ notice.
(b)The plaintiffs are within five working days to provide to counsel for the defendant an entirely unredacted copy of the deed dated 13
December 2011 with the right of inspection of such copy limited to the legal advisors for the defendant.
(c) In the event that the legal advisors for the defendant consider it necessary to refer to the content of the copy of the full copy of the deed, either in advice to the defendant, or in evidence in Court, they have leave on three days’ notice to request amendment to the preceding order to enable them to properly advance the defendant’s case or any interlocutory aspect of it.
(d)The plaintiffs are to provide security for costs in a form acceptable to the Registrar, such security to be provided in two tranches with the first tranche to be provided within 20 working days and the second tranche to be provided on the setting down date.
(e) The first tranche of security is to be in the sum of $25,000.
(f) The second tranche of security is to be in the sum of $37,500.
(g)The application for security for costs is adjourned with leave reserved to both parties, prior to setting down, to apply for revision if the amount of the second tranche of the period reserved for trial is significantly more or less than five days.
(h)In the event that either tranche of security is not provided by the plaintiffs on due date, the proceeding is to be stayed until the relevant tranche of security has been provided.
(i)The plaintiffs are to pay to the defendant the costs of the production and security applications which are fixed on a 2B basis and are, together with disbursements to be fixed by the Registrar, payable in any event.
(j)The costs of the application for further particulars are reserved but, in the event that no formal order is required thereunder, there will be no order as to those costs.
Associate Judge Osborne
Solicitors:
Sainsbury Logan & Williams, Solicitors, PO Box 41, Napier
Bell Gully, PO Box 4199, Auckland 1140