Exceed Dairies Limited v Whyte HC Invercargill CIV 2010-425-000649
[2011] NZHC 742
•16 June 2011
IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY
CIV 2010-425-000649
BETWEEN EXCEED DAIRIES LIMITED Plaintiff
AND ROGER LAURENCE WHYTE AND DIANE GRACE WHYTE
Defendants
AND ESSENTIAL NUTRITION LIMITED
Hearing: 11 April 2011 (by telephone) (Heard at Invercargill)
Counsel: A D G Hitchcock for Defendants/Applicants
P J Woods for Plaintiff/Respondent and for Third Party
Judgment: 16 June 2011
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
as to security for costs
Introduction
[1] The plaintiff (Exceed) has sued the defendants (the Whytes) for damages of $355,236.00 for breach of contract and alternatively $462,943.00 as a quantum meruit for farming goods and services supplied. In addition, Exceed claims
$130,206.00 for conversion of cows.
[2] The Whytes have issued a claim against the third party (Essential) in relation to the farming arrangements and have also counterclaimed against Exceed.
[3] The Whytes now apply for an order that Exceed provides security for costs in the sum of $70,000.00.
EXCEED DAIRIES LIMITED V WHYTE HC INV CIV 2010-425-000649 16 June 2011
[4] In A S McLachlan Limited v MEL Network Limited (2002) 16 PRNZ 747 the Court of Appeal emphasised the discretionary nature of the jurisdiction to order security for costs and observed that it is not to be fettered by constructing “principles” from the facts of previous cases. There is no check-list of so-called principles.
[5] Rule 5.45 High Court Rules (1) provides a threshold test, whereupon r 5.45 (2) comes into play, it providing -
“A Judge may, if the Judge thinks it is just in all the circumstances, order the
giving of security for costs”.
The threshold – inability to meet costs award
[6] The Whytes say that there is reason to believe that Exceed will be unable to pay the Whytes’ costs if Exceed is unsuccessful in this proceeding. The first-named defendant, Roger Laurence Whyte, deposes to discussions which he had with directors of Exceed and his understanding from them that Exceed did not have any assets or income.
[7] Mr Whyte exhibited correspondence by which the Whytes’ solicitor had (before the proceeding was issued) raised concern as to the ability of Exceed or the third party (Essential) to pay costs if unsuccessful and had invited informal resolution of the security issue.
[8] A further request for a response on the issue of security after Exceed’s
proceeding was issued brought no response.
[9] Faced with the present application, Exceed filed a notice of opposition in which it asserted that there is no reason to believe that Exceed will be unable to pay the costs of the defendants if Exceed is unsuccessful in this proceeding. Exceed relied on the evidence of one of its directors, Nigel van Dorsser.
[10] Far from establishing a likelihood that Exceed will be able to pay costs if unsuccessful, Mr van Dorsser’s evidence on Exceed’s financial position reinforces the Whytes’ perception that Exceed will be unable to meet costs if unsuccessful.
[11] Mr van Dorsser’s evidence establishes the following –
(a) Exceed was incorporated in 2004 to be a dairy farming company.
(b)Upon stopping provision of services on the Whytes’ farm, Exceed ceased all farming services because it had insufficient capital to operate, this in Mr van Dorsser’s evidence being because of the non- payment by the Whytes.
(c) Exceed’s bank account balance on 28 February 2011 was $60,758.08 in credit.
(d)Exceed has debtors totalling $17,500.00 (plus GST) and a GST refund due of $893.47.
(e) The shareholders of Exceed are prepared to inject funds into Exceed to fund this litigation.
[12] No commitment was offered by Exceed to ensure that the $60,758.08 bank balance would be preserved through to the end of this litigation. Implicitly Exceed requires access to its current assets for the purposes of sustaining this litigation with Mr van Dorsser’s evidence establishing that when those funds are exhausted the company will move into debt (to its shareholders for litigation funding).
[13] Against this background, Mr Woods, in his submissions to me on behalf of Exceed, responsibly accepted that the threshold test in relation to inability to meet costs was made out.
[14] The threshold is established.
[15] In application of r 5.45(2), I turn to consider whether it is just in all the circumstances to order the giving of security for costs.
[16] The plaintiff’s notice of opposition contends that an order for security would not be just for three reasons:
(a) The plaintiff has good prospects of success of the claim;
(b) The plaintiff’s financial position results from the defendants’ actions;
(c) The defendants’ counterclaims are for amounts greater than the plaintiff’s claim and the counterclaims are likely to occupy a significant part of the trial time. Meeting the plaintiff’s claim will not result in the defendants’ incurring greater expense that they would otherwise incur in prosecuting their counterclaim.
[17] Alternatively, the plaintiff contends that, if there is to be an award of security, then the amount sought by the plaintiff ($70,000.00) is excessive, and in any event, the security should be ordered in tranches.
[18] As the general nature of the proceeding and the competing allegations form a relevant background to all those contentions, it is necessary to summarise the claims and counterclaims.
The subject matter of the proceeding
[19] I will use shorthand references.
[20] The Whytes, dairy farmers, own the Dacre farm and the Dacre run-off (at
Longbush), together with associated plant and stock.
[21] Mr van Dorsser is a primary industry consultant with extensive experience in the dairy farming industry. He owns (alongside Mr Pol) half the shares in Exceed
(the plaintiff) and he and Mr Pol are the directors. Mr van Dorsser is also the sole director of Essential (the third party) and through his family trust controls almost all the shares in Essential. Mr Woods’ firm acts for both Exceed and Essential in this proceeding.
[22] It is common ground that negotiations took place between Mr van Dorsser and the Whytes in the first half of 2008, culminating in proposals in the nature of leasing arrangements around 23 April 2008. Proposed was a possession date of 1
June 2008.
[23] The proceeding raises at least four significant issues between the parties in relation to the April 2008 arrangements –
(a) Was there a contract?
(b) Was there a subsequent contract (or variation of contract?) (c) Who were the parties?
(d)Did the defendants do anything which should result in an award of damages against them?
Was there a contract?
[24] Exceed and Essential say that no contract of lease was finalised before 1 June
2008, whereas the Whytes assert that a partly written and partly oral contract of lease was entered into on or about 23 April 2008. Instead of a contract entered into on or around 23 April 2008, Exceed and Essential plead that possession of Dacre, the Dacre run-off and the Whytes’ plant and stock changed hands on 1 June 2008 upon certain terms. The pleading appears to imply the terms came about upon the basis of discussions between the parties. Exceed’s relevant pleading (paragraph 8 of its statement of claim) commences –
“On 1 June 2008, ENL took possession of Dacre and Dacre run-off, and
Exceed took possession of the Whyte’s cows, plant and machinery on the
following basis:
...”
[25] However, Mr van Dorsser, in his affidavit, filed for this interlocutory application, deposes that “no final agreement was ever reached” by the time of the change of possession on 1 June 2008, with negotiations between the parties continuing well into September 2008.
[26] There is a tension between the plaintiff’s pleading and the specific allegations made by Mr van Dorsser. On his evidence, there is an issue as to whether contractual arrangements were in place by 1 June 2008. On Exceed’s pleading as it stands, Exceed appears to be asserting that there was a basis, (that is to say a contractual basis) for the change of possession on 1 June 2009.
[27] It is not possible for the Court in this interlocutory context, particularly where oral discussions are material, to reach any clear view as to the existence of a contract on or before 1 June 2008. That said, the pleadings of Exceed and Essential point, at the very least to there having been a “basis” for the change of possession on 1 June
2008. Commercially speaking, in relation to assets of the value and nature involved, it can be said that it would seem improbable that parties would give and take possession of an entire farming operation in the absence of a contractual basis for doing so.
[28] The prospects of success on this issue would appear to favour the Whytes but that is the highest that can be stated.
Was there a subsequent contract (or variation of contract)?
[29] Exceed and Essential plead that as the Whytes re-entered Dacre and the
Dacre run-off and resumed control of the farm business on or about 20 September
2008 on an agreed basis. This agreement around 20 September 2008 is the first contract expressly pleaded by Exceed and Essential. Exceed and Essential plead three terms of a 20 September 2008 contract –
(a) The Whytes to reimburse costs incurred by Exceed to date.
(b) All future farm operating expenses to be to the Whytes’ account or to
be reimbursed to Exceed.
(c) From 21 September 2008 to 31 May 2009, Exceed to operate on the Dacre farm and the Dacre run-off as a supplier to the Whytes of labour, vehicles and fuel for vehicles to the Whytes.
[30] Although the pleadings of Exceed and Essential do not state whether the alleged September 2008 contract was written or oral, it emerges from the affidavit of Mr van Dorsser that the agreement was reached orally between himself and Mr Whyte at a meal on 17 September 2008.
[31] The Whytes by their pleading accept that in September 2008 an oral agreement came into place as a result of discussion between Mr van Dorsser and Mr Whyte. The Whytes say the oral agreement did not terminate the lease but rather varied it by providing Mr Whyte would have some input in management and the Whytes both provided some labour to the farming operation. Both Mr van Dorsser and Mr Whyte have given evidence as to the oral discussions alleged in the pleadings.
[32] As with the alleged contract of April 2008, the oral nature of what both parties accept were contractual discussions does not lend itself, in this interlocutory context, to any clear assessment as to whose version of oral discussions will be vindicated at trial. Mr Woods, for Exceed, pointed to evidence of conduct of the Whytes after 20 September 2008 which might suggest a resumption of control of the farms rather than mere farming input. He also referred to a report provided to the parties by a farm consultant (Ms Wylie) who had been retained in 2009 to facilitate resolution. While recognising that Ms Wylie’s report identified a direct conflict in the parties’ views as to their contractual relationship from 20 September 2008, Mr Woods invited the Court to draw substantial support for Exceed’s version of events given conclusions which Ms Wylie expressed as to the nature of the arrangement.
[33] One or more of the matters identified by Mr Woods may assume significance at trial when the trial judge weighs them against his or her conclusions as to the
content of the oral discussions. In the present context, they do not materially alt er my assessment that the correct characterisation of the September 2008 discussions should be viewed as being in the balance. Conduct relied upon by Mr Woods as indicating a retaking of possession by the Whytes may be found to have been just that – on the other hand it may have been found to have been positioning behaviour as Mr Whyte suggests or possibly equivocal behaviour. In relation to Ms Wylie’s report, there has yet to be a determination of its admissibility given the context in which the report was prepared. There will also be an issue for the trial judge as to the weight to be attached to Ms Wylie’s conclusions in her report - the parties did not ultimately reach a settlement agreement based on her conclusions and she expressly prefaced her report with comments as to her recommendations not being meant to represent what may happen should the parties progress to legal proceedings.
[34] It is not possible at this point to draw a clear conclusion as to the respective
strengths of the parties’ cases in relation to the September 2008 agreement.
Who were the parties?
[35] Counsel addressed me at some length as to the identity of the parties to the contract. (In this context I refer to “the contract” to represent whatever contract, including as varied, this Court might ultimately conclude came into existence).
[36] It is the Whytes’ case that their contract was with Essential. They have joined
Essential as a third party on that basis.
[37] On the other hand, Exceed has issued this proceeding upon the basis that it was Essential which was to be the lessee of the farm properties and Exceed which was to be the lessee of the Whytes’ plant and stock. Essential’s pleading adopts Exceed’s position.
[38] Mr Woods referred to aspects of the May discussions between the parties (including by email) in which Exceed appeared as an intended party. He referred also to payments made by the Whytes to Exceed.
[39] As with my previous conclusions as to the existence and terms of the contracts generally, I find that it is not possible to draw any clear conclusion as to which of Exceed and Essential had any particular contractual role. Pre-contractual discussions and post-contractual conduct may be of assistance to the trial judge but the assessment of the witnesses in relation to the oral contract remains of fundamental importance.
[40] In any event, I do not view the conclusion as to the contractual position of Exceed and Essential as of great significance in this security context. Exceed, based on its view of the contract and its involvement as contracting party, has chosen to bring this proceeding against the Whytes. Whether Exceed was indeed the correct plaintiff appeared to assume some significance in the security context when the Whytes in their original application for security applied also for an order that Essential provide security. This was said to be upon the basis that Essential was the only party with whom the Whytes contracted and that the proceeding had been commenced in the name of an impecunious Exceed in order to remove Essential from litigation risk. In the event, Mr Hitchcock at the hearing withdrew that part of the security application which sought provision of security by Essential as third party. That concession was clearly appropriate.
[41] This leaves the Court to determine the application as between defendants and plaintiff in the usual way, uncomplicated by any question as to whether another party could more appropriately be regarded as plaintiff and provide or contribute to security. The issue as to the identity of the contracting party becomes something of a red herring given that Exceed has chosen to bring this proceeding and is therefore, in terms of r 5.45 susceptible to a security order.
Did the defendants do anything which should result in an award of damages against them?
[42] Exceed’s three causes of action are, first, for the Whytes’ failure to pay some
$355,000.00 in breach of an oral contract; secondly, for some $462,000.00 for what the Whytes should pay on a quantum meruit; and, thirdly, some $130,000.00 for the Whytes’ conversion of stock.
[43] Exceed’s claim proceeds, in relation to each contract, upon the basis that Exceed will establish that the 20 September 2008 contract involved the Whytes’ re- entering the farm and thereafter having an obligation, as alleged, to make certain payments and reimbursements to Exceed. Secondly, as to quantum meruit, Exceed proceeds on the basis that Exceed (in the absence of a contract) was providing goods and services to the Whytes in the Whytes’ operation of the farm properties. Thirdly, in relation to conversion, Exceed proceeds on the basis that the Whytes have not replaced or returned stock provided to the Whytes or culled by the Whytes on account of Exceed.
[44] The basis of the Whytes’ defence and counterclaim and of their third party claim is at its most fundamental that Essential (and/or Exceed if Exceed was contractually involved) grossly mis-managed the farming operation so as to cause a loss of production and a trading loss while at the same time failing to make payment of rental for land and plant.
[45] Exceed and Essential maintain that they honoured their obligations whereas the Whytes did not; the Whytes maintain that they honoured their obligations and Exceed and Essential did not.
[46] Exceed’s case in this interlocutory context is that the factual position as to failures of the Whytes is relevant not only to the Court’s assessment of the merits but directly leads to a consideration that Exceed’s impecuniosity has resulted from the Whytes’ actions complained of in the proceeding.
[47] Any “reasonable probability” established by persuasive evidence – mere assertion will not suffice – that the plaintiff’s impecuniosity results from the defendant’s actions complained of in the proceeding is relevant as a factor which militates against security: see the commentary and cases collected by the authors of McGechan on Procedure at HR 5.45.03(3). This is an issue as with the other issues already discussed, where assessment, short of a full hearing, is recognised as being very difficult if not impossible; see for example Meates v Taylor (1992) 5 PRNZ 524 (CA).
[48] The issues around damage involve factual allegation and counter-allegation. The evidence is contained in affidavits filed by the major protagonists on either side (Messrs van Dorsser and Whyte). It is clear that the evidence of a number of other key players will be produced at a trial, and tested. Testing of the relatively brief evidence of Messrs van Dorsser and Whyte is also not possible at this point. The evidence of each appears plausible.
[49] On the material before the Court at this point there is not a reasonable probability that the potential impecuniosity of Exceed has been caused by the Whytes’ breaches of obligation. The competing plausible evidence on each side leaves at most a possibility that conduct on the part of the Whytes is responsible for Exceed’s limited financial situation.
[50] I also take into account the fact that the evidence suggests that Exceed entered upon this transaction without significant working capital to fall back upon in the event of difficulties in trading. I accept that this is not the only conclusion possible as to Exceed’s initial resources, Exceed having chosen not to produce the evidence of its financial statements. But significant available evidence is that of Mr van Dorsser who accepts that the reason Exceed ceased to operate was that it had “insufficient capital to operate”.
Will Exceed be denied access to the Court through a security order?
[51] Access to justice is a consideration but there is no principle that an order for security should be declined simply because its effect may be to deprive a plaintiff of the opportunity to proceed; see A S McLachlan Limited v MEL Network Limited (above [4]) at [15] - [16].
[52] As it is, Mr van Dorsser’s evidence established that at this point Exceed is in funds to provide significant security. Furthermore, while Exceed’s remaining assets may not of themselves be sufficient to fund Exceed’s subsequent costs in the litigation, Mr van Dorsser deposes that Exceed’s shareholders are prepared to inject funds into the company to fund the litigation.
[53] In these circumstances, I do not weigh access to justice issues as a factor in this case.
Bring the factors together - balancing the interests
[54] Upon review of the circumstances of this litigation as discussed, it is just to order the giving of security. This is not a proceeding where the plaintiff can demonstrate a particularly meritorious case with strong prospects of success. In relation to the various ingredients of the plaintiff’s causes of action, the merits are in the balance.
The amount of security
[55] The Whytes seek an order that $70,000.00 or such other sum as the Court considers sufficient be paid in to Court as security for costs.
[56] That sum emerges as a rounded up figure from a draft calculation of the likely level that successful defendants would receive in this case, on a 2B basis.
[57] The draft schedule provided is as follows –
(1) Commencement of defence by defendant – 2 days
$3,760.00
(2) Commencement of proceedings against third parties
2.4 days
$4,512.00
(3) List of documents on discovery – 1.5 days
$2,820.00
(4) Production of documents on discovery – 1.5 days
$1,880.00
(5) Inspection of documents – 1.5 days
$2,820.00
(6) Filing memoranda for case management conference or mentions hearing on say 3 occasions - 0.4 days x 3
$2,256.00
(7) Appearance at case management conference
$1,692.00
(8) Further pleading costs dependant on ENL’s response
to the defence and third party joinder? $
(9) Further costs dependant on Exceed’s response to the
defence and third party joinder $
(10)Preparation for hearing if case proceeds to trial (5 day
estimate) plus the time of hearing 10 days $18,800.00
(11)Appearance at hearing for sole counsel- 5 day estimate $9,400.00 (12)Estimated expert evidence costs
$20,000.00
(exclusive of points 8 and 9)
$67,940.00
[58] Exceed’s notice of opposition contended that the amount sought is excessive and that security should be awarded in any event in stages, with the first stage up to the completion of discovery.
[59] Mr Woods, for Exceed, submitted that in relation to quantum the Court should have regard to the plaintiff’s prospects of success and the contribution of the defendant’s conduct to the plaintiff’s current financial position. Those matters have already been considered. In addition, he submitted that the amount of any security should be below that proposed by the Whytes for two particular reasons.
[60] First, Mr Woods submitted that the Whytes’ calculation of scale costs incorrectly includes the scale costs for the Whytes’ third party claim ($4,512.00). I agree that it is conceptually inappropriate to take into account the Whytes’ third party claim against Essential in fixing the amount of security to be provided by Exceed as plaintiff. While it is conceivable within the costs discretion that Exceed, if unsuccessful, might ultimately become responsible for all such costs, such an outcome might not be expected in the normal course. After all the Whytes maintain that Essential is their appropriate adversary in this litigation and they are accordingly claiming against Essential as counterclaim plaintiffs.
[61] Secondly, Mr Woods submitted that the provision for estimated expert evidence of costs of $20,000.00 should be disregarded as it is unsubstantiated. I do
not find a difficulty, against the background of the factual issues in this case, in treating the $20,000.00 figure as a realistic estimate. It would be preferable in such cases for a solicitor with knowledge of the case to provide an affidavit as to the breakdown of expert costs into number of witnesses, preparation and attendance at trial. On the other hand, it is clear from the pleadings and the submissions presented to me that central issues in this case will be the quality of the farm management undertaken by Exceed and/or Essential and the financial consequences of any mismanagement. The Whytes, by their statement of defence, particularised 20 aspects of alleged mismanagement. For such evidence to be explored meaningfully there will need to be expert evidence of both a farm management nature and calculation of financial consequences. There is nothing unrealistic about the Whytes’ expectation of a $20,000.00 provision in that regard.
[62] I do not overlook the fact that the Whytes plead affirmative defences against Exceed and also pursue counterclaims. Mr Woods submitted that those will require significant trial time. I do not accept that there can be any such clean-cut division in this case between plaintiff’s case and defendants’ case. As Mr Hitchcock submitted, the counterclaim is essentially the flip-side of the claim. While Exceed effectively requires the Whytes to fund the trading losses of the 2008/2009 season, the counterclaims require the converse. The Whytes might have commenced a proceeding as plaintiffs and would then have been susceptible to a security order in relation to the costs of that litigation. In the event, Exceed chose to become plaintiff and rendered itself susceptible to the costs of the litigation.
[63] For the plaintiff on either scenario to pursue its litigation would have required through evidence precisely the same coverage of issues.
[64] In a rounded way, stripped of the item for commencement of the third party claim, the 2B costs award to the successful Whytes may well be in the order of
$63,500.00. There would be, in addition, a recoverable filing fee and appropriate disbursements.
[65] I adopt an all-in starting point of $65,000.00.
[66] On the evidence before the Court, the Whytes face the probability that the only funds now held by Exceed will have been exhausted at the conclusion of the trial.
[67] I consider it appropriate in the circumstances that Exceed as plaintiff provides security of approximately 85 percent of a 2B award, in this case $55,000.00.
Tranches of security?
[68] It is appropriate that security be provided in two tranches, with the first tranche due shortly and the second at the time of setting down. Having regard to the make-up of the costs items, it would be appropriate that the first tranche be
$17,000.00 and that the second tranche be $38,000.00.
Stay
[69] It is also appropriate, pursuant to r 5.45 (3)(a) that the plaintiff’s claim (but
not the proceeding in its entirety) be stayed until the security is provided.
Costs
[70] This is a case where costs must follow the event.
[71] Given that it was common ground between counsel that the case is appropriately to be categorised for costs purposes as 2B, costs are to follow the event on that basis.
Order
[72] I order –
(a) The plaintiff is to give security for the defendants’ costs by paying
$55,000.00 into Court, such sum to be paid into Court in two tranches namely –
(i) A tranche of $17,000.00 within 10 working days; and
(ii) A tranche of $38,000.00 on or before the setting down date.
(b)In the event that either tranche of security is not paid by its due date, the plaintiff’s claim in this proceeding will be stayed until the tranche is paid.
(c) The plaintiff is to pay the defendants in any event the costs of this application and the order now made on a 2B basis together with disbursements to be fixed by the Registrar.
Case Management
[73] Usual interlocutory attendances have been suspended while the Whytes’ application for security was dealt with. They should now be completed without delay.
[74] I direct –
(a) The parties are to file and serve verified lists of documents within 20 working days.
(b)The parties are to complete inspection of documents within 30 working days.
(c) The parties are to file and serve any interlocutory applications within
40 working days.
[75] I adjourn the proceeding to a case management conference by telephone at
9.00am, 31 August 2011.
Counsel are directed to file three working days before that conference preferably a joint memorandum dealing with the readiness to proceed for hearing. The memorandum is to deal with –
any steps necessary for the disposal of interlocutory applications;
the suitability of the case for Judicial Settlement Conference or alternative dispute resolution;
the estimated duration of the hearing and allocation of hearing date;
timetable directions for trial;
the names and number of witnesses (and which are factual and expert);
any particular directions required in relation to experts; and
confirmation that a back-up fixture will be accepted (or if not, why not), subject to prior notification.
Associate Judge Osborne
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