Farrelly v Wellington City Council
[2019] NZHC 1875
•2 August 2019
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2018-485-692
[2019] NZHC 1875
BETWEEN PATRICIA ELIZABETH FARRELLY AND OTHERS
First to thirty-eighth plaintiffs
AND
WELLINGTON CITY COUNCIL AND OTHERS
First to tenth defendants
Hearing: 19 July 2019 Appearances:
D Parker and E Dalzell for plaintiffs/applicants H Rennie QC and R Conner for second to sixth defendants/respondents
Judgment:
2 August 2019
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
TABLE OF CONTENTS
Introduction and issues [1]
Basis of application [11]
Tailored discovery [15]
Financial and other internal records [24]
Documents relating to Stratum Management’s incorporation and involvement in repairs [39] Documents relating to weathertightness at other related developments [43]
Conclusion [49]
FARRELLY v WELLINGTON CITY COUNCIL [2019] NZHC 1875 [2 August 2019]
Introduction and issues
[1] This is an application by the plaintiffs, Patricia Farrelly and others, for discovery against the second to sixth defendants, GPE Holdings Ltd, Craig Stewart, Stratum Management Ltd, David Stewart and Robert Clemens.
[2] Greta Point is a large residential complex at Evans Bay in Wellington. It is common ground that Craig Stewart and his group of companies were behind the development. Construction of the project began in 1999 or 2000. There are a total of 91 units. The plaintiffs are the owners of 39 of them. In this proceeding, the plaintiffs say that their units suffer from “serious construction defects and building failures” that have led to inadequate weathertightness and consequential damage. They sue to recover what they say it will cost to carry out remedial work. They put this at approximately $11.7 million.
[3] The plaintiffs plead various causes of action against the second to sixth defendants. None are contractual. All involve allegations of negligence or breach of the Fair Trading Act 1986:
(a)The plaintiffs refer to the second defendant by its original name of CAS Properties Ltd. They say that it was a developer of this development. CAS Properties admits this. Three causes of action are pleaded against it:
(i)negligence (in its capacity as a developer);
(ii)breach of s 9 of the Fair Trading Act; and
(iii)breach of s 11 of the Fair Trading Act.
(b)The plaintiffs allege that the third defendant, Craig Stewart, said to be the controlling shareholder and a director of CAS Properties, was also
a developer. He denies this. Four causes of action are pleaded against him:
(i)negligence (in his capacity as a developer);
(ii)negligence in his personal capacity;
(iii)breach of s 9 of the Fair Trading Act; and
(iv)breach of s 11 of the Fair Trading Act.
(c)The plaintiffs allege that the fourth defendant, Stratum Management, was also a developer. It denies this. Three causes of action are pleaded against it:
(i)negligence (in its capacity as a developer);
(ii)breach of s 9 of the Fair Trading Act;
(iii)breach of s 11 of the Fair Trading Act.
(d)The plaintiffs plead three causes of action against the fifth defendant, David Stewart, a director of Stratum Management:
(i)negligence;
(ii)breach of s 9 of the Fair Trading Act;
(iii)breach of s 11 of the Fair Trading Act.
(e)The plaintiffs plead one cause of action, negligence, against the sixth defendant, Robert Clemens, an employee of or contractor to CAS Properties or Stratum Management.
[4] The parties (including the parties to this application) have agreed that this case calls for tailored discovery. Their solicitors and counsel have gone some considerable distance down the path of agreeing on the orders required. The plaintiffs’ solicitors have produced a detailed schedule of the categories of documentation that they say the second to sixth defendants should discover. For the most part the parties are agreed on these. But there are certain categories of documentation that are controversial.
[5] On 9 May 2019, Grice J made an order for tailored discovery dealing, as her Honour was invited to do, with the uncontroversial categories of documentation. As I understand it, all parties (again, including the parties to this application) have provided discovery of documentation in those categories.
[6] By the time that the plaintiffs’ application was argued before me, the areas of controversy had reduced themselves to three, namely:
(a)documentation identified in the plaintiffs’ schedule at 8(a)(i), (v) and
(vi) and (s)–(x) (referred to in argument as the financial and other internal records);
(b)documentation at 8(f) (documents relating to Stratum Management’s incorporation and involvement in repairs); and
(c)documentation in 8(y) (documents relating to weathertight issues at other related developments).
[7]I set out the relevant aspects of the schedule below.
[8]Paragraphs 8(a)(i), (v) and (vi) and (s)–(x):
a)Documentation in relation to planning for and undertaking the development at Greta Point, including but not limited to:
i.the purchase of land, how this was funded and any security and/or guarantees provided to purchase and then develop the land;
…
v.Funding the development;
vi.All business plans, budgets and financing proposals for the Greta Point development;
…
…
s)Documents relating to the funding of the construction and/or remedial work at Greta Point and;
t)Documents relating to any profits from the sale of the units at Greta Point and the distribution of those profits;
u)Documents relating to the allocation and distribution of funds to or from GPE Holdings Limited and/or SML and/or any other CAS related parties in relation to funding the construction and/or remedial work at Greta Point;
v)Documents relating to any profits or funds received by Craig Stewart and/or his family trust and/or any other CAS related parties in relation to Greta Point;
w)Financial records of CAS Properties (1998) Limited (now GPE Holdings Limited), Stratum Management Limited and Craig Stewart (including any trusts set up for the benefit of those parties) including:
i.Financial statements for the years 2000 through to the present including balance sheets, statements of profit and loss, and asset registers;
ii.Details of any debts held by GPE Holdings and/or SML and repayments of that debt, and any related security information in relation to that debt;
iii.Details of any disposal, distribution, allocation of funds and profits.
x)Documents relating to any transactions between Craig Stewart and/or any trusts operated for the benefit of Craig Stewart, GPE Holdings Limited, SML and any other CAS related entities in relation to Greta Point, including in relation to funding of the development and funding of any construction and/or maintenance work (for example only, including documents relating to invoice 00000427 from SML to GPE Holdings Limited, and invoice 00000659 from the CA Stewart Family Trust to GPE Holdings Limited) and any other similar invoices or transfers of funds related to or arising from Greta Point.
(a) All documentation, correspondence or records of communications or dealings of the second to eighth defendants (or any of them) in relation to Greta Point including but not limited to any internal correspondence, and correspondence with other CAS related parties;
…
[9]Paragraph 8(f):
Documents relating to the incorporation of Stratum Management Limited (SML), any transfer of employment from other CAS related parties (including [but] not limited to from GPE Holdings Limited) to SML, the involvement of SML at Greta Point, SML’s role in relation to the ongoing weathertightness issues at Greta Pont, and the decision to have SML take over the role of developer at Greta Point;
[10]Paragraph 8(y):
All documents, correspondence, file notes, memoranda, internal correspondence, correspondence with owners, expert reports, details of construction and/or remedial work undertaken or planned, dealings with the Council, and other material held by the second, third, fourth and fifth defendants in respect of weathertightness issues at other CAS related developments, including at:
i.1 Tasman Street;
ii.2–15 Roxburgh Street; and
iii.35 Dee Street.
Basis of application
[11] A preliminary issue emerged during the course of argument concerning the basis for the plaintiffs’ application.
[12] For the plaintiffs, Mr Parker developed the argument as one under rr 8.8–8.10 of the High Court Rules 2016, which relate to tailored discovery. The second to sixth defendants say that they have already discovered all relevant documentation. On that basis, Mr Rennie contended that the plaintiffs’ application was more appropriately regarded as an application under r 8.19 for further and better discovery. The difference is that whereas under rr 8.8–8.10 the question would involve an assessment of the appropriate scope of discovery, unsullied by any presumed starting point, if the application were treated as one under 8.19, then the plaintiffs would have to show that there are reasons for thinking that the defendant’s discovery to date is inadequate.
[13] In my view, this application is better addressed as an application to determine the proper scope of tailored discovery required under rr 8.8–8.10. The parties have
agreed that tailored discovery is appropriate. As already said, they have made considerable progress in identifying the appropriate categories of documents. Grice J has made an order that proceeds on the basis that tailored discovery is involved. The remaining issue is simply the scope of that form of discovery.
[14] In any event, it appears to me to be unhelpful to focus on the precise basis for this application. The fundamental question is the extent of discovery necessary to ensure that any trial is fair, and I do not think it would assist to start from a presumptive position.
Tailored discovery
[15] Tailored discovery was introduced by the 2012 amendments to pt 8 of the High Court Rules, finally abandoning the Peruvian Guano1 test.2 The Law Commission had earlier recommended departing from Peruvian Guano in an effort to reduce the costs of civil litigation, explaining:3
The law should not impose or permit procedures that result in expense or delay disproportionate to what is at stake. A compromise has to be struck between perfection and cost.
[16] The touchstone principle for tailored discovery is proportionality, which is reflected in r 8.11(1) and cl 1(d) of the discovery checklist.4 Clause 3 of the discovery checklist deals in greater detail with tailored discovery. Crucially, it requires the parties to endeavour to identify appropriately limited categories of documents based on the guiding principle of seeking “to limit discovery to what is reasonable and proportionate”.5
[17]The application of these principles was summarised by Asher J in
Commerce Commission v Cathay Pacific Airways Ltd:6
1 See Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co (1882) 11 QBD 55 (CA) at 62–63.
2 See High Court Amendment Rules (No 2) 2011 (explanatory note).
3 Law Commission Reforming the Rules of General Discovery (PP45, 2001) at [14].
4 High Court Rules 2016, sch 9.
5 Schedule 9, cl 3(2)(a)(i).
6 Commerce Commission v Cathay Pacific Airways Ltd [2012] NZHC 726 at [18].
To determine the proportionality arguments in relation to tailored discovery of particular categories it is necessary to consider the chances of finding relevant documents in the discovery exercise and their degree of relevance. This should then be balanced against the cost of carrying out that discovery process. Broader considerations such as the amount at issue, the resources of the parties, and delay to the proceedings may also be relevant …
[18] Asher J’s summary, with which I respectfully agree, highlights a critical point. The focus of the rules relating to tailored discovery is identifying categories of documents — often by means of computer search fields utilising key words and the like. The tendency is then to assume that all documents in such categories are to be discovered.
[19] However, depending on the approach that the parties, or the court, take to categorisation, such an assumption may undermine the object of the rules relating to tailored discovery by obliging litigants to discover irrelevant material.
[20] Discovery is the process whereby the parties to litigation are obliged to disclose relevant documentation that they are in a position to disclose. Its purpose is to ensure that all parties have access to such documentation, so that everyone’s cards are on the table and the litigation can be conducted fairly with no element of ambush. The core concept, then, is relevance.
[21] Unless, in identifying categories of documents for discovery, the parties have agreed, or the Court has determined, that all documents falling into the categories identified are to be listed, or the definitions of the categories include tests for relevance, it appears to me that, even within categories of documentation for tailored discovery, it is still incumbent on the party providing discovery to review the documentation for relevance (as determined by the pleadings, of course). That, in my view, is inherent in what Asher J was saying in the passage from Commerce Commission v Cathay Pacific Airways Ltd cited at [17]. As far as I am aware there is no New Zealand authority addressing this point.
[22] The approach I favour is supported by two judgments of the Federal Court of Australia, Aveling v UBS Capital Markets Australia Holdings Ltd7 and
7 Aveling v UBS Capital Markets Australia Holdings Ltd [2005] FCA 415 at [11].
Racing New South Wales v Betfair Pty Ltd.8 However, in another Australian case, Owen v Barclays Bank plc, the Supreme Court of New South Wales took a different approach, suggesting that, where parties are ordered to provide discovery of categories of documents, all documents falling within those categories must be discovered without any assessment of relevance being made by the party providing discovery.9 In my view, the former approach is preferable, subject to the ability of the parties to agree or the Court to order discovery of all documents within a category, because it is more consistent with the overarching principles of ensuring efficiency and proportionality in the discovery process.
[23] With those principles in mind, I address each of the categories of documents the parties have been unable to reach agreement upon.
Financial and other internal records
[24] As I understand the plaintiffs’ argument, it is that this category of documents may contain material relevant to their allegations that Craig Stewart and Stratum Management were developers of Greta Point. Of course, the documents may also contain material relevant to whether those parties assumed duties of care in respect of any aspect of the development and whether they breached any obligations they might have had under the Fair Trading Act.
[25] I have serious reservations about this aspect of the plaintiffs’ application. Mr Parker took me through the leading cases relating to when a person or other entity will be treated as a developer.10 The relevance of this stems from Mount Albert Borough Council v Johnson, where the Court of Appeal held that a developer owes a non-delegable duty of care to “see that proper care and skill are exercised in the building of the houses”.11 Harrison J summarised the law in this area in Body Corporate 188273 v Leuschke Group Architects Ltd:12
8 Racing New South Wales v Betfair Pty Ltd [2009] FCAFC 119 at [19].
9 Owen v Barclays Bank plc [2010] NSWSC 1225 at [20]–[25].
10 Mount Albert Borough Council v Johnson [1979] 2 NZLR 234 (CA); Body Corporate 188273 v Leuschke Group Architects Ltd (2007) 8 NZCPR 914 (HC); Body Corporate 202254 v Taylor [2008] NZCA 317, [2009] 2 NZLR 17; Kevin Investments v Montgomery [2012] NZHC 1596.
11 Mount Albert Borough Council v Johnson, above n 10, at 241 per Cooke and Somers JJ.
12 Body Corporate 188273 v Leuschke Group Architects Ltd, above n 10.
[31] The word “developer” is not a term of art or a label of ready identification like a local authority, builder, architect or engineer, whose functions are well understood and settled within the hierarchy of involvement. It is a loose description, applied to the legal entity which by virtue of its ownership of the property and control of the consent, design, construction, approval and marketing process qualifies for the imposition of liability in appropriate circumstances.
[32] The developer, and I accept there can be more than one, is the party sitting at the centre of and directing the project, invariably for its own financial benefit. It is the entity which decides on and engages the builder and any professional advisers. It is responsible for the implementation and completion of the development process. It has the power to make all important decisions. Policy demands that the developer owes actionable duties to owners of the buildings it develops.
[26] I accept Mr Parker’s submissions that there may be more than one developer in the case of any development, and that the key indicia for determining whether a party is a developer are the extent to which he, she or it exercised control over the development and stood to gain from its successful completion.
[27] Nor do I doubt that Craig Stewart at least exercised a significant degree of control and stood to gain — by one means or another — from its successful completion. However, it does not seem to me to follow that the plaintiffs are entitled to discovery of all of the documentation described as financial and other internal records.
[28] For a start, those categories contemplate the discovery of a vast amount of material, most of which is almost certain to be irrelevant to any issue that arises on the pleadings. To require the second to sixth defendants to discover all this material on the basis that it might contain relevant documents would in my judgement, be inconsistent with the important principle of proportionality.
[29] It is likely that there will be documentation in existence demonstrating that Craig Stewart played a key role in relation to the development and that, in one way or another, he would profit from its successful completion. However, such evidence would be insufficient by itself to establish that Craig Stewart was a developer of Greta Point as that term was used in Mount Albert Borough Council v Johnson. In Body Corporate 188273 v Leuschke Group Architects Ltd, Harrison J was faced with a submission that the director of a development company was a developer of two
apartment blocks in Auckland. I set out his Honour’s response to that submission in full, as it is equally application to the case advanced by Mr Parker:
[37] Ms Grant’s submission could only succeed if the council established that Colmark was no more than a sham, which was designed and operated as a pretence for reality or “as a mere cloak to conceal the true nature of the transaction” (Re Securitibank Ltd (No 2) [1978] 2 NZLR 136 per Richmond P at p 146). She has not, and could not, advanced that argument. As Ms Murphy submits in answer, limited liability companies are separate legal personalities from their shareholders; they are a legitimate and well- recognised mechanism for carrying out commercial activities (s 15 of the Companies Act 1993; Lee v Lee’s Air Farming [1961] NZLR 325 (PC)). Characterisation of a company as a “mere vehicle” means nothing in the absence of an allegation of sham.
[38] Messrs Cooper and Leuschke were entitled to form Colmark to undertake the Rendall Terrace development. Its defining characteristic was its legal personality separate from its shareholders. Its legitimacy is not diminished by virtue of its intended function of isolating or protecting Messrs Leuschke and Cooper from personal liability. That intention is not to be confused with the separate question of whether or not, when performing duties as a director or employee, a shareholder assumes a direct personal responsibility to third parties, to which I will come later.
[30] CAS Properties, as a corporate entity, could only function through its governance and management organs. It is inevitable that there will be evidence that Craig Stewart, and others involved with the company’s governance and management, exercised control and benefited financially. But that simply reflects the structure put in place to effect the development, and would certainly not establish that the corporate structure was a sham. My sense is that the prospect of finding any documentation demonstrating that the structure was a sham and that Craig Stewart was the real developer is vanishingly small.
[31] In my view, it is incumbent upon a plaintiff alleging that an arrangement is a sham to provide a genuine basis for that allegation before the Court will entertain an application for wide-ranging tailored discovery in an effort to locate evidence of the same. The references in resource consent documents to “CAS Group” and to Craig Stewart as “the developer”, which Mr Parker relied upon, do not provide a basis for such an allegation. As Craig Stewart explains in an affidavit dated 27 May 2019, it is common practice during the initial stages of a development for resource consent applications to use a ‘catch-all’ title as an interim description while the corporate structure for the development is still being finalised.
[32] Ordering discovery of all financial and other internal records simply to enable the plaintiffs to search for evidence that the corporate structure was a sham would not be reasonable or proportionate in the circumstances of this case. The cost and delay of such a course of action would clearly outweigh any benefits given the low probability of locating any genuinely relevant documents. In other words, it could fairly be described as a ‘fishing expedition’.
[33] As already said, on the other hand, the financial and other internal records may contain material relevant to other aspects of the case. For example, Stratum Management, although not incorporated until 7 June 2005, appears to have played a significant role in the development. A genuine argument may be available that it assumed the role of a developer (or a co-developer) from 2005 onwards. Craig Stewart says in his affidavit that Stratum Management was merely a management company that provided project management services to CAS Properties. But, as Mr Parker submitted, that is not determinative of whether Stratum Management was a developer. Unlike in relation to Craig Stewart, it will not be necessary for the plaintiffs to demonstrate a sham in order to show that Stratum Management was a developer. In those circumstances, it is appropriate that the Court have before it any relevant evidence as to the role played by Stratum Management in the development.
[34] I am satisfied that the documents in the following categories may be relevant to that issue:
(a)paragraph 8(s), from 1 April 2005 onwards;
(b)paragraph 8(u), from 1 April 2005 onwards; and
(c)paragraph 8(w), from 1 April 2005 onwards, except the financial records of Craig Stewart (or any trust set up for his benefit).
[35] The plaintiffs also sue Craig Stewart on the basis that he personally assumed responsibility for the development.13 I have considered the possibility that any of the financial and other internal records might record information bearing on his personal role that might go towards establishing a duty of care in that way. I have reached the conclusion that such a possibility is too remote to justify discovery beyond the scope outlined above.
[36] The other categories of documents focus almost exclusively on following the money into the hands of Craig Stewart. This seems to go to the plaintiff’s argument that Craig Stewart was a developer, but it does not helpfully progress the argument that Craig Stewart personally assumed responsibility for the development. Support for that proposition is more likely to be found in Craig Stewart’s external communications or other dealings with third parties.
[37] Equally, I do not see how following the money into the hands of Craig Stewart could helpfully progress the plaintiffs’ case that he breached the Fair Trading Act. At very least, any assistance such documents could provide would not be worth the cost and delay of requiring the defendants to discover them.
[38] For those reasons, I am not prepared to make a blanket order that the second to sixth defendants discover all documentation in the categories referred to at paragraphs 8(a)(i), (v) and (vi) and (s)–(x) of the schedule. However, I am prepared to make an order that those defendants discover any relevant documentation within the categories identified at [34] above.
Documents relating to Stratum Management’s incorporation and involvement in repairs
[39] In relation to this category of documentation — which, unlike the previous category, I view as relatively confined — the plaintiffs contend that the Greta Point development has never been completed. They say that the limitation period has not
13 See Body Corporate 188273 v Leuschke Group Architects Ltd, above n 10, at [49]–[55]; Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 (CA) at 532 per McGechan J; and James Hardie Industries plc v White [2018] NZCA 580 at [63].
yet begun. This, they will contend, is relevant to limitation defences that are raised against them.
[40] Central to this contention is the proposition that Stratum Management was incorporated “for the purpose of completing the Greta Point development”.
[41] On these bases, they contend that the documentation in this category is highly relevant to the limitation issue. I agree.
[42] I am therefore prepared to order that the second to sixth defendants discover all documentation in their possession or power within the category defined at paragraph 8(f) of the schedule.
Documents relating to weathertightness at other related developments
[43] The plaintiffs contended that at least CAS Properties and Craig Stewart were aware of the existence of weathertightness issues associated with other CAS Properties developments in Wellington, and in particular the three referred to in the schedule at paragraph 8(y): Tasman Street, Roxburgh Street and Dee Street.
[44] They will argue that the relevant defendants’ knowledge of the inadequacies of certain building techniques or materials is relevant to the extent of their obligations. Therefore, they argue, any documentation connected with those earlier developments is relevant in this case.
[45] As I understand the position, the defendants accept this. They say that in the course of discovery they have reviewed the documentation in this category within their possession or power and discovered any relevant documentation. However, they say that in doing so they have confined their discovery to material concerning weathertightness issues comparable to those alleged here.
[46] This approach appears to me simply to introduce a relevance test, which I regard as appropriate for the reasons already canvassed.
[47] For the plaintiffs, Mr Parker’s rejoinder is that that leaves the plaintiffs reliant on the defendants to have carried out that duty thoroughly, and he says that the Court should order the plaintiffs to discover all the documentation covered by paragraph 8(y) of the schedule — which will be extensive — so that the plaintiffs can make their own assessment.
[48] Such a complaint might be made in virtually every case. The obligation on a party to litigation (and his, her or its legal advisers) to discover relevant material is a fundamental one, which is reinforced by rr 8.10 and 8.13. The Court has the assurance of leading counsel and the defendants’ solicitors that the second to sixth defendants have reviewed this category of documentation, amongst others, and discovered any relevant material. Unless the plaintiffs are able to point to any evidence that that is not the case, I am not prepared to make an order that all material in this category — relevant or otherwise — be made available for inspection. I am prepared, however, to formalise Mr Rennie’s compromise position as an order, bearing in mind that the obligation to comply with discovery is an ongoing one.14
Conclusion
[49]I therefore make the following orders:
(a)The second to sixth defendants are to discover all relevant documents dated from 1 April 2005 identified at paragraphs 8(s), (u) and (w) of the schedule, except for any financial records of Craig Stewart (or any trust settled for his benefit).
(b)The second to sixth defendants are to discover all documentation in the category identified at paragraph 8(f) of the schedule.
(c)With respect to the documentation identified at paragraph 8(y) of the schedule, to the extent they have not already done so, the second to sixth defendants are to discover any documents that concern
14 High Court Rules 2016, r 8.18(1).
weathertightness issues comparable to those alleged in the causes of action pleaded against them.
[50] I reserve costs, these not having been the subject of argument. I expect counsel will be able to settle any costs issues. If not they may come back to me by memorandum in the usual way.
Associate Judge Johnston
Solicitors:
Parker & Associates, Wellington for the plaintiffsHazelton Law, Wellington for the second to sixth defendants
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