Focus Construction Interiors Limited v Spaceworks Design Group Limited
[2018] NZHC 570
•28 March 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2016-404-002609
[2018] NZHC 570
BETWEEN FOCUS CONSTRUCTION INTERIORS LIMITED
Plaintiff
AND
SPACEWORKS DESIGN GROUP LIMITED
First Defendant
ELIZABETH MARY CHARLOTTE HINES (NEE WHALEY)
Second Defendant
Hearing: 8 February 2018 Appearances:
L Ponniah for Plaintiff
S S McMullan for Defendants
Judgment:
28 March 2018
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 28 March 2018 at 4.00 pm
pursuant to R 11.5 of the High Court Rules Registrar / Deputy Registrar
Date ……………………..
FOCUS CONSTRUCTION INTERIORS LTD v SPACEWORKS DESIGN GROUP LTD [2018] NZHC 570 [28
March 2018]
Introduction
[1] The plaintiff, Focus Construction Interiors Ltd (Focus), seeks an order for particular discovery against the defendants, Spaceworks Design Group Ltd (Spaceworks) and Elizabeth Hines (née Whaley) (Ms Whaley). Initially, 16 categories of documents were sought. During the hearing of the application one, category 10, was abandoned.
[2] Rule 8.19 of the High Court Rules 2016 permits an order for particular discovery to be made if it appears to a judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered one or more documents or a group of documents that should have been discovered.
[3] Katz J summarised the relevant principles under r 8.19 in Lighter Quay Residents’ Society Inc v Waterfront Properties (2009) Ltd as follows:1
(a) Existence of the document does not have to be established on the balance of probabilities on a “more likely than not” basis. A lower threshold is required, which may vary given the relevance of the documents and issues of proportionality.
(b) While there is a presumption that affidavits of documents filed are conclusive, an application under r 8.19 is a proper way to circumvent the conclusiveness rule. The party seeking further discovery has to establish that the existing affidavit of documents is incomplete.
(c) Whether a document “should have been discovered” should be determined by reference to the “adverse documents” test in r 8.7, or any stricter test imposed under tailored discovery pursuant to r 8.8.
(d)A four-stage approach is convenient:
(i)Are the documents relevant, and if so how important will they be?
(ii)What are the grounds, and what is the probative value of those grounds, for the belief that the document sought exist?
(iii)Is discovery proportionate?
(iv)Weighing and balancing these matters, is an order appropriate?
1 Lighter Quay Residents’ Society Inc v Waterfront Properties (2009) Ltd [2016] NZHC 818 at [16] (footnotes omitted).
[4] Of particular relevance in this case is the question of proportionality at stage three of the four-stage approach, which is to be assessed by “balancing the time and cost of discovery against the potential value of discovery. The concept of proportionality is said to reinforce the requirement that a discovery order ought not to be oppressive.”2
Background
[5] Focus is a construction company that specialises in a wide range of services including interior fit-outs of commercial and retail premises, joinery, construction and project management. Its managing director is Mr Barry Plumpton.
[6] Spaceworks is a commercial interior design company. It undertakes a full range of interior design work, including concept planning and design, procuring furniture and the construction of office joinery, assisting with building consent applications, and construction management. Its shareholder, creative director and CEO is Ms Whaley. She was previously employed by Spaceworks.
[7] The previous owner of Spaceworks had a close relationship with Mr Plumpton and Spaceworks regularly used Focus as a contractor. Typically, Spaceworks would prepare an initial sketch plan/drawing for its client and request a construction budget pricing from Focus. Spaceworks would send the pricing to its client and negotiate. This was “work of a negotiated tender nature”.3 Spaceworks would recommend Focus to the client. If a meeting was required, Spaceworks and Focus would jointly attend. On the few occasions a second quote from another contractor was sought, Spaceworks would almost always convince the client that it would work better overall if the construction contract was negotiated directly with Focus. Ms Whaley would represent Spaceworks (as an employee) on such occasions, attending the introductory meetings with clients and recommending that they use the plaintiff for construction.
2 Southland Building Society v Barlow Justice Ltd [2013] NZHC 1125 at [17].
3 Ms Whaley in her affidavit dated 26 January 2018 defines work obtained on a “negotiated tender basis” as being “contract work where [the contractor] would be the only contractor and was free to negotiate directly with the client.”
[8] In 2006, Ms Whaley had the opportunity to buy the Spaceworks business. Mr Plumpton agreed to assist by purchasing some of the shares. He regarded this as a means of ensuring the continuance of the relationship between Spaceworks and Focus. In September 2007, Ms Whaley and Mr Plumpton signed a shareholders’ agreement. The vehicle for Mr Plumpton’s investment was Franklin Investment Holdings Ltd. The agreement recorded that Franklin had advanced $133,333.33 for a one-third share in Spaceworks, and that it was “anticipated that [Spaceworks] will continue to work with Focus wherever possible in relation to interior design fit-outs, and continue to foster the business between Focus and [Spaceworks]”.
[9] The relationship between the parties then broke down. The parties disagree as to why this happened. Mr Plumpton says that it was because Spaceworks stopped referring work to Focus. Ms Whaley says it was because Mr Plumpton wanted dividends at a time when the company’s lending arrangements did not permit it. Regular dividends were paid until 2008 when the bank learned of them and threatened to call in the loan. Ms Whaley says it was that series of events that damaged their relationship such that the parties ceased to communicate, and so Spaceworks could not refer work to Focus.
[10] In February 2010, the parties reached a settlement, recorded in a written agreement following mediation. It provided that Spaceworks would repay Franklin
$100,000 of its $133,333.33 investment and both Spaceworks and Ms Whaley would make reasonable and good faith endeavours to refer $3 million in work to Focus over the subsequent four years.
[11]Relevantly, the agreement provides as follows:
(a)Clause 3 of the agreement:
Spaceworks and Elizabeth shall make reasonable endeavours acting in good faith to refer work to Focus having a total gross value of $3 million (excluding GST), it being anticipated that this can be achieved over a period of 4 years from the date of this agreement.
(b)Clause 4 of the agreement:
Spaceworks, Elizabeth and Focus shall make reasonable endeavours and act in good faith towards one another to achieve the referral of work as set out at clause 3 above.
(c) By clause 5 of the agreement, the word “work is defined inter alia as follows:
Work shall be considered to have been referred to Focus only when it is actually undertaken by Focus or its sub-contractors (for example it shall not include work for which Focus is invited to tender but does not undertake).
(d)Clause 5(d) of the agreement:
Spaceworks, Elizabeth and Focus shall make reasonable endeavours and act in good faith to achieve referral work that is of a negotiated tender nature where Spaceworks invites only Focus to provide a quote for the work, subject always to the requirements of the client.
[12] Between 2010 and 2016, Spaceworks undertook more than 700 projects but Mr Plumpton says that Focus was only involved in, or tendered for, approximately 44 of them.
[13] In October 2016, Focus brought the current proceeding, alleging that the defendants had breached the agreement by failing to make reasonable endeavours, acting in good faith, to refer work of a negotiated tender nature to Focus. In particular, Focus alleges that the defendants had preferred other contractors, and started turning client projects involving work of a negotiated tender basis into in-house “Turnkey” projects.4 It seeks damages of $658,148, interest and costs.
[14] In July 2017, Focus terminated its relationship with Spaceworks, advising that “for commercial reasons we will be declining to tender any more of your work.”
Application for discovery
[15] The defendants gave discovery in two tranches, which resulted in their affidavit of documents on 22 September 2017. They say that, to date, they have incurred expenses in excess of $60,000 for discovery.
[16] Many of the categories of documents that are sought include text and instant messages. The defendants say that Ms Whaley does not store her instant or text messages and that, in any event, she does not believe her text or instant messages
4 Mr Plumpton states in his reply affidavit dated 2 February 2018 that under “Turnkey projects Spaceworks did the design and planning and effectively became the main contractor by directly contracting with subcontractors … the Turnkey sub-contractor works for Spaceworks, so Spaceworks decides which contractor to use.”
would contain information within the discovery orders sought. Mr Plumpton responds that he has personal experience of Ms Whaley using text messaging in the past. However, he does not explain what sort of communications were made using this medium. Some of the categories of documents sought for particular discovery date as far back as 2008 in some applications, and to 2010 in others. It is very unlikely that documents by way of text message or instant message exist, or will be able to be discovered. I indicate now that, although I consider that some further discovery is required, the discovery order I make will not require discovery of text messages or instant messages.
Category 1 and 3: relevant documents relating to projects after February 2010 and to the defendants’ efforts to achieve referral work
[17]Categories 1 and 3 overlap. Focus seeks:
1. All relevant contracts and electronic communications (including electronic documents, emails and text messages and instant messaging) between Spaceworks Design Group Ltd and/or Elizabeth Hines (nee Whaley) and their clients, from the first communication until the conclusion of a contract and for the period February 2010 until 18 July 2016.
…
3. All communications (including electronic documents, emails and text messages and instant messaging) between the Spaceworks Design Group Ltd and/or Elizabeth Hines and their clients, from the first communication for the period 8 February 2010 until 18 July 2016 (post Settlement agreement) in respect of each of the 302 projects that is relevant to and/or demonstrates the Defendant’s efforts to achieve referral work to the plaintiff.
[18] The defendants accept that these categories of documents are discoverable but says that they have discovered all the relevant documents within them.
[19] Mr Ponniah, for Focus, submits that the defendants failed to discover a number of relevant sub-categories of documents, namely those:
(a)unrelated to “full projects”;5
(b)related to out-of-Auckland projects;
5 A “full project”, as defined in Ms Whaley’s affidavit dated 26 January 2018, is one in which “Spaceworks managed the project through to construction”.
(c)related to projects in which Spaceworks had a more limited role such as joinery or furniture supply;
(d)correspondence Spaceworks considered was “routine”;
(e)projects Spaceworks considered “could not have led to a referral”; and
(f)not within the keyword searches used by Spaceworks i.e. “focussci.co.nz”, “Focus”, “Dixon”, “Mike”, “Tender”, and “contractor”.
[20] Mr Ponniah notes that according to Ms Whaley’s affidavit, the defendants restricted documents relating to communication between the defendants and their clients to only those which relate to “full projects” in Auckland that showed the defendant’s efforts to achieve referral work to the plaintiff between February 2010 and 18 July 2016. Mr Ponniah submits that this excluded any relevant communication showing the defendants’ lack of effort in referring work or preference shown to other contractors, which are relevant to this proceeding.
[21] Ms Whaley explains that the defendants’ searches for relevant documents were limited to Auckland-based “full projects”. To explain why the defendants considered that only Auckland-based full projects were relevant for discovery, Ms Whaley supplied an email from Focus in which it declined to provide pricing for a particular project outside Auckland. However, the email does not state that Focus will never accept work outside of Auckland, nor does the agreement itself limit the work to be referred as being limited to Auckland.
[22] While Focus did not raise concerns regarding the defendants’ lack of referral of projects outside of Auckland until recently, I accept that documents relating to such projects are still relevant to the plaintiff’s claim. Nor is there evidence that Focus was not interested in non-full projects. The agreement did not exclude non-full projects from being referred, and so such documents are also relevant to Focus’ claim.
[23] Focus also seeks discovery of documents relating to projects Spaceworks considered “could not have led to referral” to the plaintiff. These are identified at [47] of Mr Plumpton’s affidavit dated 21 December 2017, and are the projects identified in category 16 of this application. I will consider them in relation to that category.
[24] In relation to “routine correspondence”, Ms Whaley describes such correspondence as being the exchange of “many emails relating to such matters as design details, arranging meetings or paying invoices. Routine correspondence of this kind was not discovered because it does not bear on the issues raised by [the plaintiff’s] claim.” Focus has not made any direct submissions on this sub-category of documents. I do not consider the documents in this sub-category are relevant to Focus’ claim or should be discovered.
[25] In respect of the “key search terms” at [20(f)], Focus has not suggested any other key search terms that it considers would produce relevant documents under either category 1 or 3, nor has it explained why it considers any such documents would be relevant. Given that, it is not reasonable to conclude that such documents have been shown to be relevant, or that discovery would be proportionate given the lack of proposed search terms may otherwise mean tens of thousands of documents would have to be searched.
[26] Given the relevance of documents relating to “full projects” outside of Auckland and projects limited to the supply of joinery or furniture (inside and outside of Auckland), discovery of such documents would be proportionate and appropriate, excluding text message or instant message documents. These documents will assist in identifying whether there were contracts that Focus could/should have been offered.
Category 2: pre-settlement documentation
[27]This category comprises:
2. All communications (including electronic documents, emails and text messages and instant messaging) between Spaceworks Design Group Ltd and/or Elizabeth Hines (nee Whaley) and their clients, from the commencement of dealings with the client, for the period 7 September 2007 until 8 February 2010 (pre-settlement agreement) in respect of each project
successfully referred to the Plaintiff, that is relevant to or demonstrates the Defendant’s efforts to achieve referral work to the Plaintiff.
[28] Mr Plumpton believes that the defendants deliberately changed the way Spaceworks conducted its business compared to the pre-February 2010 period by undertaking turnkey projects for clients, and referring work to other preferred contractors. As a result, documents relating to the way Spaceworks conducted its business previously is relevant to show the comparison.
[29] The defendants submit that the documents in this category are not relevant to the issues in dispute because the obligations in the agreement were prospective and made no reference to the parties’ previous relationship. Further, the parties’ relationship had been damaged between 2008 and 2010, and after that there was no formal relationship. Finally, the defendants were affected by the global financial crisis during that period as well. Mr McMullan submits that, in those circumstances, there is no reason to believe that documents generated over that period will assist in determining whether the defendants performed the obligations they later undertook for Focus’ benefit in February 2010 and, even if the documents were discoverable, recovery would be difficult as the email accounts of Spaceworks staff at the time are not readily accessible.
[30] Mr McMullan also notes that Focus would have control of documents relating to projects in which it was involved, yet it has not discovered relevant documents dating back to 2007.
[31] I am not convinced that the documents being sought are relevant to the present proceedings, given the deterioration in the relationship between the parties and the global financial crisis which would inevitably have affected Spaceworks’ business. In these circumstances records of trading between 2007 and 2010 are unlikely to provide a helpful comparison of the trading conditions that followed the 2010 settlement. Further, the time and cost involved in giving the discovery would be disproportionate to the degree of assistance that the documents could provide.
Category 4 – 9: correspondence relating to Black Interiors, Practec and Plum Interiors
[32]The documents in the categories are:
4. All relevant contracts and electronic communications (including electronic documents, emails and text messages and instant messaging) between Spaceworks Design Group Ltd and/or Elizabeth Hines and Black
Interiors and/or Dylan Alexander Hutt, for the period August 2008 until 21 March 2017.
5. All relevant contracts and electronic communications (including electronic documents, emails and text messages and instant messaging) between Spaceworks Design Group Limited and/or Elizabeth Hines and
Blackspace Ltd and/or Dylan Alexander Hutt and/or Stephen Ross Bootten and/or Hutt Trustees Ltd, that is relevant to determine the relationship between these named parties, for the period August 2008 until 21 March 2017.
6. All relevant contracts and electronic communications (including electronic documents, emails and text messages and instant messaging) between Spaceworks Design Group Ltd and/or Elizabeth Hines and Practec
Interiors Ltd and/or Jason Burt and/ Stephen Davies, for the period August 2008 until 18 July 2016.
7. All relevant contracts and electronic communications (including electronic documents, emails and text messages and instant messaging) between Spaceworks Design Group Ltd and/or Elizabeth Hines and Plumb
Interiors in relation to the Media Design School project.
8. All relevant contracts and electronic communications (including electronic documents, emails and text messages and instant messaging) between Spaceworks Design Group Ltd and/or Elizabeth Hines and Plumb
Interiors for the period August 2008 until 18 July 2016.
9. All relevant internal communications (including electronic documents, emails, text messages and instant messaging) between Spaceworks and/or Elizabeth Hines and Rosie Hogg and other staff of the Defendants in relation to dealings with the Plaintiff, Black Interiors, Practec Interiors Ltd and Plumb Interiors Ltd, for the period February 2010 until 18 July 2016.
[33] Focus seeks discovery of all projects that relate to the abovenamed parties, with whom it suspects the defendants have or have had a preferential relationship.
[34] In Ms Whaley’s affidavit she seeks to explain certain documents that Focus relies on to support its contention of preference, and she does so by enclosing further documents that Focus submits have never previously been discovered by the defendants. Focus submits that this shows there are relevant documents relating to the abovenamed parties that have not been discovered. Focus also submits that the
keyword search terms (listed above at [20(f)] used by the defendant in discovery did not include any of the names of the parties listed in categories 4 to 9, and so did not discover all relevant documents.
[35] The defendants oppose the application for particular disclosure of these categories of documents on the basis that it “relies largely on unsubstantiated suspicion and innuendo”. Mr Plumpton’s principal affidavit relies on “information” from “third parties” that indicates Spaceworks had for some time preferred other contractors. However, the defendants submit that no details of this “information” has been provided and Ms Whaley denies it. The defendants also submit that they have discovered all correspondence with, and internal correspondence relating to, all the abovenamed individuals that is relevant to all of the “full projects” in Auckland.
[36] I do not consider that there is credible evidence either that the defendants’have or have had a preferential relationship with other contractors or that it is relevant to the plaintiff’s claim to explore the relationship between the defendants and other contractors for the purpose of identifying any preferential treatment. In any event, the orders for further discovery now made in relation to other categories will produce documents that relate to the other contractors Spaceworks has used.
Category 11 – 15: financial documentation
[37]Focus seeks:
11. The annual financial statement of Spaceworks Design Group Limited for the period February 2010 until 18 July 2016.
12. The income tax returns and annual financial accounts of Elizabeth Hines for the period February 2010 until 18 July 2016.
13. The income tax returns and annual financial accounts of Elizabeth Hines for the period February 2010 until 18 July 2016.
14. All business plans, business analysis, budgets and banking proposals of Spaceworks Design Group Limited and Elizabeth Hines for the period 7 September 2007 until 18 July 2016.
15. All financial reports, management accounts and financial analysis relating to Spaceworks Design Group Limited and Elizabeth Hines for the period 7 September 2007 until 18 July 2016.
[38] In respect of Ms Whaley’s financial information under categories 12 and 13 (category 13 is a duplicate of category 12), Mr Plumpton suspects that she has received benefits or payments for preferring certain contractors. However, no evidence has been offered to support that claim. I do not consider these documents are relevant to Focus’ claim for its alleged loss under the agreement, and I decline to order discovery of these documents.
[39] Focus submits that the financial statements, tax returns, financial reports and management accounts of the defendants are relevant to its claim from a liability perspective. It also submits that the business plans, business analysis, budgets and banking proposals of the defendants are relevant to determine whether Spaceworks had any formal ongoing relationship with parties other than Focus. Focus’ accountant witness, Mr Bassur, states that he understood Focus’ allegation to be that the settlement agreement was intended to continue the pre-2010 course of dealings and referral of work, and that this changed. Mr Bassur therefore considered that a comparison between the pre-and post-2010 periods will be necessary to assess the changes in the defendants’ conduct. To do that, the documents in categories 11, 14 and 15 should be discovered.
[40] I do not consider the financial information under categories 11, 14 and 15 is relevant to the pleaded claim. Mr Plumpton states in his principal affidavit that this information is necessary to calculate the plaintiff’s loss. However, that can be calculated from the project-specific financial information already discovered. Discovery of the documents under categories 11, 14 and 15 is not necessary.
Category 16: Specific project files
[41]Finally, Focus seeks:
16. All relevant contracts and communications (including electronic documents, emails and text messages and instant messaging) relating to the following projects (approximate date provided for assistance only):
- Gameloft – September 2010
- 280 Queen St Level 5 – July 2012
- Ironbank – March 2013
- Mardell Taka – April 2013
- Copper Brands – May 2013
- The Mind Lab – August 2013
- Tomuri – Jan 2014
- Woods Christchurch – October 2013
- Bankstream December 2013
- Harcourts – January 2014
- Hamburg Stud – April 2014
- 154 Queen St – March 2014
- Superior Personel – April 2014
- HOT Mt Eden – March 2014
- Pigeon Law – April 2014
- Google – May 2014
- Candor 3 – May 2014
- Verrisimo bathrooms – May 2014
- Tomuri Downtown – June 2014
- HOT St Heliers – July 2014
- Shalom Court – October 2014
- Fab Group – Jan 2015
- Media Design School – Feb 2015
- Vesbar – Feb 2015
- Huckleberry (Milford, Oteha, Belmont B/way GI)
- Mind Lab CHCH and Auckland – April
- Google – May 2016
- LG Electronics Highbrook – April 2016.
[42] The defendants do not generally contest the existence of the documents sought, although I note their reference to the fact that some documents may be unable to be located due, for example, to the lapse in time and closure of employee email accounts that cannot be re-opened.
[43] Ms Whaley accepts, however, that relevant documents from four of the projects are discoverable, namely Hamburg Süd, House of Travel Mt Eden, House of Travel St Heliers and Shalom Court. Ms Whaley has agreed to give discovery for those projects on the same basis as their other Auckland-based projects, i.e. communications that had a bearing on the selection of the successful tenderer but not routine emails such as invoices or arranging meetings.
[44] The defendants have, as of 13 February 2018, provided to Focus a list of the relevant documents relating to these projects and inspection copies. An order for particular discovery is not required in respect of those projects.
[45] Ms Whaley notes in her affidavit that the reference to the “Ironbank” project is a reference to the fit-out of Spacework’s own office. On the basis that the agreement
is in relation to client work referrals, the project is outside the scope of the agreement as it was not a client project. I agree.
[46] In Ms Whaley’s schedule of all projects that Spaceworks invoiced to clients between February 2010 and 18 July 2016 she identifies whether a project was a “full project”, the project was in Auckland, Spaceworks had input into the tender process, the plaintiff was invited to tender and whether the plaintiff was successful. Of these, Spaceworks’ involvement was of “full projects”, supply of joinery or furniture, or “design/concept and/or spaceplanning”.
[47] For the projects under category 16 that are either “full projects” or supply of joinery or furniture, all relevant documents have either been discovered or will be discovered under the orders I will make in relation to categories 1 and 3, and 4 – 9. I consider a separate order for discovery of such documents in relation to those projects is therefore not needed.
[48] The plaintiff has not shown a sufficient basis to find that contracts and communications in relation to the projects where Spaceworks’ involvement was only “design/concept and/or spaceplanning” are relevant. I do not make an order for discovery in relation to such projects.
Result
[49]The application for particular discovery is allowed in part.
[50] I make an order that, within 10 working days of service on the defendants of the sealed order, each of the two defendants shall file and serve an affidavit verifying whether the following documents (or classes of documents) are or have been in their respective possession, custody or power, and if it has been but is no longer in either of their custody or power, when they parted with it and what has become of it:
(a)All relevant contracts and communications (including electronic documents and emails, but not including text messages or instant messages) between Spaceworks Design Group Ltd and/or Elizabeth
Hines (née Whaley) and their clients, for the period February 2010 until 18 July 2016, in respect of all out-of-Auckland “full projects” and all projects where Spaceworks’ involvement related to joinery and/or furniture supply.
(b)All relevant communications (including electronic documents and emails, but not including text messages or instant messages) between Spaceworks Design Group Ltd and/or Elizabeth Hines (née Whaley) and contracting firms, for the period February 2010 until 18 July 2016, in respect of all out-of-Auckland “full projects” and all projects where Spaceworks’ involvement related to joinery and/or furniture supply.
(c)All relevant internal communications (including electronic documents, emails but not including text messages and instant messaging) between Spaceworks Design Group Ltd and/or Elizabeth Hines and Rosie Hogg and other staff of the Defendants in relation to all out-of-Auckland “full projects” and all projects where Spaceworks’ involvement related to joinery and/or furniture supply for the period February 2010 until 18 July 2016.
[51]These orders do not include documents pertaining to the “Ironbank” project.
[52]Leave is reserved to apply for further directions.
[53] I note that the existing timetable now requires amendments. Counsel may file a joint memorandum seeking a consent order in that regard.
[54] The plaintiff has not made submissions on costs, and the defendants only seek costs on a band 2B basis if successful. I consider it appropriate for costs to lie where they fall.
P Courtney J
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