Highgate on Broadway Ltd v Devine
[2012] NZHC 2288
•10 September 2012
IN THE HIGH COURT OF NEW ZEALAND BLENHEIM REGISTRY
CIV 2012-406-136 [2012] NZHC 2288
IN THE MATTER OF the Arbitration Act 1996
AND
IN THE MATTER OF an application for a determination under
Article 16 of the Act
BETWEEN HIGHGATE ON BROADWAY LIMITED Applicant
ANDARTHUR LAWRENCE MICHAEL DEVINE
Respondent
Hearing: 16 August 2012
Counsel: D J Clark for Applicant
L P Radich for Respondent
Judgment: 10 September 2012
JUDGMENT OF THE HON JUSTICE KÓS (Security for costs)
Introduction
[1] The applicant landlord unlawfully terminates the respondent tenant’s lease of a hairdressing salon. The landlord subsequently admits it was not entitled to terminate the lease. Agreement beyond that cannot be reached. A High Court Judge grants the tenant relief against forfeiture, and requires reinstatement and the grant of a new lease. Difficulties effecting these orders occur and the landlord appeals to the Court of Appeal. The tenant abandons his efforts to regain possession. He initiates
arbitration proceedings to recover damages for his unlawful eviction.
HIGHGATE ON BROADWAY LIMITED v DEVINE HC BLE CIV 2012-406-136 [10 September 2012]
[2] The landlord protests jurisdiction and the arbitrator (appointed by the Law Society) hears argument on that question. His award is available, but the landlord now says it cannot afford to pay its share of the arbitrator’s fee. Some $5,000 or so. The arbitrator reduces his fee to one half – the amount paid by the tenant – and releases the award. The tenant succeeds on the jurisdiction issue. The landlord challenges that decision, issuing the present originating application in the High Court.
[3] The tenant applies for security of costs, under High Court Rule 5.45(1)(b), on the basis there is evidence the landlord will be unable to pay costs if its application ultimately fails.
[4] The various steps taken to date may be tabulated thus:
Proceeding/Application Brought by Result Appealed/reviewed
(1) Relief against forfeiture
(2) Appeal to Court of
Appeal
(3) Reinstatement of premises
(4) Arbitration proceedings(5) Protest to arbitrator’s
jurisdiction
(6) Application to challenge jurisdiction award
Tenant Tenant succeeds Landlord appeals to Court of Appeal: see (2)
Landlord To be heard N/A Tenant Abandoned N/A Tenant To be heard N/A
Landlord Tenant succeeds Landlord challenges: see (6)
Landlord To be heard N/A
[5] I note the substantive application is before me on 24 September in the High
Court at Blenheim. In the circumstances I propose to be both brief and circumspect.
Issues
[6] Three issues arise:
(a) Issue 1: Is there reason to believe the applicant landlord will be unable to meet an award of costs against it?
(b) Issue 2: Is it appropriate for an order for security for costs to be made? (c) Issue 3: How much security is appropriate?
Issue 1: Is there reason to believe the applicant landlord will be unable to meet an award of costs against it?
Law
[7] The question of whether the landlord will be able to meet an award of costs is essentially a factual question.1 There is no burden of proof or predisposition one way or the other.2 In Concorde Enterprises Limited v Anthony Motors (Hutt) Limited (No 2)3 Quilliam J noted that what was needed was credible evidence of surrounding circumstances from which it may reasonably be inferred that the respondent to the
security application will be unable to pay costs. As Duffy J has said recently in
Sharda Holdings Limited v Gasoline Alley Services Limited:4
It is clear from the authorities cited that the threshold of proof for making an order for security for costs is less than proof of inability to pay an award of costs. It is enough if the Court is satisfied that there is credible (that is, believable) evidence from which it may reasonably be inferred that the plaintiff will be unable to pay any such order.
[8] The words “will be unable” in rule 5.45(1)(b) are concerned with ability to pay. Not with financially capable, but constitutionally unwilling, persons – where a stone must be squeezed hard to produce blood.5 The “will be unable” formula in the rule is drawn directly from the former United Kingdom Rules of the Supreme Court,
0.23, r. 1(1)(b). They seem first to have been introduced in the 1965 version of the
United Kingdom Rules and followed in the New Zealand High Court Rules in 1986. Prior to that impecuniosity was addressed as a matter of inherent jurisdiction.6
1 New Zealand Kiwifruit Marketing Board v Meheatataka Coolpack Limited (1993) 7 PRNZ 209 (HC).
2 Nikau Holdings Limited v Bank of New Zealand (1992) 5 PRNZ 430 (HC).
3 Concorde Enterprises Limited v Anthony Motors (Hutt) Limited (No 2) [1977] 1 NZLR 516 (HC) at 519.
4 Sharda Holdings Limited v Gasoline Alley Services Limited HC Auckland CIV 2008-004-539,
13 November 2009 at [6].
5 See eg Mu v Body Corporate 312421 HC Auckland CIV 2011-404-4768, 8 December 2011 at
[11]; Tubbs v McKenzie HC Christchurch CIV 2005-409-2588, 25 June 2010 at [4].
6 Williamson v Johnson (1889) 7 NZLR 369 (HC) at 372.
Expansion of the threshold (which may be worth considering, given that it is just that
– a threshold – with an “unfettered discretion” at the next stage)7 is a matter the Rules Committee may wish to grapple with. A case to expand the threshold from the unable to the unwilling can certainly be made.
Evidence
[9] In this case one must start with the landlord’s solicitors’ letter to the arbitrator of 24 April 2012. It will be recalled that this letter was sent to the arbitrator at a time when his award on the landlord’s protest to jurisdiction was available to be uplifted. The thrust of the letter was that the landlord could not meet its share of the arbitrator’s fee – $5,135. I set the letter out in full:
We refer to Peter Radich’s letter to you of yesterday.
Unfortunately Peter’s letter did not fully inform you of intervening events.
1 On 30 March 2012 the [tenant] required that security in the sum of
$5,560 be paid to the Court of Appeal in relation to the appeal to that
Court concerning the substance of these proceedings.
2On the same day the [tenant] required the sum of $14,074 plus interest be paid into the High Court in relation to the High Court proceedings.
3Both of these sums could have been waived in whole or in part by the [tenant].
4The requirement to pay these monies has meant that money that could have been utilised to pay your account is not available. The monies had been obtained from a third party and the ability for the [landlord] to pay an additional sum has been exhausted.
5 The [tenant has] not paid any rent and the [landlord] has no income.
6 This state of affairs has been brought about therefore by:
(a) The [landlord] being contemporaneously vexed by simultaneous proceedings in front of the Courts and in arbitration relating to the same dispute.
(b) The [landlord] requiring monies be paid as identified above where they could have been waived in whole or in part.
Given the approach of the [tenant] we cannot see a current solution to the problem.
7 See at [19] below.
The final words of the letter are themselves significant: it is not suggested in the letter that the issue is a temporary cash flow one. The net result of that initiative was, as the landlord deposes, that the arbitrator reduce his fee by 50 per cent – to equal the amount paid by the tenant – so the award could be released.
[10] The landlord has however paid $5,000 into its solicitor’s trust account as a token of good faith as to its ability to pay costs. Mr Clark undertakes to disburse those funds only in accordance with a further order of this Court. It should be noted, however, that the amount of security sought by the tenant in this case – based on his counsel’s calculation of costs on a 2B basis – is $11,250.
[11] The only other relevant information before the Court in concerning this issue is the affidavit of Mr Yates, a director of the landlord company. That affidavit deposes that the landlord owns two properties – the commercial premises in Blenheim which include the hairdressing salon, and an apartment in Picton. Mr Yates produces rating valuations by the Marlborough District Council. They together comprise $1,095,000. He produces also evidence of outstanding mortgage indebtedness on the two properties to ASB Bank Limited. The net result is that the net equity of the buildings based on the rating valuations is said to be $220,484. It is clear however that that information is incomplete. As Mr Clark acknowledged, the April 2012 letter to the arbitrator shows that the landlord company has received financial assistance from Mr Yates or other third parties to meet expenses in relation to a litigation. These it will have to repay. Mr Yates did not produce any more detailed financial statements. The rating valuations are indicative rather than reasoned. It follows that the Court cannot reach a view as to the actual net equity in the two properties. Mr Yates deposes also that he has not been able to find a replacement tenant, and that has resulted in a “significant loss of income for the company”. He says the company is not in default of any loan obligations, that he and his wife live in the apartment owned by the landlord company, and that they have an incentive not to allow it to be taken from under them.
Submissions
[12] Against this background Mr Luke Radich for the tenant makes the following submissions. He says there is evidence that the landlord cannot meet its financial obligations as they fall due, such being indicated clearly from the content of the letter to the arbitrator. There has not been adequate disclosure of the landlord’s financial position and anything more than the most basic evidence of value of assets. Debt beyond that to the ASB Bank Limited is not known, and there is plainly a shareholder or other third party debt deposed to in the letter. Mr Yates’ evidence as to the net equity in the company is therefore unreliable. Mr Radich submits that in these circumstances “the evidence clearly established that Highgate would be unable to meet an adverse costs award”.
[13] For the landlord, Mr David Clark submits that the equity in the two buildings shows that the landlord can meet a costs award of $11,250. The payment into trust of $5,000 by way of security means that the amount at risk is only some $6,250. He points to two further factors. First, the action of the tenant in purporting to cancel the lease after obtaining an order for renewal is said to be causative of the landlord’s impaired financial position. Secondly, he points to the fact that one of the properties is occupied by Mr and Mrs Yates personally, and they would not allow that property to be lost for the sake of a payment of $6,250. Mr Clark acknowledges that Mr Yates’ calculation as to net equity cannot be relied on, inasmuch as it does not take account of shareholder or other third party debt. He implies that is not likely to be very much, but accepts the evidence is incomplete.
Analysis
[14] I am not prepared to allow the landlord to approbate and reprobate in this way. If its position on 24 April 2012 in correspondence with the arbitrator was that it was unable to pay a fee of $5,135 – as a result of which the arbitrator reduced his fee in order to enable the award to be produced – I am satisfied there is credible (i.e. believable) evidence from which it may reasonably be inferred the landlord will be unable to pay a costs award.
[15] The letter states in clear terms that the landlord has no income; its ability to meet additional obligations had been “exhausted” as at 24 April 2012; the $14,074 required to be paid by the landlord to meet its High Court costs obligation was paid by a third party (whether Mr Yates, the bank or someone else is unclear); security for costs in the Court of Appeal of ($5,560) was also paid by a third party; and it could not meet a $5,135 obligation to pay the arbitrator’s fees to deliver a preliminary award on what was its own protest to jurisdiction.
[16] I do not consider the letter suggests a mere cashflow problem which could be met by further borrowing or any undertaking to pay. The landlord saw no current solution at all.
[17] Regardless of the matters raised by Mr Clark in an effort to explain away the letter, the tenant and this Court are entitled to take it at face value. It is credible evidence of an inability to pay.
[18] The answer to Issue 1 is “Yes”.
Issue 2: Is it appropriate for an order for security for costs to be made?
[19] The tenant has met the threshold requirement for an order. Against that background I consider a number of factors relevant to the exercise of the Court’s discretion. In A S McLachlan Limited v MEL Network Limited8 a 2002 decision of the Court of Appeal, that discretion was described as “unfettered”. That it was described in that relatively extravagant manner indicates simply the breadth of the Court’s discretion. The applicant for security for costs may have crossed the threshold; it is another question as to whether it is invited to stay.
[20] While impecuniosity makes an order for security for costs more likely, primarily because it is likely that to permit the case to proceed further without security may well be unduly oppressive of the other parties, it has never been the
case that impecuniosity per se requires the making of such an order. That was so at
8 AS McLachlan Limited v MEL Network Limited (2002) 16 PRNZ 747.
common law,9 and it is so also under the rules since that threshold has been introduced.10 As Professor Zuckerman says:11
An order for security for costs directs that unless the claimant (or exceptionally, the defendant) provides a security that will underwrite any liability for costs that he may incur towards the defendant, he will not be allowed to proceed with the claim. On its face of it, this is an extraordinary jurisdiction. The principle of access to justice demands that citizens should have untrammelled opportunity to pursue bona fide claims in the Court. Therefore, requiring a claimant to provide security for costs, as a condition to being allowed to pursue his claim, will normally constitute an unjust constraint of his right of access to justice: Abraham v Thompson [1997] 4 All ER 362 (CA). However, considerations of justice support the imposition of security into two types of situations: where the claimant intends to evade any future liability as to costs, and where the claimant would otherwise be effectively immune from costs orders.
[21] Considerations relevant to the discretion may favour, tend against or be neutral to the making of an order. I do not suggest the list that follows is complete. The caution expressed by the Court of Appeal in McLachlan12 that such considerations are not evenly weighed, and must not be used to fetter discretion, must be recalled. On the other hand, an ordered and principled approach is a good reminder that the imposition of security is not an automatic consequence of the
plaintiff’s impecuniosity. A point that is often overlooked by applicants for security. Many seem to assume that if the impecuniosity threshold is passed, and that state is not necessarily a direct consequence of a cause of action, security will be ordered. The analysis required is actually much more subtle.
[22] Affirmative answers to the following enquiries will tend in favour of an order against an impecunious plaintiff:13
(a) Is the plaintiff a nominal one? Where the plaintiff is “nominal”, so
that it is in effect representing the interests of others who will thus be
9 Cowell v Taylor (1885) 31 Ch D 34 (CA).
10 See [8] above.
11 Zuckerman on Procedure (2nd ed, Sweet & Maxwell, London, 2006) at 380.
12 At [13] – [14].
13 I use “plaintiff” here for simplicity, as an application for security is normally made by a
defendant.
spared exposure to costs, it may be appropriate to make an order for security.14 In the United Kingdon specific concurrent statutory jurisdiction to award security for costs in the case of a limited liability company has long existed.15 As Professor Zuckerman has observed16 the justification for that distinction lies in the separate legal personality of companies, limiting financial exposure (including for costs). Shareholders, who benefit from a company’s litigation, are immune to its liability for costs. That may give a company an unfair advantage. A similar provision in New Zealand17 has been repealed, and the position of companies is to be considered under Rule 5.45 in the ordinary way. Concurrent jurisdiction still exists in the case of incorporated societies,18 although that provision is now probably superfluous.19 Security for costs in the Environment Court, for instance, is dealt with under s 278(1) of the Resource Management
Act 1991 and District Court Rule 4.20.
Here there is no suggestion that the landlord is nominee for other interests. The fact that it is a limited liability company gives rise to no special considerations.
(b)Is there evidence of the plaintiff disposing of assets to avoid meeting an adverse costs order? Where there is cogent evidence of a plaintiff disposing of assets to immunise itself from liability for costs (and thereby becoming impecunious), an order for security may well be appropriate. (A pre-judgment charging order under Rule 17.41 is another option in such a case).
There is no suggestion that is so here.
14 Cowell v Taylor (1886) 31 Ch D 34 (CA), at 38, Lloyd v Hathern Station Brick Co (1901) 85 LT
158 (CA); Greener v Kahn & Co [1906] 2 KB 374 (CA).
15 See currently CPR 25.30(2)(c) (United Kingdom); s 76(1) Companies Act 1985 (UK).
16 Op sit at 384.
17 Companies Act 1955, s 467.
18 Incorporated Societies Act 1908, s 17.
19 McGechan on Procedure (looseleaf ed, Brookers) at [HR 5.45.16].
(c) Is the plaintiff ’s substantive claim prima facie unmeritorious? While it is not appropriate that a Court predetermine the question of merits or form more than “an impression”,20 if a prima facie case can be established that the respondent’s claim is unmeritorious that will be a factor in favour of security. The position is not in New Zealand as absolute as that suggested by Clarke LJ in Ali v Hudson,21 i.e. that the weakness of a party’s case will ordinarily be relevant only where it has “no real prospect of succeeding.” In New Zealand a prima facie lack of merit will be weighed in the balance; the less apparently meritorious, then the more likely security is.
Here the landlord’s substantive application has prima facie merit.
(d)Does the plaintiff have access to third party funding? Where a plaintiff is impecunious, but can reasonably draw upon resources from associated third parties such as shareholders or other persons interested in the subject matter or litigation, that is a ground for the order in security notwithstanding the difficulties the impecunious plaintiff might otherwise face.22 It is less likely in such a case that a prima facie meritorious case will be thwarted by the ordering of security.23
Although the landlord protests in its letter to the arbitrator that it has exhausted alternative resources, the reality here is clearly that Mr Yates or some other supporter of the landlord company has been funding its participation in the litigation (given its absence of income).
(e) Would the denial of security for costs in the circumstances of this litigation be oppressive to the reasonable interests of the defendant and parties other than the plaintiff? Security for costs is relatively
exceptional. Where it is likely to result in the denial of access to
20 McLachlan at [21].
21 Ali v Hudson [2003] EWCA Civ 1793 at [40].
22 Bell Wholesale Export Co Pty Ltd v Gates Export Corporation (1984) 54 ALR 176 (FCA) 179–
180.
23 See [23(b)] below.
justice, it is entirely exceptional. But in some situations to allow litigation to proceed without the checks and protection of security will be oppressive to the interests of other parties, particularly where the litigation is unjustified or unmeritorious, over-complicated or unnecessarily protracted.24
Here the landlord, while financially impaired, has been able to draw on third party funds, presumably from Mr Yates. The sum of $5,000 has been put in its solicitor’s trust account. There is no suggestion either that that is all it can find, or that to require it to pre-fund scale costs on its application will preclude it pursuing its claim. On the other hand, it can also be said that in this litigation the landlord, whose unlawful eviction of the tenant started the ball rolling, has given little quarter. The tenant, successful before Mackenzie J, has not seen the costs it is entitled to, because those are tied up in Court. That may be logical enough given its own financial problems and the prospect of an appeal, but non-payment of these costs is of course to a degree oppressive.
[23] In contrast, affirmative answers to the following enquiries may tend against an order against an impecunious plaintiff:
(a) Is it reasonably probable that impecuniosity was caused by the defendant? Where it is reasonably probable that the defendant’s actions the subject of a cause of action caused the plaintiff ’s impecuniosity, that is a strong consideration against awarding security. The Court will already have formed a view as to whether the cause of action has potential merit.25 The question then is whether it is reasonably probable that it caused the plaintiff’s financial embarrassment. A question of linkage, rather than any further
examination of the merits.
24 McLachlan at [16].
25 See [22(c)] above.
Here the landlord denies it is impecunious at all. But it suggests that to the extent its financial position is impaired, the act of the tenant in first seeking relief against forfeiture, obtaining it and then purporting to cancel the lease, is the real cause of this impairment. The tenant of course has a different view. It says the alleged failure of the landlord to reinstate (despite a High Court order) and appeal to the Court of Appeal meant it was not viable commercially to persist in affirming the lease. So it cancelled. It is not clear to me from submissions or my inspection of the papers whether issue is taken with the legitimacy of cancellation in those circumstances. Regardless, the absence of any tenant here has its origin in the admittedly unlawful act of a landlord in evicting the tenant in the first place.
(b)Would ordering security deprive the plaintiff of the capacity to advance a prima facie meritorious claim? Access to justice is an essential human right. The cost of exercising that right is the payment of costs in the event of failure. The right of a successful defendant to costs in that event is arguably subordinate to the plaintiff’s right to be heard. Strong social policy considerations favour the use of Courts as an accessible forum for the resolution of disputes and grievances of almost all kinds. Only where a clear impression can be formed that the plaintiff’s claim is altogether without merit – so that in the alternative it would be amenable to being struck out – would it be right for security to be ordered where to do so would bring the plaintiff’s claim to dead halt. In cases where the claim is being seriously misconducted (with undue complexity or expense), security orders short of effective termination of the claim may be appropriate. As the Court of Appeal said in McLachlan, “access to the Courts for a
genuine plaintiff is not lightly to be denied”.26
As I have already found, there is no suggestion here that the landlord’s
financial position (by itself or in conjunction with others it is able to call upon) is so parlous that ordering a further $6,250 security for
26 McLachlan at [15].
costs (over and above the $5,000 in its solicitor’s trust account) would
preclude the landlord from pursing its claims.
(c) Has the applicant delayed unduly in applying for security? Undue delay by the defendant in applying for security may be a factor in denying such an order. Particularly where the plaintiff has been led on to continue to prosecute its claim and incur expense, thereby contributing to its adverse financial position. A defendant must act promptly where it has reason to believe the plaintiff may be unable to meet a costs award.
No undue delay in this case has been (or could be) suggested.
[24] The following further considerations of a general nature must also be considered:
(a) Is the conduct of either party relevant? Behaviour by either party that is contemptuous or oppressive will be particularly significant, but the whole spectrum of each party’s conduct in relation to the litigation and it subject matter may be considered. For instance, the failure by a party to advance affidavit evidence relevant to any stage of the security enquiry, where a case to answer has been made by its
opponent.27
In this case I am of at least a provisional view that the landlord’s conduct justifies ordering payment of security for costs. First, there was its refusal to pay the arbitrator’s fee on argument over its protest to jurisdiction. While that is now sought to be explained away as a “cash flow” issue, the letter did not say so, and presented a fait accompli refusal to pay costs in April 2012. No credible basis has been put before me to suggest that that cash flow issue could not in
April 2012 have been resolved. Secondly, although the High Court
27 See e.g. Sharda Holdings Ltd v Gasoline Alley Services Ltd HC Auckland CIV-2008-004-
000539, 13 November 2009 at [7].
ordered costs of some $14,000 plus interest on the relief against forfeiture application (on which the tenant succeeded), and although the tenant would have been entitled to payment of those costs, it appears the landlord refused to pay costs on any basis other than that they be paid into the High Court pending determination of its appeal in the Court of Appeal. I accept that concerns as to the solvency of the tenant may justify the course, although the fact remains that the eviction plainly was unlawful, as the landlord now admits. Thirdly, there is the conduct of the landlord in saying on the one hand that it is good for costs, but on the other hand paying somewhat less than half of those costs into its solicitor’s trust account. There is at least an impression given (although I accept ultimately it may not be sustained) that the landlord has conducted itself in these proceedings in a manner that is both tactical and defiant of the ordinary consequences of adverse outcomes. It may be, I accept, that that impression will be dispelled when I consider the substantive application. But it is at least a consideration at this stage for ordering payment into Court of full security for costs.
(b)Are there any other relevant considerations? That is beyond those already addressed. For instance, different considerations may apply where the litigation has public interest overtones.
This is not such a case, and no further considerations arise in it.
(c) How should the respective interests of the parties best be balanced?
This is the overriding and most important consideration of all.
In this case, considering all these matters together (but in particular the origins of the litigation in the landlord’s unlawful eviction of the tenant, the stance taken by the landlord in April and otherwise in this litigation, and the fact that security will not stop it from prosecuting its application) I exercise my discretion to require payment of security for costs.
[25] The answer to Issue 2 therefore is that it is appropriate that security for costs be ordered.
Issue 3: How much security is appropriate?
[26] There is no argument in this case over quantum. A category 2 band B calculation by the tenant produces a figure of $11,250. Security in that amount will be ordered.
[27] The answer to Issue 3 therefore is that security in the sum of $11,250 will be ordered.
Disposition
[28] There will be an order requiring payment into Court of security for costs in the sum of $11,250. Payment is to be made no later than 4.00 pm on Friday 14
September 2012. The $5,000 sum paid into the landlord’s solicitor’s trust account may be used for that purpose, and the undertaking given by Mr Clark is discharged to that extent.
[29] The tenant is entitled to costs on this application on a category 2 band B
basis, together with disbursements fixed by the Registrar.
Stephen Kós J
Solicitors:
Wisheart Macnab & Partners, Blenheim for Applicant
Radich Law, Blenheim for Respondent
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