HT 2017 Limited v Fig Jam 2017 Limited

[2020] NZHC 1520

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-2538

[2020] NZHC 1520

BETWEEN

HT 2017 LIMITED

Plaintiff

AND

FIG JAM 2017 LIMITED

First Defendant

MARK ANDREW SIEVERS
Second Defendant

DREW MARSHALL FRENCH
First Counterclaim Defendant

GALINA IVANOVA

Second Counterclaim Defendant

Hearing:

On the papers

Appearances:

RB Hucker & R Selby for the Plaintiff and Counterclaim Defendants

DJ Chisholm QC & JD Ryan for the Defendants RDH Massey for Jon Bradley, a non-party

Judgment:

1 July 2020

JUDGMENT OF ASSOCIATE JUDGE SMITH

This judgment was delivered by me on 1 July 2020 at 11am pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors / Counsel:

Hucker & Associates, Auckland, R Hucker ([email protected]) D Chisholm QC, Auckland ([email protected])

Bell Gully, Auckland, RDH Massey, ([email protected])

HT 2017 Ltd v Fig Jam 2017 Ltd & Ors [2020] NZHC 1520 [1 July 2020]

[1]    On 26 February 2020 I made a number of interlocutory orders by consent relating to discovery. The matters dealt with included an application by the first defendant for particular discovery against the plaintiff, and an application by the plaintiff for non-party discovery against a Deloitte partner, Mr Jon Bradley.

[2]    While the discovery applications themselves were dealt with by consent orders, the parties were unable to resolve the issue of costs on these applications. They agreed that costs should be determined by the Court on the basis of submissions to be filed by the parties.

[3]    Costs submissions having been filed by all of the interested parties, I now give judgment on the two costs applications.

The proceeding

[4]    On 28 February 2017, the plaintiff entered into an agreement with the first defendant, under which the plaintiff agreed to purchase for $1,900,000 all of the assets of the first defendant’s business. The business (which I will call the Hosking Trailers Business) included the fabrication and sale of steel boat trailers, and associated repair work. The second defendant, Mr Sievers, was the sole director of the first defendant.

[5]    In the proceeding, the plaintiff alleges that in the course of negotiations for the sale, Mr Sievers and his wife Katie Hosking provided various records and financial information about the Hosking Trailers Business, and the sale and purchase agreement contained a number of vendor warranties concerning various matters, including the condition of the fixed assets, and the relationship with key customers of the Hosking Trailers Business (including Rayglass Boats and Stabicraft). There was also a general warranty that there were no circumstances which had not been disclosed in writing to the plaintiff prior to the date of the agreement which might reasonably be expected to materially and adversely affect the financial position of the Hosking Trailers Business.

[6]    The plaintiff says that the vendor warranties were breached in a number of respects, including in respect of the condition of the fixed assets, non-disclosure by the defendants of information relating to their relationship with Rayglass Boats and

Stabicraft, and non-disclosure of arrangements for the remuneration of some of the employees of the Hosking Trailers Business.

[7]    The plaintiff says that, having identified the various breaches and misrepresentations, it sold the Hosking Trailers Business on 10 May 2018 for only

$800,000. It calculates its losses caused by the misrepresentations and breaches of warranty, at $945,331. It claims that sum from the first defendant, and against Mr Sievers as a guarantor of the first defendant’s obligations under the agreement. In addition, the plaintiff claims the sum of $40,597.90 for failure by the first defendant to honour a claims indemnity contained in the agreement.

[8]    The defendants deny the alleged breaches of the warranty and indemnity clauses, and say that any loss suffered by the plaintiff has resulted from shortcomings in its assessment of the Hosking Trailers Business, and its poor management of the business following settlement. The first defendant also counterclaims against the plaintiff for the sum of $100,000, which was payable under the agreement on certain conditions (relating to Stabicraft) being satisfied. The first defendant’s obligations in respect of the $100,000 were guaranteed by the counterclaim defendants, who are parties associated with the plaintiff.

[9]    The plaintiff and the counterclaim defendants (together, “the respondents”) deny that the condition in the agreement relating to Stabicraft was satisfied, and accordingly deny liability for the $100,000 claimed.

The first defendant’s application for costs against the respondents on the application for particular discovery

[10]   The first defendant seeks costs against the respondents on a 2B basis. The amount claimed is $6,453 for costs (2.7 days at $2,390 per day), and disbursements of

$1,826.08 – total $8,279.08.

[11]   The first defendant first requested additional discovery from the respondents by letter dated 13 September 2019. When it had not received any response by 14 October 2019, it filed its application for particular discovery. The particular discovery application covered a fairly wide range of documents, generally comprising financial

information relating to the plaintiff, audio recordings of certain meetings conducted by representatives of the plaintiff, text messages, documents relating to Stabicraft and Rayglass, documents relating to the plaintiff’s eventual sale of the Hosking Trailers Business, and a number of specified emails.

[12]   The respondents’ solicitors responded to the 13 September letter on 15 October 2019. Generally, they said that they did not see the relevance of the further financial documentation sought by the first defendant, and indicated that they had already discovered such documents as they had relating to the condition of the fixed assets. Some confirmation was provided on other items queried by the first defendant, but the respondents did not agree that documents relating to its sale of the Hosking Trailers Business were discoverable. The respondents suggested that this aspect of the discovery request was a “fishing expedition”.

[13]   Further negotiations followed between the first defendant and the respondents, and some of the documents sought by the first defendant were supplied informally by the respondents. By 13 January 2020, the first defendant said that the following discovery items were outstanding:

(i)Plaintiff’s financial statements for the year ended 31 March 2018.

(ii)The results of the plaintiff’s customer survey conducted by Advantage Business in March 2018.

(iii)All documents relating to the sale of the Hosking Trailers Business on 10 May 2018.

[14]   The respondents advised on 10 February 2020 that they would not be providing the outstanding discovery sought by the first defendant. They considered that the significant documents sought by the first defendant had already been provided. They provided transcripts of certain telephone conversations that had been requested, but maintained the position that further documents relating to the sale of the Hosking Trailers Business sought by the first defendant fell into the “fishing expedition”

category (at least without specific allegations of how it was said that the plaintiff had not run the business properly, and/or had damaged the relationship with Stabicraft).

[15]   The respondents did not file a notice of opposition, but the application was listed for hearing on a defended basis with the various other applications to be determined on 26 February 2020.

[16]   On 19 February 2020, the first defendant made an open proposal to the respondents to resolve the application. Mr Chisholm submits that this proposal was almost identical to the orders ultimately agreed by consent, except for the issue of costs. Under a heading “Possible way forward”, the 19 February 2020 proposal would have required the plaintiff to provide an affidavit listing the following:

(i)The plaintiff’s financial statements for the year ended 31 March 2018.

(ii)The plaintiff’s monthly management accounts for the period from 1 March 2017 until the business was sold on 10 May 2018.

(iii)The source data and results of the plaintiff’s customer survey conducted by Advantage Business in March 2018.

(iv)All documents relating to the sale by the plaintiff of the Hosking Trailers Business.

[17]   On 21 February 2020, the first defendant’s solicitors made a follow-up request for a response to their 19 February 2020 proposal, commenting that they would like to avoid the need to prepare submissions.

[18]   On 22 February 2020 the respondents’ solicitors made a counterproposal to resolve the application, but they did not agree to provide the documents relating to the sale of the Hosking Trailers Business referred to at paragraph 16(iv) above. The respondents contended that none of these documents were relevant to the issues in the proceeding.

[19]   The respondents’ position was not accepted by the first defendant. The first defendant’s solicitors then submitted a draft joint memorandum to the solicitors for the respondents, reinstating their proposal that all documentation relating to the sale by the plaintiff of the Hosking Trailers Business should be disclosed by the respondents. The first defendant maintained its contention that the information was relevant to the plaintiff’s alleged loss, and to the state of the Hosking Trailers Business.

[20]   On 23 February 2020 the respondents’ solicitors advised that the terms of the draft memorandum were not acceptable. No agreement was reached, and on the morning of 24 February 2020 the first defendant filed and served their submissions in support of the application.

[21]   At 9.12am on the morning of 24 February 2020, the respondents’ solicitors sent an email to the first defendant’s solicitors advising:

Our instructions are to agree to the Joint Memorandum without the changes to the categories of documents proposed by us.

Please sign and return to us and we will attend to filing.

[22]   Against that background, Mr Chisholm submits that the first defendant is prima facie entitled to costs as if they were successful on the application. They sought orders for further and better discovery of, among other things, financial statements and documents relating to the plaintiff’s subsequent sale of the business, and the respondents did not file any notice of opposition. Indeed, at the last minute, they agreed to discover the requested documents.

[23]   Mr Chisholm submitted that the documents sought were clearly relevant to a claim by a purchaser for breach of warranty on the sale of a business, or for pre- contractual representation. In those circumstances, costs should follow the event.

[24]   In her submissions in opposition, Ms Selby noted that the present application was one of several dealt with on 26 February 2020. Orders were made on another application requiring the defendants to produce additional documents, and discovery orders were made against the defendants’ accountants (Deloitte) and Mr Sievers’ wife as non-parties. The particular discovery application was part of a suite of applications

in which there was mixed success for the parties, and all applications were resolved on a consent basis.

[25]   Ms Selby also referred to without prejudice correspondence between the parties, submitting that the correspondence in the bundle produced by the first defendant was incomplete.

[26]   Ms Selby submitted that the original categories of documents sought by the first defendant were more wide-ranging than those ultimately agreed, and that the documents show that it was agreed fairly early on that the respondents would provide further discovery (although the scope of the further discovery would require further negotiation between the parties).

[27]   Finally, Ms Selby submitted that the submissions filed by the defendants on 24 February 2020 went well beyond the scope of the orders sought. Also, the first defendant had indicated that only a one-hour hearing would be necessary, and it was not necessary for it to prepare a bundle of documents for hearing.

[28]   The first defendant filed brief submissions in reply. Mr Chisholm and Mr Ryan submitted that, while the application was one of three applications listed for hearing on 26 February 2020, each application was dealt with separately, and distinct memoranda were filed regarding each application. The applications were not interdependent. Secondly, they submitted that no without prejudice correspondence was exchanged in connection with the first defendant’s application. It was only once the first defendant had incurred the costs of preparing for the hearing of its application, and filed and served its submissions, that the respondents agreed to supply the requested documents. In the end, the first defendant obtained orders substantially as sought in its application.

Discussion and conclusions

[29]   I am satisfied that the first defendant is entitled to costs. It appears from the correspondence produced that the first defendant did not receive a substantive response to its letter of 13 September 2019, and any interlocutory applications were due to be filed by 11 October 2019. Understandably in those circumstances, the first

defendant proceeded to file its application. The respondents’ substantive response was not provided until 15 October 2019, after the first defendant had filed its application.

[30]   Thereafter, while the parties were able to resolve most of the documents sought by the first defendant in the application, it appears that the respondents continued to hold out on providing some of the information sought, until after the first defendant had been put to the expense of preparing a detailed submission and a bundle of documents for the hearing.

[31]   Even without a notice of opposition having been filed, the Court would still have had to consider the merits of the first defendant’s application (to the extent the documents sought had not been provided). In those circumstances, I accept that it was appropriate for the first defendant’s counsel to prepare brief written submissions and a bundle of relevant documents for the hearing. It is unfortunate that the respondents’ eventual acceptance of the first defendant’s position was not communicated to the first defendant’s solicitors until after their submissions had been filed and served. But that is an ordinary risk associated with running negotiations down to the wire in litigation, and the respondents cannot be heard to complain if their delay in accepting the first defendant’s response resulted in the first defendant taking necessary Court steps in the meantime.

[32]   In the absence of any notice of opposition by the respondents, I am not prepared to embark on any review of whether the documents eventually agreed to be provided were relevant to the issues in the case, and I have nothing before me to support Ms Selby’s submissions that the various applications were in some way interdependent, or that it was implicitly accepted that costs would be reserved on all of them. In fact, the joint memorandum in the form eventually agreed between the parties provided that costs would be determined by the Court on the papers.

[33]   I conclude that the first defendant is entitled to costs on a 2B basis as sought. Costs are accordingly awarded to the first defendant against the respondents in the total sum of $8,279.08 (including disbursements).

Mr Bradley’s application for costs on the non-party discovery application against him

[34]   On 9 August 2019, the plaintiff applied for non-party discovery against a number of parties, including Mr Jon Bradley, a partner of Deloitte. Deloitte were the chartered accountants who acted for the first defendant in the period up to the sale of the Hosking Trailer Business to the plaintiff.

[35]   The documents sought from Mr Bradley were the first defendant’s financial statements for the years ended 31 March 2017 and 31 March 2018, the first defendant’s tax returns for those years, Deloitte’s working papers relating to the first defendant for the four tax years up to 31 March 2018 (and primary documents provided to Deloitte for the purposes of preparing tax summaries and/or financial statements), copies of invoices for the fixed assets of the first defendant as listed in the schedule attached to the sale agreement between the first defendant and the plaintiff, and the first defendant’s general ledgers for the four tax years to 31 March 2018.

[36]   Mr Bradley did not file a notice of opposition. Instead, the parties entered into discussions, and Mr Bradley informally provided a series of documents to the first defendant for the purposes of discovery. Mr Bradley’s solicitors asked the plaintiff to keep him updated as to the progress of the parties’ discussions, and whether the non- party discovery application against Mr Bradley would be pursued.

[37]   The next step from Mr Bradley’s perspective was that on or about 21 February 2020 the plaintiff and the defendants submitted a joint memorandum setting out proposed orders to be made by consent for non-party discovery to be provided by the various non-parties, including Mr Bradley. They asked for his counsel’s signature on the memorandum by 3pm the same day.

[38]   It appears that there was some misunderstanding between counsel at the time as to whether this joint memorandum had the support of Mr Bradley and Deloitte. The plaintiff appears to have assumed that it did, on the basis that Deloitte were the first defendant’s chartered accountants. It turned out that Mr Bradley was not aware of the terms of the joint memorandum, and he did not agree to them.

[39]   Mr Bradley considered that the joint memorandum included new categories of information, which were materially wider than those included in the application. He took the view that searching for these new categories of documents would be a time- consuming and expensive exercise. On 25 February 2020, his counsel filed a memorandum objecting to the breadth of the new orders sought.

[40]   When the matter was called on 26 February 2020, I stood the matter down to allow Mr Hucker, who appeared for the plaintiff at that hearing, and Mr Massey to confer on appropriate terms for the non-party discovery order against Mr Bradley. When the matter was recalled, counsel advised me that orders could be made by consent in the terms set out in the plaintiff’s application for non-party discovery.

[41]   Mr Bradley now applies for costs. There is no issue over his costs of complying with the non-party discovery order – by agreement, those costs will be met in the first instance by the first defendant. The issue is over Mr Bradley’s legal costs of responding to the non-party discovery application, including his counsel’s Court appearance on 26 February 2020.

[42]   Mr Bradley asks for costs under r 8.22(3) of the High Court Rules 2016. That rule provides:

8.22 Costs of discovery

…

(3) If an order is made under rule 8.20(2) or 8.21(2), the Judge may, if the Judge thinks it just, order the applicant to pay to the person from whom discovery is sought the whole or part of that person’s expenses (including solicitor and client costs) incurred in relation to the application and in complying with any order made on the application.

[43]   Mr Massey submitted that the starting principle is that the party who applies for non-party discovery should pay the non-party’s costs.1

[44]   He submitted that if Mr Bradley had received notice of the joint memorandum, his objection to the wider orders could have been addressed without the need for the hearing on 26 February 2020. In those circumstances, it is just and reasonable that he

1      Clear Communications Ltd v Telecom Corporation of New Zealand Ltd (1994) HPRNZ 200 (HC).

should recover his costs in relation to the hearing. The amount sought by Mr Bradley is $4,440 (excluding GST), being solicitor/client costs incurred by him in the period 24 February 2020 to 26 February 2020.

[45]   In his submissions, Mr Hucker submitted that Mr Bradley’s costs should be met by the defendants. Deloitte are the accountants retained by the first and second defendants, and they completed the accounts for the Hosking Trailers Business. The documents of Deloitte which were referred to in the application were in fact in the power, possession, or control of the defendants, and the documents were already the subject of discovery orders made in the proceeding.

[46]   Mr Hucker next submitted that, when Mr Bradley received the joint memorandum signed by counsel for the plaintiff and the defendants, it would have been open to him to simply file a memorandum consenting to the orders outlined in the original application. Instead, Mr Bradley filed a memorandum on 25 February 2020 opposing the orders proposed in the joint memorandum, and maintaining that the category of documents in the joint memorandum was wider than was required. He applied for an adjournment of the non-party discovery application against him.

[47]   Mr Hucker submitted that the orders sought in the joint memorandum were in fact narrower than those sought in the original application, as emails and the emailing of documentation (a category in the joint memorandum that was of concern to Mr Bradley) were already covered under the term “all primary documents” in the original application. Also, the reference in the original application to “all working papers”, included notes of conversations with the defendants or their agents (another matter of concern expressed by Mr Bradley in his counsel’s 25 February 2020 memorandum).

[48]   Having regard to all those matters, Mr Hucker submitted that Mr Bradley should either be left to meet his own costs, or his costs should be met by the defendants. However, if the Court were minded to make an order for costs against the plaintiff, Mr Hucker submitted that the amount claimed is in any event excessive. The costs have been claimed at the rate of $600 per hour plus GST, being a rate said to be just below the level charged by several Queen’s Counsel. He submitted that the attendances could have been carried out at senior associate level at a rate not exceeding

$300 per hour plus GST. Nor was there any need to prepare a bundle of documents for the hearing, or indeed for there to be a hearing given that no notice of opposition was ever filed by Mr Bradley. Mr Hucker submitted that a reasonable time spent dealing with the application would have been two hours, for reviewing the application and considering the consent memorandum.

[49]   Mr Chisholm and Mr Ryan filed a short memorandum in reply on behalf of the first defendant. They submitted that there are no grounds in this case to depart from the usual principle that the party who applies for a non-party discovery order should pay the non-party’s costs. They submitted that there is no “close connection” between Deloitte and the defendants – they are independent entities. This is not a case where the party providing non-party discovery is a part of a corporate group.

[50]   Mr Chisholm and Mr Ryan next submitted that, if the plaintiff considered that the documents were in the defendants’ possession and control, they should have filed an application for particular discovery against the defendants – not a non-party application against Mr Bradley.

[51]   They submitted that, in response to the application, the defendants incurred the costs of Deloitte providing the requested documents. When it became apparent that that was occurring, the application against Mr Bradley should have been withdrawn.

[52]   Finally, it was wrong for the plaintiff to assume that the defendants had obtained the consent of Mr Bradley to the joint memorandum.

Discussion and conclusions

[53]   I do not consider this is a case where the defendants should be required to meet Mr Bradley’s costs. It was the plaintiff who chose to seek a non-party discovery order against Mr Bradley, and I accept the submission of Mr Chisholm and Mr Ryan that there is no basis for departing from the ordinary principle that the party who applies for a non-party discovery order should meet the non-party’s costs.

[54]   I did not receive detailed submissions on whether the documents held by Deloitte were in fact in the control of the defendants, and thus within the categories of documents the defendants would have been obliged to disclose anyway. In those circumstances, the appropriate course is to award costs on the basis that some or all of the documents sought were not in fact in the defendants’ control (that being the sensible inference to be drawn from the filing of the application against Mr Bradley). And I do not consider there is sufficient before me to conclude that the non-party discovery application against Mr Bradley was necessitated by any failure of the defendants to provide relevant documents that were in their control.

[55]   I accept that Mr Bradley is entitled to reasonable costs for reviewing the application and for responding to the joint memorandum, and I think Mr Bradley was also entitled to be represented by counsel at the hearing on 26 February 2020. On the face of it, “all emails” could well have appeared to Mr Bradley to extend beyond the concept of “primary documents”. Similarly, notes of conversations with the defendants or their agents might reasonably have appeared to him to extend beyond the concept of an accountant’s “working papers”. I think Mr Bradley was entitled to have these points clarified. In addition, I accept that some level of communication between Mr Bradley and the defendants was appropriate, if only so that Mr Bradley could be aware of any objections the defendants might have to the production of documents held by Deloitte (although argument on any such objections would be carried by the defendants, not by Mr Bradley).

[56]   All of that said, I consider that the costs claimed by Mr Bradley do appear to be significantly more than appear to have been necessary. Mr Bradley and Deloitte were not parties, and there would appear to have been little reason for them to spend significant time opposing the application, particularly in circumstances where they would not be required to meet the costs of complying with any order the Court might make.

[57]   I also accept Mr Hucker’s submission that the rate of $600 per hour claimed by Mr Bradley is excessive for what appears to have been an intermediate-level exercise. In my view, the justice of the case will be sufficiently met by an order that the plaintiff pay Mr Bradley $2,000 for his costs on the application. There will be an order accordingly.

Associate Judge Smith