Internet Traders Ltd v Williams
[2015] NZHC 2562
•20 October 2015
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
CIV 2014-470-158 [2015] NZHC 2562
BETWEEN INTERNET TRADERS LTD AND ORS
Plaintiffs
AND
NICOLE JEAN WILLIAMS AND ORS Defendants
Hearing: 21 September 2015 (in Auckland) Counsel:
J P Temm and K J Patterson for Plaintiffs
R E Harrison QC for DefendantsJudgment:
20 October 2015
JUDGMENT (NO. 3) OF HEATH J
This judgment was delivered by me on 20 October 2015 at 2.00pm pursuant to
Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Ken Patterson, Tauranga
Abernethy Broatch Law, Mount Maunganui
Counsel:
J P Temm, RotoruaR E Harrison QC, Auckland
INTERNET TRADERS LTD AND ORS v WILLIAMS AND ORS [2015] NZHC 2562 [20 October 2015]
CONTENTS
Introduction [1]
Background [6]
The application for review
(a) The remaining issues [10] (b) Discovery – business records for Internet Traders and IT Pharmaceutical [11] (c) Discovery – legal professional privilege (i) The issue [13] (ii) The Associate Judge’s decision [16] (d) Analysis [21] Application to strike-out Third Amended Statement of Claim (a) Background [32] (b) The Associate Judge’s decision [35] (c) Problems with the Third Amended Statement of Claim (i) Introduction [37] (ii) The first cause of action [39] (iii) The second and fourth causes of action [43] (iv) Remaining causes of action [49] Result [51] Costs [54]
Introduction
[1] Ms Nicole Williams, the trustees of the Aesculapian Family Trust (Ms Williams and Arnold Trustees 2009 Ltd), Glencove (2014) Ltd and KiwiPharma Ltd (collectively, the Williams’ interests) have applied to this Court to review1 a number of decisions made by Associate Judge Bell, in the High Court at Tauranga, on 15 July 2015.2 Reasons for those decisions were given on 3 August 2015.3
[2] One of the decisions in issue required part of the substantive claim to be set down for hearing over seven days, commencing on 9 November 2015, on terms directed by the Associate Judge. I granted an application for review of that decision in a judgment given on 24 September 2015. I vacated the proposed hearing and adjourned the trial for a hearing of all issues over three weeks in 2016, to commence
on a date to be fixed by the Registrar.4
1 Judicature Act 1908, s 26P(1) and r 2.3 of the High Court Rules.
2 Internet Traders Ltd v Williams HC Tauranga CIV 2014-470-158, 15 July 2015 (Minute).
3 Internet Traders Ltd v Williams [2015] NZHC 1809.
4 Internet Traders Ltd v Williams (No 2) [2015] NZHC 2327 at para [28].
[3] My decision on the other challenges remained reserved. The Williams’ interests seek to review Judge Bell’s decision not to order the Heale interests5 to discover documents (relating to the question of damages) and requiring them to disclose documents to which legal professional privilege had been claimed by Ms Williams personally.6
[4] The Williams’ interests also apply for orders striking out parts of the Third Amended Statement of Claim of 24 July 2015. That pleading was filed as a result of directions given by Judge Bell on 15 July 2015, but before his reasons for judgment were available. The Associate Judge provided significant guidance to the plaintiffs about the extent to which it was necessary to re-model their pleading. Mr Harrison QC, for the Williams’ interests, contends that it remains seriously deficient.
[5] All remaining applications all opposed by the plaintiffs, Internet Traders Ltd (Internet Traders), IT Pharmaceutical Supplies Ltd (IT Pharmaceutical), the trustees of the JR and LJ Heale Family Trust (the Heale Trust) and Mr John Heale, Ms Lauren Heale and Holland Beckett Trustee No 5 Ltd (collectively, the Heale interests).
Background7
[6] Mr Heale, a pharmacist, and Ms Williams, a business woman, formed a fruitful professional relationship as long ago as September 1999. At that time, they identified a business opportunity, whereby medical supplies were to be purchased from wholesale suppliers in New Zealand and exported overseas. Their point of difference was that the business would be carried on over the Internet. That meant that significant costs involved in commencing business and in acquiring assets in New Zealand were set-off by the absence of any need for the business to carry
physical stock.
5 As defined in para [5] below.
6 These decisions are summarised more precisely in para [10] below.
7 My summary of the background is taken substantially from my judgment of 23 December 2014, on an application for an interim injunction: Internet Traders Ltd v Williams [2014] NZHC 3407; much of which was repeated in my judgment on the split trial issue: Internet Traders Ltd v Williams (No 2) [2015] NZHC 2327.
[7] Two companies were incorporated to undertake the business venture; Internet Traders, on 15 September 1999, and IT Pharmaceutical on 17 September 1999. A written shareholders’ agreement (the Shareholders’ Agreement), dated 11 November
1999, was executed by trustees of trusts associated with Mr Heale and Ms Williams who were to hold shares in Internet Traders, as well as two other parties to whom no further reference needs to be made at this time.
[8] Mr Heale and Ms Williams were directors of each company. Ms Williams was employed as managing director of Internet Traders. Her labour was made available to IT Pharmaceutical, by means of a contractual arrangement between the two companies.
[9] The business relationship between Ms Williams and Mr Heale came to an abrupt end at 11.00am on 23 June 2014, when Ms Williams resigned her positions as directors of both companies and as an employee of Internet Traders. She had given no prior warning to Mr Heale of her pending resignation. Up to that point, the business of IT Pharmaceutical was trading profitably. The acrimonious dispute that has arisen following Ms Williams resignations led to the present proceeding.
The application for review
(a) The remaining issues
[10] The remaining decisions which are in issue on the Williams’ interests’
application for review are:
(a) A decision not to order particular discovery of business records for both Internet Traders and IT Pharmaceutical for the trading period after Ms Williams resigned as a director of those companies on 23
June 2014.
(b)A decision requiring Ms Williams (personally) to discover files held by a firm of solicitors in connection with the acquisition of a building at Marsh Street, Tauranga, from which she intended the business carried on by IT Pharmaceutical to be undertaken. Ms Williams
asserts that the documents in issue are subject to legal professional privilege.
(b) Discovery – business records for Internet Traders and IT Pharmaceutical
[11] I do not need to consider whether (at the time of his judgment on 15 July
2015) the Judge’s decision to refuse discovery of the business records of Internet Traders and IT Pharmaceutical for the period after Ms Williams’ resignation was correct. Now that both liability and relief will be dealt with as part of the same hearing,8 discovery is plainly required.
[12] Formally, I reverse the Associate Judge’s decision on this issue and make an order that the plaintiffs file and serve a verified list of documents falling under this heading on or before 20 November 2015.
(c) Discovery – legal professional privilege
(i) The issue
[13] The plaintiffs sought discovery of the file of a firm of solicitors, Lyon O’Neale, Arnold of Tauranga. That firm acted on the possible acquisition of business premises at 127 Second Avenue, 37 Monmouth Street and 24A Marsh Street, Tauranga. Ms Williams was the person from whom the solicitors took their instructions.
[14] The circumstances in which a claim for legal professional privilege may be made (and waived) are now codified in ss 53, 54, 55, 56, 65, 66 and 67 of the Evidence Act 2006. Ms Williams contends that, as the person who instructed the solicitors, she is entitled to claim legal professional privilege in respect of advice received. Saying that she is the sole person in whom it vests, Ms Williams does not waive privilege.
[15] The Heale interests submit that Ms Williams was acting as agent for
IT Pharmaceutical when she obtained the advice; or, alternatively, that she and
IT Pharmaceutical instructed the solicitors jointly. On either of those bases, the Heale interests assert that IT Pharmaceutical is entitled to waive the privilege, in order to obtain the documents.
(ii) The Associate Judge’s decision
[16] In giving reasons for his decision to order discovery, Judge Bell said:9
[79] It is convenient to draw a distinction between substantive disclosure and procedural discovery. Under procedural discovery parties are required to set out in affidavit documents in their control that relate to the issues in the proceeding, even if they could not be required to make those documents available but for the litigation. The use of documents under procedural discovery is limited to the particular case. A party making an affidavit of documents is entitled to claim privilege under the standard heads, including communications with legal advisers and preparatory materials for legal proceedings. Outside legal proceedings, there are occasions when the law requires documents to be disclosed. It is unnecessary to catalogue them here. One example is a beneficiary’s right to obtain information from a trustee. I call this substantive disclosure. One party may be entitled to information from another, even if there are no proceedings between them, and may use that information for purposes other than legal proceedings. While substantive disclosure can be enforced without legal proceedings (for example, cancellation of an insurance policy for non-disclosure), the courts may also make orders requiring the information to be made available, including by orders for procedural discovery.
[80] Under substantive disclosure privilege in communications with legal advisers may not provide an adequate ground for refusing to provide information. That will happen in cases where the content of the advice is information the applicant is entitled to under substantive rules. In W Dennis
& Sons Ltd v West Norfolk Farmers’ Manure and Chemical Co-operative Ltd [[1943] Ch 220 (ChD)], shareholders were held to be entitled to legal advice the directors had obtained before any dispute had arisen between the shareholders and the company. In CIA de Barca Panama SA v George Wimpey & Co Ltd [[1980] 1 Lloyds Rep 598 (CA)] a joint venture partner was required to disclose to the other partner documents which were otherwise subject to litigation privilege. In such cases, it may be necessary to establish the purpose for which legal advice was obtained. So in discussing disclosure between partners and trustees and beneficiaries, the learned authors of Disclosure say:
It is necessary to distinguish clearly two situations. One is where the trustee or partnership communicates with a lawyer (or third party, where this is protected) for the benefit of the trust or partnership. For example, he or it may seek or obtain advice with reference to the trust’s or partnership’s relations with others, or as to the trustee’s powers under the settlement, or the partnership’s powers under the deed. The other is where the trustee or an individual partner does so
for his own personal benefit, as against the trust beneficiaries or the other partners, for example as to whether he has committed a breach of trust or of his obligations as a partner. Although there can in an appropriate case be litigation privilege as against the beneficiary or other parties in the latter case, there can be no privilege, as against the beneficiary or other partners, in the former case.
[81] Ms Williams was under a substantive disclosure duty to Internet Traders Ltd and IT Pharmaceutical Supplies Ltd. As their director she was required under s 131 of the Companies Act to act in good faith and in what she believed to be the best interests of the company. Decisions of the English courts on that duty have held that it requires directors to inform the company of the existence of a business opportunity to the company.
[17] The order made by the Associate Judge was unorthodox. He said:
[22] The defendants are to disclose all files of Lyon O’Neale Arnold relating to the acquisition of alternative premises for the first and second plaintiffs, with particular regard to the following addresses: 127 Second Avenue, 37 Monmouth Street and 24A Marsh Street. Privilege may not be claimed for any communications between Lyon O’Neale Arnold and any of the defendants that would otherwise be privileged under s 54 of the Evidence Act 2006. The loss of privilege in lawyer-client communications will not apply, however, if Ms Williams abandons the claim made in paragraphs 51–
53 of her affidavit of 17 October 2014 that she was pursuing the acquisition of those properties in the interests of the plaintiffs. Moreover, she will still be entitled to claim privilege in communications between herself and her lawyers going to her and the defendants’ rights and liabilities in relation to her departure from Internet Traders Ltd and IT Pharmaceutical Supplies Ltd.
(Emphasis added)
[18] The order was premised on a need for Ms Williams to “abandon” evidence given in an affidavit of 17 October 2014, of what was said in her affidavit filed on the particular discovery application, on 26 June 2015. In effect, the Associate Judge held that, if she were prepared to recant her earlier evidence, Ms Williams was not obliged to disclose the documents in question.
[19] Judge Bell’s reference to Ms Williams’ affidavit of 17 October 2014 is
connected to observations that I made in my interim injunction judgment of 23
December 2014. In describing the circumstances in which Ms Williams expressed an interest in acquiring business premises, I said:10
[30] On 6 May 2014, a company called Greenstone Pharmaceuticals Ltd, a company in which Ms Williams had interests, sought a resource consent for work to be done at a property it had acquired at 24 Marsh Street, Tauranga. Ms Williams has given evidence that she intended to change IT Pharmaceutical’s name to Greenstone, for “re-branding” purposes following her “anticipated … buy out”. The application stated that:
Resource consent is sought to establish and operate a pharmaceutical wholesale business in the existing commercial building, which is located at 24 Marsh Street, Tauranga.
The trading name of the company to establish and operate in the existing commercial premises was shown as “IT Pharmaceutical Supplies Ltd”. The application stated that the “company has been in operation for 12 years and currently operates out of a three bedroom flat in Tauranga”.
[20] In an affidavit sworn in opposition to the particular discovery application with which Judge Bell dealt, Ms Williams deposed:
. . ., I confirm that the instruction given to Lyon O’Neale Arnold in relation to the proposed property purchases and related transactions … were not given by me either in my capacity as a Director of, or on behalf of, either [Internet Traders Ltd or IT Pharmaceutical]. Acquiring commercial properties was in no way part of the business of either [Internet Traders Ltd or IT Pharmaceutical]. At all material times I was acting in a personal capacity with a view to acquiring property through a property-owning vehicle, ultimately as it turned out [Glencove].
(d) Analysis
[21] The question is whether Judge Bell was entitled to make (what amounted to) a conditional order for discovery of the (alleged) privileged documents. His order put Ms Williams in a position of having to elect whether to acknowledge that earlier evidence on oath was false. She has not been cross-examined on either of the two affidavits in issue.
[22] My starting point is the scheme of the provisions of the Evidence Act 2006 that deal with the relevant privilege. Five aspects of (what is broadly called) legal professional privilege are addressed in that Act.
(a) Section 54(1) deals with the situation in which there has been a communication between a person and a legal adviser that was both made in the course of and for the purpose of obtaining professional legal advice and intended to be confidential.
(b) Section 55 explains the extent to which the privilege attaches to
documents that relate to solicitors’ trust accounts.
(c) Section 56 captures the privilege that attaches to communications or information gathered with the dominant purpose of preparing for a proceeding; commonly, this is known as “litigation privilege”.
(d)Section 66 deals with the consequences of instructions being given jointly to a solicitor.
(e) Section 65 explains the circumstances in which any of the relevant privileges might be waived.
[23] Leaving to one side the possibility that some trust account records might require disclosure,11 three of those provisions are engaged. The first is s 54. Application of that section determines whether legal professional privilege attaches to the communications in issue. The second is s 66, which is concerned with situations in which there is a joint interest in privileged material. The third is s 65, which deals with the question of waiver.
[24] There is no doubt that communications between Ms Williams and the firm of solicitors with whom she dealt come under the rubric of legal professional privilege, for the purposes of s 54. The real issue is whether there was a joint privilege and, if so, whether it is capable of being waived by IT Pharmaceutical or (possibly) IT Traders. The question of waiver, under s 65, cannot be considered before the identity of the holder of the privilege has been established.
[25] Section 66 of the Evidence Act relevantly provides:
66 Joint and successive interests in privileged material
(1) A person who jointly with some other person or persons has a privilege conferred by any of sections 54 to 60 and 64 in respect of a communication, information, opinion, or document—
(a) is entitled to assert the privilege against third parties; and
11 Evidence Act 2006, s 55.
(b) is not restricted by any of sections 54 to 60 and 64 from having access or seeking access to the privileged matter; and
(c) may, on the application of a person who has a legitimate interest in maintaining the privilege (including another holder of the privilege), be ordered by a Judge not to disclose the privileged matter in a proceeding.
…
[26] Judge Bell took the view that the question whether privilege would attach turned on abandonment or otherwise of a position taken by Ms Williams in her earlier affidavit.12 In the absence of cross-examination, the usual position is that affidavit evidence will be treated as correct for the purpose of an interlocutory application, unless it can be characterised as inherently implausible or unreliable. In Robertson v ASB Bank Ltd,13 the Court of Appeal (in the context of an application to set aside a bankruptcy notice) commented on the circumstances in which it might be appropriate to proceed on the basis that untested evidence was implausible. The Court said:14
[32] The Court’s approach on an application to set aside a bankruptcy notice should be treated as akin to that taken when affidavit evidence is considered on an application for summary judgment or when continuation (or otherwise) of a caveat is in issue. As with those types of applications, the summary nature of the procedure “is wholly unsuitable for the determination of disputed questions of fact”. However, in assessing the strength of a claim the Court need not accept uncritically evidence that is inherently lacking in credibility; for example, where it is inconsistent with contemporary documents or inherently improbable.
(Emphasis added; footnotes omitted)
[27] With respect, this was not a case in which it was appropriate for the Judge to assume that the two versions were necessarily incompatible. Ms Williams had proffered an explanation to correct (what she perceived could be) a misunderstanding of what she had said in evidence on the interim injunction application. Once her explanation is tested by cross-examination, it may be accepted
or rejected. However, in a situation where the Court is considering only affidavit
12 Internet Traders Ltd v Williams [2015] NZHC 1809 (reasons), at para [22], set out at para [16]
above, and the extracts from Ms Williams’ affidavits summarised or set out at para [17] above.
13 Robertson v ASB Bank Ltd [2014] NZCA 597.
14 Ibid, at para [32]. The authorities on which the Court of Appeal relied were Eng Mee Yong v Letchumanan[1980] AC 331 (PC) at 341; Sims v Lowe [1988] 1 NZLR 656 (CA) at 659–660 (in the context of a caveat proceeding); and Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26] (in the summary judgment context).
evidence, it was not appropriate, on the principle to which the Court of Appeal referred in Robertson v ASB Bank Ltd,15 to take the position that there was no plausible explanation for the difference. The Associate Judge erred in taking a contrary approach.
[28] In the context of the issue that has arisen in this case, s 66(1)(c) of the Evidence Act is awkwardly expressed. The opening words of s 66(1) appear to assume the existence of a joint privilege, whereas s 66(1)(c) says that the procedure can be applied by one joint holder against another. In this case there is a dispute about whether there is a joint privilege at all. Nevertheless, whether the s 661(c) procedure does or does not strictly apply, it provides helpful guidance about how a dispute of this type may best be resolved.
[29] In effect, IT Pharmaceutical is claiming that it has a joint interest with Ms Williams in the privileged information and seeks to obtain copies of the documents for its use, and to waive privilege for the benefit of other Heale interests. Ms Williams rejects IT Pharmaceutical’s assertion and has a legitimate interest in maintaining the privilege. The idea that underlies s 66(1)(c) can (and should) be applied in this case. The simplest way to do that is by having a discrete hearing of the application for particular discovery, at which relevant witnesses can be cross- examined.
[30] In my view, the most appropriate way of resolving this issue is for the application for particular discovery to be determined after Ms Williams and any other relevant witness have been cross-examined on their affidavits. That is the only way in which the identity of the holder of the privilege can legitimately be determined before trial.
[31] I reverse the Associate Judge’s decision and remit the application for particular discovery for reconsideration. At the next case management conference directions should be made in relation to the witnesses (if more than Ms Williams) who will be required for cross-examination and the date of any contested hearing.
Any ancillary directions may also be made at that time.
15 Robertson v ASB Bank Ltd [2014] NZCA 597, at para [32], set out at para [26] above.
Application to strike-out Third Amended Statement of Claim
(a) Background
[32] In his reasons for judgment of 3 August 2015, Judge Bell went to some trouble to explain how the claims made by the plaintiffs could be properly repleaded. It is fair to say that, in a number of respects, the Third Amended Statement of Claim does not meet all of the points made by the Associate Judge. The Third Amended Statement of Claim was filed on 24 July 2015, after the result judgment but before reasons for judgment were given.
[33] The Third Amended Statement of Claim pleads nine causes of action, based on allegations that:
(a) Ms Williams and the trustees of the Aesculapian Family Trust (the Aesculapian Trust) breached the Shareholders’ Agreement. Relief is also sought against Glencove (2014) Ltd (Glencove) and KiwiPharma Ltd (KiwiPharma).
(b) Ms Williams breached duties owed as a director to Internet Traders.
Relief is also sought against Glencove and KiwiPharma.
(c) Ms Williams breached duties owed as a director to IT Pharmaceutical.
Relief is also sought against Glencove and KiwiPharma.
(d) Ms Williams breached fiduciary obligations owed to Internet Traders. (e) Ms Williams breached fiduciary obligations owed to IT
Pharmaceutical.
(f) The Aesculapian Trust breached obligations owed to the Heale Trust
under the Shareholders’ Agreement.
(g)Ms Williams (both in her personal capacity and as one of the trustees of the Aesculapian Trust) breached fiduciary duties owed to Mr Heale (as one of the trustees of the Heale Trust). It is said that this duty
arose independently of fiduciary obligations owed to either of the plaintiff companies.
(h)Ms Williams and the Aesculapian Trust have conducted themselves in a manner that is “oppressive, unfairly discriminatory or unfairly prejudicial” in the business activities of Internet Traders and IT Pharmaceutical, giving rise to a claim under s 174 of the Companies Act 1993 at the suit of the Heale Trust.
(i)Ms Williams and the Aesculapian Trust are liable to Mr Heale (as a trustee of the Heale Trust) for unjust enrichment arising out of a partnership investment held by Mr Heale and Ms Williams in an entity called HA Medic.
[34] I agree with Judge Bell that the pleaded claim was (and remains) over- complicated. When I gave judgment on the plaintiffs’ application for an interim injunction on 23 December 2014, I based my decision that there was a serious question to be tried on pleaded breaches by Ms Williams of duties owed by her as a
director of IT Pharmaceutical, and companion fiduciary obligations.16 I concluded
that part of my judgment by saying:
[44] There is other evidence to which I could refer. However, what I have already stated demonstrates a seriously arguable case that Ms Williams, on realising that the value of the shares she wished to acquire from Mr Heale’s interests was much greater than she anticipated, embarked upon a course of conduct designed to enable her to use IT Pharmaceutical’s business contacts as a springboard for her own venture, without advising Mr Heale of the steps she was taking. In my view, on those facts there is a seriously arguable case that Ms Williams breached her fiduciary duties as a director that were owed to IT Pharmaceuticals.
(b) The Associate Judge’s decision
[35] In his reasons for judgment, Associate Judge Bell explained a number of deficiencies in the Second Amended Statement of Claim, in the context of an application to strike-out that document. That strike-out application had focussed on
the quality of the pleading. The Judge dealt with the main criticisms, but provided
16 Internet Traders Ltd v Williams [2014] NZHC 3407 at paras [19] and [44].
further time for a further Amended Statement of Claim to be filed, in a form compliant with both the High Court Rules and his judgment.17 An allied application for particulars was left on the basis that the Heale interests would have an opportunity to rectify deficient areas, in the new version of the Statement of Claim.18
It is fair to say, however, that the Associate Judge was somewhat dismissive of the nature of some of the complaints advanced.19
[36] Judge Bell focussed the attention of the Heale interests on the pleading requirements set out in r 5.17 of the High Court Rules:
5.17 Distinct matters to be stated separately
(1) Distinct causes of action and distinct grounds of defence, founded on separate and distinct facts, must if possible be stated separately and clearly.
(2) If a party alleges a state of mind of a person, that party must give particulars of the facts relied on in alleging that state of mind.
(3) A state of mind includes a mental disorder or disability, malice, or fraudulent intention but does not include mere knowledge.
(c) Problems with the Third Amended Statement of Claim
(i) Introduction
[37] Without referring exhaustively to Mr Harrison’s criticisms, I propose to outline what I consider to be continuing deficiencies with the Statement of Claim. I do so by reference to specific problems connected to the first, second and fourth causes of action, and more generalised comments in relation to other criticisms that have been levelled against the amended pleading.
[38] When I conclude my review, I shall make a series of orders that are designed to ensure the next version of the Statement of Claim is fully compliant. The application to strike-out will be adjourned for reconsideration in light of the Fourth Amended Statement of Claim. The Heale interests can expect no further leniency from the Court if existing problems are not remedied by the time the application is
next called.
17 Internet Traders Ltd v Williams [2015] NZHC 1809, at paras [29]–[46].
18 Ibid, at paras [47] and [48].
19 Ibid, at para [47].
(ii) The first cause of action
[39] The first cause of action is based on alleged breaches of the Shareholders’
Agreement. Judge Bell identified problems with this cause of action. He said:20
[35] The shareholder agreement of 11 November 1999 is an agreement of the shareholders of Internet Traders Ltd. Under cl 31, Internet Traders Ltd is able to enforce certain provisions of the agreement in accordance with the Contracts (Privity) Act 1982. IT Pharmaceutical Supplies Ltd is not a party to the agreement. There is no provision of the agreement (express or implied) allowing it to sue on the agreement. Accordingly, IT Pharmaceutical Supplies Ltd cannot be a party to a cause of action alleging breaches of the shareholders’ agreement of 11 November 1999.
[36] Because IT Pharmaceutical Supplies Ltd cannot sue on the shareholders’ agreement, the plaintiffs may attempt to say that losses incurred by IT Pharmaceutical Supplies Ltd are really damage suffered by Internet Traders Ltd. I have required the causes of action of Internet Traders Ltd and of IT Pharmaceutical Supplies Ltd to be separated out so that it can be made clear whether the plaintiffs are making such claims. If Internet Traders Ltd does intend to claim that damage inflicted on IT Pharmaceutical Supplies Ltd may be the subject of a claim in its name – for example, for breach of the shareholders’ agreement – then it will need to plead clearly the basis for claiming such loss. I call this the third party damage problem. It has arisen in construction claims – see, for example, Alfred McAlpine Construction Ltd v Panatown Ltd.21 It has also received academic discussion.22
[40] The first cause of action pleads a claim for breach of contract. It is alleged, by Internet Traders, that Ms Williams and the trustees of the Aesculapian Family Trust (the Aesculapian) breached the Shareholders’ Agreement. Further, and without any apparent legal basis, relief in respect of this cause of action is also sought against Glencove and KiwiPharma.
[41] Judge Bell considered that Internet Traders was entitled to enforce certain parts of the Shareholders’ Agreement, by virtue of cl 31 of that document. Clause 31 provides:
31. COMPANY MAY ENFORCE CERTAIN OBLIGATIONS
31.1The obligations of the Shareholders under clauses 5, 19, 20 and 21 of this agreement are also for the benefit of [Internet Traders] and
20 Ibid, at paras [35] and [36].
21 Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (HL).
22 Brian Coote “Performance Interest, Panatown, and the Problem of Loss” (2001) 117 LQR 81.
may be enforced in accordance with the Contracts (Privity) Act 1982 by [Internet Traders].
[42] The four provisions that may be enforced under cl 31 concern “shares and shareholder loans”,23 “pharmacy supplier rebates”,24 “confidentiality”25 and “non- competition”.26 In order for a claim to be brought by Internet Traders one of those provisions must be engaged; otherwise, the parties did not intend that Internet Traders could use the Contracts (Privity) Act to maintain a separate claim. The difficulty inherent in the claim as currently pleaded is that the obligations of
confidentiality and non-competition apply only to the shareholders, of whom Ms
Williams personally was not one.
(iii) The second and fourth causes of action
[43] The second cause of action is brought by Internet Traders against Ms Williams. Perplexingly, it also seems to sue Glencove and KiwiPharma, but only as to “relief”. The pleading alleges that Ms Williams owed statutory and common law duties, as a director, to Internet Traders and breached those duties.27
[44] The fourth cause of action alleges similar breaches of duties by Ms Williams. The difference is that they are framed as breaches of fiduciary obligations, as distinct from the statutory and common law obligations on which the allegations in the second cause of action are based.
[45] Mr Harrison draws attention to (what he terms) fundamental flaws in the pleading of these causes of action. The first is a continuation of a claim for relief against Glencove and KiwiPharma, despite the fact that they were not (and could not be) directors of Internet Traders. The second is the rolling up of factual allegations set out earlier in the Statement of Claim, by way of narrative, into particular allegations of breach. Some parts of the earlier narrative suggests alternative bases
of claim which are not specifically pleaded. In both respects, Mr Harrison submits
23 Shareholders’ Agreement cl 5.
24 Ibid, cl 19.
25 Ibid, cl 20.
26 Ibid, cl 21.
27 Generally, see Benton v Priore [2003] 1 NZLR 564 (HC).
that the pleading fails to remedy the defects identified by Judge Bell in giving judgment on the original application.28
[46] Relevantly, Associate Judge Bell said:29
[11] The plaintiffs advised on 9 July 2015 that they would file and serve an amended statement of claim. It is to be called the third amended statement of claim (being the third amended pleading after the statement of claim) and is to address the following matters:
[a] Except where plaintiffs have joint claims, claims by one plaintiff are to be pleaded separately from claims by another plaintiff. For example, any cause of action by internet Traders Ltd for breach of director’s duty should be pleaded as a separate cause of action from a claim by IT Pharmaceutical Supplies Ltd for breach of director’s duty.
…
[j] The plaintiffs are to take care that they plead against the defendants only the matters giving rise to liability under the particular causes of action.
[47] I consider there is merit in both of the objections taken by Mr Harrison. The pleading that seeks relief against Glencove and KiwiPharma is inconsistent with the relevant direction of Judge Bell.30 The second is problematic because a number of the narrative allegations to which reference is made in paras 56 and 58 (second cause of action) and 64 and 67 (fourth cause of action) involve distinct causes of action. Examples can be found under the earlier headings “reckless trading” and “tortious
interference”. The pleading is confused and needs to be clarified.
[48] Counsel for the Heale interests should consider carefully the precise allegations they are making as to how particular duties of directors were breached. They should endeavour to identify precisely what loss has flowed from those breaches. They must explain the factual premises on which allegations of breach are made in a manner that enables the Williams’ interests to respond to them. All of
those points arise out of the obligation contained in r 5.17 of the High Court Rules to
28 Internet Traders Ltd v Williams HC Tauranga CIV 2014-470-158, 15 July 2015 at paras [11](a) and (j); reasons for those views are set out in more detail in Internet Traders Ltd v Williams [2015] NZHC 1809 at paras [31]–[33].
29 Internet Traders Ltd v Williams HC Tauranga CIV 2014-470-158, 15 July 2015 at paras [11](a)
and (j).
30 Ibid, para [11](a) set out at para [46] above.
plead “distinct causes of action … founded on separate and distinct facts …
separately and clearly”.31
(iv) Remaining causes of action
[49] Defects with the rolling up of narrative factual allegations permeate other causes of action. They too should be addressed in the next version of the Statement of Claim.
[50] Ultimately, the pleading obligations that Judge Bell has identified and I have reinforced should be addressed. Without endorsing all of the criticisms made by Mr Harrison, counsel for the Heale interests should ensure that they address all points raised in his detailed submissions on the current application. Curial scrutiny of a Fourth Amended Statement of Claim will assume that counsel for the Heale interests have undertaken a critical analysis to satisfy themselves what claims can properly be made, and how they should be pleaded.
Result
[51] For those reasons, I make the following orders:
(a) The decision of Associate Judge Bell dismissing the application by the Williams’ interests for an order for discovery against the plaintiffs is reversed. I direct that a verified list of documents be filed and served on or before 20 November 2015.32
(b)The Associate Judge’s decision in respect of the claim for privilege made by Ms Williams is reversed. The application is remitted for reconsideration.33
(c) I adjourn the application to strike-out. A Fourth Amended Statement of Claim shall be filed and served on or before 20 November 2015 to
address the remaining criticisms identified in this judgment, and by
31 Rule 5.17 of the High Court Rules is set out at para [36] above.
32 See paras [11] and [12] above.
33 See para [31] above.
the Associate Judge. If the Williams’ interests wish to pursue any criticisms of that pleading, amendments to the current application to strike-out may be made.
[52] The Registrar is directed to set the proceeding down for hearing over three weeks on the first available date in 2016. That date shall be fixed following consultation with all counsel.
[53] The Registrar shall convene a case management conference, to be held in Court for chambers, on the first available date after 27 November 2015 at which time further directions shall be made to enable any outstanding interlocutory issues to be resolved promptly. I expect that Judge Bell will issue further directions indicating the time by which he requires memoranda to be filed and served in advance of the conference and the issues that he wishes counsel to address in them.
Costs
[54] The Williams’ interests have been substantially successful on both the application for review and the application to strike-out. There is no reason why costs should not follow the event. One set of costs are awarded in favour of the Williams’ interests on a 2B basis, together with reasonable disbursements. Both shall be fixed by the Registrar.
[55] In his reasons for judgment of 3 August 2015, the Associate Judge reserved costs on the applications with which he dealt.34 So far as I am aware, no order as to costs has been made. Given the outcome of the review proceeding, costs should also be awarded in favour of the Williams’ interests on those applications. They too are awarded on a 2B basis, together with reasonable disbursements, both to be fixed by the Registrar. Reasonable travel and accommodation expenses incurred by counsel for the Williams’ interests in respect of the hearing in Whangarei on 8 July 2015 are
included in the disbursements to be fixed.
34 Internet Traders Ltd v Williams [2015] NZHC 1809, at para [90].
[56] I thank counsel for their assistance.
P R Heath J
Delivered at 2.00pm on 20 October 2015
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