Jaques v Main
[2017] NZHC 857
•2 May 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-000619 [2017] NZHC 857
BETWEEN DAVID ARTHUR JAQUES
Plaintiff
AND
VICTOR RAYMOND MAIN First Defendant
THOMAS CLARENCE HODGSON Second Defendant
Hearing: 23 February 2017 Appearances:
Plaintiff in person
B L Gray for DefendantJudgment:
2 May 2017
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 2 May 2017 at 4.00 pm
pursuant to R 11.5 of the High Court Rules
Registrar / Deputy Registrar
Date……………………….
JAQUES v MAIN & OR [2017] NZHC 857 [2 May 2017]
Introduction
[1] The plaintiff and the defendants are party to a settlement agreement that the plaintiff says requires the defendants to pay the plaintiff the sum of $30,000, together with $4,000 plus GST per week from 10 April 2011 until the $30,000 is paid. The
$30,000 has not been paid and the plaintiff’s claim now exceeds $980,000.
[2] The defendants have applied to strike out the proceeding under r 15.1(a) of the High Court Rules on the ground that it does not disclose a reasonably arguable cause of action They say that the term relied on for the amount in excess of $30,000 is a penalty provision and unenforceable. There is an alternative application to strike out under r 7.48 for the plaintiff’s non-compliance with an order for security for costs.
[3] The plaintiff opposes the applications on the grounds that he has a reasonably arguable case that should be heard and that there was no prejudice to the defendants as a result of his failure to comply with the security for costs order.
Application to strike out for want of reasonably arguable cause of action
Jurisdiction
[4] Rule 15.1(a) permits the Court to strike out all or part of a pleading if it:
discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading.
[5] The threshold for striking out on this ground is high. The recognised criteria are:1
(a) The pleaded facts (admitted or not) are assumed to be true;
(b) The cause of action or defence must be clearly untenable;
1 Attorney-General v Prince [1998] 1 NZLR 262 (CA) at 267; Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].
(c) The jurisdiction is to be exercised sparingly and only in clear cases;
(d)The jurisdiction is not excluded by the need to decide difficult questions of law that require extensive argument;
(e) The Court should be particularly slow to strike out a claim in any developing area of the law.
The nature of the claim
[6] The defendants were business associates. They incorporated a company to hold intellectual property in a toxic waste disposal system created by the second defendant. They incorporated another company, Nouveau-Zenith Ltd (NZL), to exploit that intellectual property. At the relevant times they were the directors and shareholders of NZL.
[7] The plaintiff and the defendants first met in early 2011. Within a relatively short time the plaintiff was engaged as the CEO of NZL on a contract basis. The contract between the plaintiff and NZL was dated 24 May 2011 but said to commence on 11 April 2011. The term of the contract was three years (expressed as
36 months) “unless it is terminated earlier in accordance with the provisions of this contract”. There were, however, no other provisions relevant to termination.
[8] The plaintiff’s remuneration was to be $240,000 per annum plus GST, with the plaintiff to provide an initial invoice that would be deemed to be repeating. No invoice was ever supplied and no remuneration was ever paid.
[9] The plaintiff also paid $30,000 into the company. He maintains this was paid pursuant to a share purchase agreement. The defendants maintain that it was capital in return for a share purchase option.
[10] NZL did not prosper. Within months the relationship between the parties was at an end. In September 2011 they entered into a settlement agreement which provided that:
Dave has a three year management contract with Nouveau-Zenith Ltd. Dave has a claim to a share purchase option with Nouveau-Zenith Ltd. Victor and Tom dispute Dave has the share purchase option.
In consideration of Dave waiving his right to these two terms, in full and final settlement, Victor and Tom both jointly and severally agree
1. To repay the $30,000 paid; and
2. To accrue $4,000 plus GST per week from 10.4.11 until the full
$30,000 is paid; and
3. In any event to have paid all money owing under this agreement by
10.4.14;
4.All money owing under ##2 must be paid when all money under #1 is paid.
[11] No money was paid under the settlement agreement.
[12] In 2015 the plaintiff commenced these proceedings claiming damages of
$740,600, damages of $239,200 and “damages in the amount of $4,600 … accruing on a weekly basis from 10 April 2015 until all monies paid in full”.
[13] It is common ground that after the proceedings were issued the defendants made an offer to pay the $30,000 with interest.
Unsuccessful summary judgment application
[14] The plaintiff applied for summary judgment which Associate Judge Doogue refused.2 The Associate Judge referred to the various factual disputes between the parties, including the defendants’ assertion of misleading statements by the plaintiff about his professional status and financial position. However, the Associate Judge’s main concern was the basis on which the plaintiff asserted that damages were continuing to accrue:3
[18] Another aspect of the case that caused me some unease was the following. It was how a claim for $30,000 developed into a summary judgment application for nearly $1,000,000 some four years later. In that regard I pointed out to the plaintiff that the settlement agreement did not
2 Jaques v Main [2015] NZHC 2123.
3 At [18]–[21].
apparently make explicit arrangements for settling the liability that NZL/the defendants might have arising from the premature termination of the contract for services. What the parties seem to have had in mind is that the re- payment of the $30,000 would be carried out at the same rate as the plaintiff would have been paid under the contract for services. It was only in this indirect way that the contract for services had any connection with the settlement agreement. If this analysis is correct, what has happened is that the only debt fixed by the agreement has increased 33 times over four years. If that is the effect of the agreement, this raises questions of whether the contract is unenforceable because it imposes a penalty on the defendants: Bridge v Campbell Discount Co Ltd.4
[19] In order to better understand what the effect of the contract was, further consideration will have to be given to what the parties actually intended by their contract. It would seem to at least be arguable that the effect of the contractual arrangements was that the amount that was owing under the contract, $30,000, was repayable at the rate of $4,000 per week. This last amount was presumably chosen because it would involve payment of an amount that would otherwise have been expended on the liability which the company owed on account of the contract for services that it entered into with the plaintiff. That being so, the $30,000 should have been paid off within 7½ weeks.
[20] If the defendants had not paid that amount off within 7½ weeks they would not have complied with their contractual obligation. That may not have amounted to a breach of contract, though, because of the further requirement that all payments were to have been completed by April 2014. But it would appear that they have been in breach from the latter date. By my calculations, had no payments been made from September 2011 when the contract was made up until April 2014 (at which point the defendants would have been in breach of the contract), the amount owing at $4,000 per week would have accrued to the sum of $548,000. In the absence of any assistance on the point and adopting Mr Gray’s submission that $986,000 is now owing, it appears that since the point where the defendants have been in breach of contract, an additional $438,000 has been debited to them.
[21] It is not possible to calculate what the interest rate being charged is but it is self-evident that the above figures show that if the defendants did not pay on time in April 2014 then they were subject to very large additional imposts which cannot be explained as conventional interest and which arguably amount to penalties. A contract of that kind would not arguably be enforceable.
(emphasis added)
A reasonably arguable cause of action?
[15] The defendants say that, properly construed, the settlement agreement only required them to repay the $30,000. Because the management contract did not
provide for compensation upon termination there was no basis on which to link the
4 Bridge v Campbell Discount Co Ltd [1962] AC 500.
$4,000 per week to that aspect of the relationship. Therefore the provision for accruing $4,000 per week was no more than a mechanism for the repayment of the
$30,000 figure. Since that would have been achieved within two months, the asserted ongoing liability for $4,000 per week could only be regarded as a penalty and unenforceable.
[16] I do not entirely agree with this analysis. The plaintiff’s pleading clearly links the claim for the accruing of $4,000 plus GST ($4,600) per week to the termination of the management agreement. At paragraph 10 of the statement of claim the plaintiff pleaded that the settlement agreement provided that the defendants would:
(a) Repay the $30,000 paid by Bank Cheque (and the plaintiff would no longer have the right to acquire shares in Nouveau-Zenith Limited); and
(b) Accrue the sum of $4,600 per week from 10.4.11 until the $30,000 was paid (on account of the Management Contract being terminated prematurely); and
(c) In any event to pay all money owing by 10.4.14.
[17] Of course, the pleading at (b) does not accurately reflect the terms of the settlement agreement itself because the management contract makes no mention of payment upon termination. But I read the words in brackets as merely explanatory. The fact that the $4,000 plus GST ($4,600) per week was to accrue from 10 April
2011 (the day before the management contract commenced) provides a basis for the plaintiff’s assertion is that the settlement agreement was directed towards both the termination of the contract and ensuring payment of the $30,000 due under clause 1. I note from the affidavit evidence filed in support of the summary judgment application that this is what the plaintiff contends.
[18] I do not, however, consider that it is tenable for the plaintiff to assert that
$4,600 would continue to accrue until the $30,000 was paid, regardless of when (or if) that occurred. He confirmed to me that he still considers the primary issue to be whether the $4,600 continues to accrue or whether it ceased accruing on 10 April
2014 but acknowledged that it was probably the latter. If that were so, the most he could claim would be $747,000 plus the $30,000.
[19] In my view neither position is tenable. The management agreement did not contain any provision for notice of, or compensation for, termination so, on the usual principles, it was terminable on reasonable notice.5 What constitutes reasonable notice is to be determined by reference by the circumstances existing at the time notice is given.6 But even the plaintiff’s “fall back” position, that the $4,600 accrued until 10 April 2014, would result in payment in full for the entire contract period. That is incompatible with the very concept of notice on termination. The position is all the more so in relation to the argument that the $4,600 could continue to accrue indefinitely.
[20] A provision such as this, which can fairly be described as unconscionable and oppressive, may be unenforceable as a penalty provision. In Amaltal Corp Ltd v Maruha (NZ) Corp Ltd the Court of Appeal described the rule that a penalty clause is unenforceable as being “simply a branch of equity’s relief jurisdiction, supplemented by developments in the common law Courts whereby oppression of a party to a contract may be prevented”.7 Blanchard J, writing for the Court, cited from AME v UDC Finance Ltd v Austin, including the following passage in which Mason and Wilson JJ, having referred to the desirability of giving contracting parties latitude to determine the terms of their contract, said:8
But equity and the common law have long maintained a supervisory jurisdiction, not to rewrite contract imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory. The test to be applied in drawing that distinction is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff’s conduct in seeking to enforce the term.
[21] In my view clause 2 is a penalty provision and is unenforceable in its entirety. That means that pleadings that rely on clause 2 should be struck out. This will leave
only the claim for $30,000, which is within the District Court’s jurisdiction.
5 Minister of Education v De Luxe Motor Services (1972) Ltd [1990] 1 NZLR 27 (CA).
6 Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169.
7 Amaltal Corp Ltd v Maruha (NZ) Corp Ltd [2004] 2 NZLR 614 (CA) at [56], citations omitted.
8 AMEV-UDC Finance Ltd v Austin [1986] HCA 63, (1986) 162 CLR 170 at 193.
[22] Under s 46(2) of the District Courts Act 1947 where a proceeding that has been commenced in the High Court is within the jurisdiction of the District Court, it may be transferred to the District Court unless, in the opinion of the High Court, some important question of law or fact is likely to arise.9 I am satisfied that the present proceeding does not fall within that proviso and the proper course is to transfer the proceeding to the District Court.
Application to strike out for non-compliance with security for costs order
[23] Given my earlier conclusion the outcome of this application can only affect the claim for $30,000. If successful it would spell the end of the proceedings altogether and if unsuccessful it would preserve the claim for $30,000 to be transferred to the District Court.
Jurisdiction under r 7.48
[24] Rule 7.48 relevantly provides that:
(1) If a party (the party in default) fails to comply with an interlocutory order or any requirement imposed by or under subpart 1 of Part 7 (case management) a judge may, subject to any express provision of these rules, make any order that the Judge thinks just.
(2) The Judge may, for example, order –
(a) that any pleading of a party in default be struck out in whole or in part;
(b) that judgment be sealed;
(c) that the proceeding be stayed in whole or in part …
[25] The jurisdiction to strike out under r 7.48 highlights the tension between the importance of the case management system in ensuring the timely and efficient disposition of proceedings and the seriousness of depriving a litigant of having the merits of his or her claim substantively determined. In Parlane v Hayes (which concerned the late filing of evidence before trial) the Court of Appeal identified the
issue as being what the interests of justice require and that judges should recognise
9 This proceeding remains under the former Act by virtue of the District Court Act 2016 Sch
3(5)(1).
that case management matters to the parties, other litigants and the public at large but went on to say that:10
…case management is a means to an end: the prompt and just disposition of cases, including a merits judgment for those that reach hearing. To compromise irretrievably a party’s right to a merits judgment for failure to meet some procedural obligation is a serious step that should be taken only when necessary to do justice to the other interests at stake.
[26] In the present case Fisher J’s decision in Smith v Antons Trawling Company Ltd (which concerned the failure to pay security for costs as ordered) is also of assistance:11
The principles to be applied have been referred to in a number of cases including Jagwar Holdings Ltd v Fullers Corporation Ltd (1991) 4 PRNZ
577 and Speed Up Holdings Ltd v Gough & Co (Handly) Ltd [1986] FSR
330. These days we try to decide cases on their merits if we possibly can. Cases should not lightly be dismissed on purely technical or procedural grounds. On the other hand there comes a point at which the victim of procedural default is entitled to justice too. And effective case management rests on credible procedural directions which the courts will enforce where necessary.
There is a discretion to be exercised in the light of the circumstances of each individual case but in my view the following aspects of the default will usually be critical:
(a) Its duration.
(b) Its impact upon the progress of the proceedings as a whole. (c) Whether there appears to be any excuse or explanation.
(d) Whether it continued after reasonable opportunities and reminders, particularly where the Court has already made a fresh order, or given a warning, due to earlier non-compliance.
(e) Whether it has substantially prejudiced the innocent party, whether procedurally or due to some wider impact upon the innocent party’s interests and affairs.
(f) Whether there is any realistic expectation that it will be rectified following further opportunity for compliance.
I do not suggest that that list of criteria is or could ever be comprehensive or binding but I intend to approach this case with those ones particularly in mind.
10 Parlane v Hayes [2015] NZCA 341
11 Smith v Antons Trawling Co Ltd HC Auckland CL40/98, 24 March 2000 at [3]–[5].
[27] I therefore approach the defendants’ application under r 7.48 conscious of both the defendants’ right to have this proceeding progress efficiently and in accordance with the interlocutory orders made to achieve that end and the plaintiff’s legitimate expectation that he will have the merits of his claim determined unless there is very good reason.
Background to application
[28] In October 2015, a month after Associate Judge Doogue dismissed the plaintiff’s summary judgment application, there was a directions conference before Associate Judge Bell. In his minute issued after the conference the Associate Judge made the following observation:12
I invite the plaintiff to review his claim in light of Associate Judge Doogue’s Judgment. On one view of the matter, this case may be within the jurisdiction of the District Court. If the plaintiff accepts that he cannot hope to obtain judgment for a sum of more than $200,000, then it may be worth transferring this case to a District Court.
[29] The plaintiff ignored this advice.
[30] At the beginning of 2016 the defendants applied for security for costs. One of the grounds on which the plaintiff opposed the application was that he had provided sufficient information regarding his means. Associate Judge Christiansen rejected this, noting that the plaintiff’s claims of interests in property and of income received all related to properties owned by family trusts and that there was no certainty regarding promises on behalf of the trusts to indemnify the plaintiff. Moreover, the Associate Judge took into account that the plaintiff had previously been bankrupt and had been associated with a large number of companies, a significant proportion of which have since been struck off the register. He added to these factors:
… The Court’s assessment of Mr Jaques’ claims … It is apparent from the reasons provided by Judge Doogue that Mr Jaques did not even come close to succeeding with his summary judgment application.
12 Minute of Bell AJ, 9 October 2015.
[31] Associate Judge Christiansen directed the plaintiff to pay $30,000 into court by way of security by 24 June 2016.13 He also stayed the proceedings until the security was paid, directing that if the security was not paid by the date fixed the Court would consider an application by the defendants to dismiss the proceedings.
[32] The plaintiff did not pay the security for costs by 24 June 2016. He applied unsuccessfully for a review of Associate Judge Christiansen’s decision but not a stay of the security for costs order.14 Edwards J determined the review on the papers on
24 August 2016 and did not make any order altering the date for payment of the security, which had already passed.
[33] By this stage a three-day trial had been allocated to commence 28 November
2016. The matter was referred to Heath J for directions on the possibility of dismissing the proceeding for failure to pay the security. Heath J directed that:15
… The proceeding remains stayed. Security shall be given in the sum of
$30,000, on or before 14 October 2016. In the event that security is not posted by that date, the defendant may apply on notice to the plaintiff for an
order dismissing the proceeding for failure to comply with the directions.
[34] On 13 October 2016 the plaintiff filed a memorandum advising that he was unable to pay the security for costs by the required date but expected to be able to do so soon afterwards and advised that he was in the process of selling assets (a caravan, a property and a business licence) that he expected would realise around
$250,000. He went on to express the view that there was no prejudice to the defendants, noting that the proceedings remained stayed and that no progress was likely to be made until February 2017. He did not mention the impending trial date.
[35] The defendants responded with a memorandum dated 14 October 2016 indicating their intention to apply for an order dismissing the proceeding. On 17
October 2016 Heath J vacated the trial date.
[36] On 10 January 2017 the plaintiff paid $30,000 into court by way of security for costs.
13 Jacques v Main [2016] NZHC 779.
14 Jacques v Main [2016] NZHC 1978.
15 Minute of Heath J, 8 September 2016.
[37] In February 2017, a week before the defendants’ strike out application was due to be heard, the defendants’ counsel applied for leave to make a payment into court unaware that the payment in procedure no longer formed part of the High Court Rules. In counsel’s memorandum of that date, however, he advised that the defendants had made a written offer to the plaintiff to pay the sum of $30,000 together with interest of $8,314.64 with a denial of liability.
Application to strike out
[38] The factors relevant to the application are the nature of the plaintiff’s non- compliance with the order for security for costs and the issue of prejudice to the defendants. The issue of security for costs had been raised immediately after the summary judgment application was dismissed. Given the plaintiff’s circumstances (a former bankrupt, with no assets to his name) and the clearly extravagant nature of his claim, an order for security for costs was inevitable. But rather than deal with that inevitability the plaintiff put the defendants to the cost of a defended application for an order for security for costs, a defended application for review of that order and having to deal with the vacation of the allocated trial date. The original order for security for costs had never been stayed and the plaintiff was accordingly in breach throughout 2016. I consider that the plaintiff’s failure to pay security for costs as directed represented a serious instance of non-compliance.
[39] The plaintiff does not see any prejudice to the defendants in his delay in paying the security for costs because, on his view, nothing was happening anyway. This perception suggests a lack of understanding of the realities of litigants engaged unwillingly in meretricious litigation. The plaintiff might well have perceived that nothing was happening but, as I have already observed, the defendants were actively engaged during 2016 in trying to get the plaintiff to pay the security for costs and dealing with the fact that a trial date had been allocated.
[40] Most litigants (and it is clear that the defendants take this view) wish to have litigation resolved as speedily as possible. The longer a party is engaged in litigation the more costs are incurred. In this case, during the period when, on the plaintiff’s view, nothing was happening, the defendants incurred costs that would not be
covered by the costs orders and also lost a trial date. Moreover, during this period the plaintiff continued to assert that damages for which the defendants would ultimately be liable were still accruing at a rate of $220,800 per annum. In those circumstances it is a disingenuous to suggest that the defendants were not prejudiced.
[41] Looked at overall, however, I am not satisfied that the plaintiff’s non- compliance does justify the proceeding being struck out. It seems reasonably clear that the plaintiff’s failure to comply was not deliberate but rather the result of his difficulty assembling the necessary sum. The prejudice to the defendants can be accommodated largely by costs. The application to strike out for non-compliance of the security for costs order is therefore dismissed.
Costs
[42] This proceeding would ordinarily be categorised as 2B for costs purposes. However, the defendants seek indemnity costs for all steps in the proceeding.
[43] Rule 14.6 permits indemnity costs on specified grounds, which include that:
the party has acted vexatiously, frivolously, improperly or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding.
[44] The circumstances that might justify indemnity costs were discussed in Bradbury v Westpac Banking Corporation.16 Generally these reflect very bad or very unreasonable behaviour by a party in the context of the proceedings.
[45] The flaw in the plaintiff’s claim was clear from an early stage and was brought to his attention. The defendants’ notice of opposition to the summary judgment application specifically identified the unconscionable nature of the agreement. The plaintiff was undeterred and proceeded to the defended summary judgment hearing. The issue of clause 2 being unenforceable as a penalty provision was squarely raised in Associate Judge Doogue’s decision of 3 September 2015. A little over a month later Associate Judge Bell expressly invited the plaintiff to review
his claim in light of the summary judgment decision, pointing out that the case may
16 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [29]–[30].
be within the jurisdiction of the District Court. The plaintiff was still undeterred and continued on.
[46] In my view there was no justification for the plaintiff’s steadfast pursuit of his claim in its current form. The bulk of the claim is not tenable and the part that is tenable should be dealt with in the District Court. His refusal to deal responsibly with the issues that the defendants have been raising from the outset have meant that they the defendants have been put to the unnecessary expense and trouble of dealing with High Court litigation, including the long process of obtaining security for costs. I consider that this is a proper case for indemnity costs.
[47] I do not overlook the fact that the application to strike out for non-compliance has failed. However, both strike out applications were advanced in tandem and had I been determining costs solely on the basis of the strike out for non-compliance I would have declined to make an award of costs either way, given that the plaintiff has had the indulgence of the Court in relation to this issue. In these circumstances I do not consider that the failure of the second strike out application should affect my decision to allow indemnity costs generally.
Result
[48] The defendants’ application to strike out on the ground that no tenable cause of action exists is granted in relation to the claim based on clause 2 of the settlement agreement.
[49] The claim for the $30,000 debt remains and should be transferred to the
District Court. However, since the defendants acknowledge their liability for
$30,000 plus interest it seems likely that this aspect of the claim can be resolved between the parties. If settlement can be reached the proceedings will not need to be transferred. I therefore make an order that on or before 1 June 2017 the parties will each file a memorandum confirming whether the claim for $30,000 plus interest has been settled. If it has not been settled the proceedings are to be transferred to the District Court.
[50] The application to strike out on the grounds of non-compliance with the security for costs application is dismissed.
[51] The defendants are entitled to indemnity costs for all steps in the proceeding.
P Courtney J
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