Kennedy v Body Corporate 82981
[2024] NZHC 913
•24 April 2024
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2021-485-749
[2024] NZHC 913
BETWEEN CY KENNEDY and
KAJSA KARIN ELEONORA BJORS
PlaintiffsAND
BODY CORPORATE 82981
First Defendant
NEIL DOUGLAS CHARLES COOPER
Second DefendantANTONY VOLPICELLI
Third DefendantLEIGH FRANCIS BURNEY
Fourth DefendantDIANE FLORENCE BURNEY
Fifth Defendant
Hearing: 9 April 2024 Appearances:
H Chung for Plaintiffs
N S Wood for Defendants
Judgment:
24 April 2024
JUDGMENT OF ASSOCIATE JUDGE SKELTON
[1] This is an application by the defendants for an order pursuant to r 10.15 of the High Court Rules 2016 (HCR) that certain questions be decided separately from all other questions, before any trial in the proceeding.
[2] In short, the plaintiffs are owners of two residential units in the mixed-use building known as the Dominion Building in Wellington. They claim breaches of
KENNEDY and v BODY CORPORATE 82981 [2024] NZHC 913 [24 April 2024]
statutory duty, negligence and nuisance against the Body Corporate in relation to leaks from the roof exterior cladding.1 The plaintiffs also claim breaches of statutory duties against the second to fifth defendants (the individual defendants) as either current or former committee members of the Body Corporate. The plaintiffs allege that, to the extent necessary, the cause of action against the individual defendants is brought by way of derivative action, that is, on behalf of the Body Corporate.
[3] The relevant procedural background is set out in my judgment dated 6 November 2023.2 In that judgment I ordered the fourth and fifth defendants be added as parties to the proceeding, and that the plaintiffs did not require leave of the Court to bring their cause of action against the individual defendants to the extent that it is by way of derivative action. However, the issue of whether the plaintiffs have standing to bring this cause of action was left open for the reasons set out in that judgment.3 The authorities indicate that there are several routes available to the defendants to challenge the standing of the plaintiffs to bring their cause of action on behalf of the Body Corporate.4 These are:
(a)an application for strike out;
(b)applying for the issue to be determined as a separate or preliminary question under rr 10.14 and 10.15 of the HCR; or
(c)leaving the matter to be decided at the substantive hearing.
[4] The defendants have now applied for the standing issue to be determined as a separate or preliminary question under rr 10.14 and 10.15 HCR. The proposed questions are:
(a)Q1: As put in issue in the parties’ current pleadings, do the plaintiffs have standing to bring, on behalf of the Body Corporate, their cause of
1 More detailed background is set out in the judgment of Grice J in Kennedy v Body Corporate 82981 [2022] NZHC 1377 at [3]–[8].
2 Kennedy v Body Corporate 82981 [2023] NZHC 3123 at [6]–[13].
3 At [34]–[40].
4 At [27]–[34].
action against the individual defendants, including under any exception to the rule in Foss v Harbottle? (the standing question); 5 and
(b)Q2: As put in issue in the fifth affirmative defence of the individual defendants’ current statements of defence, is the effect of certain resolutions passed at the Body Corporate’s annual general meeting on 10 May 2023 (the AGM) that:
(i)any liability that the individual defendants might otherwise have had to the Body Corporate has now been released and extinguished; and, thus,
(ii)the plaintiffs’ cause of action against the individual defendants no longer subsists (the ratification question).
[5]The relevant resolutions passed at the AGM include that the Body Corporate:
(a)approves, confirms and ratifies all decisions and actions of all present and former committee members that are the subject of any allegation or claim in this proceeding; and
(b)stands behind any present and former committee members joined as defendants in this proceeding and does not seek to, and will not, claim against, them in respect of any allegation or claim that is the subject of this proceeding.
[6]The orders sought by the defendants are:
(a)that Q1 and Q2 are to be decided separately from all other questions, and before any trial, in this proceeding;
5 The rule in Foss v Harbotte (1843) 2 Hare 461 is essentially that the proper plaintiff in an action in respect of a company or association of persons is prima facie the company or association of persons.
(b)the evidence required for the separate determination of these questions is to be given by way of affidavit;
(c)this proceeding is otherwise adjourned, and no party needs to take any further step in this proceeding, until the Court separately decides the questions; and
(d)the costs of this application are awarded to the defendants.
Legal principles
[7]Rules 10.15 of the HCR provides:
10.15 Orders for decision
The court may, whether or not the decision will dispose of the proceeding, make orders for—
(a)the decision of any question separately from any other question, before, at, or after any trial or further trial in the proceeding; and
(b)the formulation of the question for decision and, if thought necessary, the statement of a case.
[8]Rule 10.14 defines “question”, for the purposes of r 10.15, as:
… any question or issue in any proceeding, whether of fact or of law or partly of fact and partly of law, and whether raised by pleadings, agreement of parties, or otherwise.
[9] The Court has a broad discretion to decide whether a separate questions determination pursuant to r 10.15 should be ordered and, in exercising this discretion, it must take into account the interests of the immediate parties but also the parties to other cases before the Court.6 The starting presumption is that all matters in issue should be determined in one trial because this is normally the most efficient manner for dealing with proceedings.7 The burden, therefore, rests on the applicant to show
6 Turners & Growers Ltd v Zespri Group Ltd HC Auckland CIV2009-4040-4392, 5 May 2010 at [9].
7 At [10]; and Karam v Fairfax Ltd [2012] NZHC 1331 at [58]. The approach in these cases have been recently cited with approval in Intech v Anura Ltd [2024] NZHC 355.
there are “good, preponderant reasons in favour of a separate questions determination”.8
[10] In Turners & Growers Ltd v Zespri Group Ltd, White J, drawing on other cases considering applications under r 10.15, compiled a range of criteria that is taken into account in deciding whether to order a split trial.9
[11] Justice Kós, in his decision in Haden v Attorney-General, provided a practical approach in working through the criteria outlined in Turners & Growers Ltd v Zespri Group Ltd through the formulation of the following principal questions:10
(a)will there be difficult demarcation questions between those issues to be addressed at the first trial and those left for the second?
(b)will the separate question bring the proceedings to an end?
(c)what potential time saving does the separate question offer?
(d)how will appeals be dealt with?
(e)are there any other practical considerations tending one way or another?
[12] I propose to determine the defendants’ application under r 10.15 taking into account these five questions.
Issues
[13]The principal issues in the application are:
(a)should Q1 and Q2 be determined as separate questions before the substantive trial in this proceeding?;
8 Karam v Fairfax Ltd, above n 7, at [58].
9 Turners & Growers Ltd v Zespri Group Ltd, above n 6, at [11].
10 Haden v Attorney-General (2011) 22 PRNZ 1 (HC) at [50]. See also Karam v Fairfax New Zealand Ltd, above n 7, at [59].
(b)if so, should the evidence required for the separate determination of these questions be given by way of affidavit?;
(c)is it also appropriate to adjourn the proceedings pending the determination of the separate questions?; and
Should Q1 and Q2 be determined as separate questions before the substantive trial?
[14] The defendants rely on the English Court of Appeal’s judgment in Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2) endorsing early determination of the question of standing in the context of a common law derivative action on behalf of a company.11 The Court stated: 12
First, as we have already said, we have no doubt that Vinelott J. erred in dismissing the summons of May 10,1979. He ought to have determined as a preliminary issue whether the plaintiffs were entitled to sue on behalf of Newman by bringing a derivative action. It cannot have been right to have subjected the company to a 30-day action (as it was then estimated to be) in order to enable him to decide whether the plaintiffs were entitled in law to subject the company to a 30-day action. Such an approach defeats the whole purpose of the rule in Foss v. Harbottle and sanctions the very mischief that the rule is designed to prevent. By the time a derivative action is concluded, the rule in Foss v. Harbottle can have little, if any, role to play. Either the wrong is proved, thereby establishing conclusively the rights of the company; or the wrong is not proved, so cadit quaestio [the issue is no longer in question].
[15]Mr Wood, for the defendants, submits that:
(a)both of the questions proposed meet the relevant definition of “question” under r 10.14 HCR;
(b)answering the questions in a separate preliminary hearing would help “secure the just, speedy, and inexpensive determination of the proceeding”;13
11 Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2) [1982] 1 Ch 204 (CA) at 221. See also Oates v Consolidated Capital Services Ltd [2009] NSWCA 183 at [105]; and Fruit Shippers Ltd v Petrie [2020] NZHC 749 at [48].
12 Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2), above n 11, at 221.
13 High Court Rules 2016, r 1.2.
(c)if either of the questions are answered in the affirmative, judgment would be entered for the individual defendants giving them certainty and relieving them of the concern about personal liability, avoiding the need for further discovery by those defendants and ensuring a more focussed proceeding against the Body Corporate as the only defendant; and
(d)there are potential time savings for trial if the separate question is determined affirmatively because this will eliminate the time involved in having to determine the allegations and issues against the individual defendants including determining the unparticularised loss allegedly suffered by the Body Corporate that arises only in respect of the cause of action against the individual defendants.
[16] The plaintiffs neither oppose, nor consent to, the order that Q1 and Q2 be decided separately from all other questions, and before any trial in the proceeding. However, the plaintiffs put forward several issues in their submissions as relevant factors to be considered.
[17] The plaintiffs raise the issue of the standard to which they will be required to make out their case to establish standing. It is common ground between the parties that the plaintiffs are not required to prove their case on the balance of probabilities to establish standing. I have not received full argument on the relevant standard and I do not consider that it is appropriate for me to determine the relevant standard at this stage. It seems that the highest standard which may apply, without determining the matter at this stage, is that the plaintiffs are required to establish a prima facie case that: (i) the Body Corporate is entitled to the relief claimed; and (ii) that the cause of action falls within the proper boundaries of the exception to the rule in Foss v Harbottle.14
[18] Ms Chung, for the plaintiffs, submits that the plaintiffs will be required to establish, even if only to a prima facie standard, whether the individual defendants breached regulations, or otherwise acted illegally, and whether such breaches caused
14 Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2), above n 11, at 221–222.
the Body Corporate loss. On the other hand, the defendants submit that Q1 involves a narrow factual compass. That is because the cause of action against the individual defendants in the plaintiffs’ fifth amended statement of claim dated 7 March 2024 relies on the “fraud on the minority” exception to the rule in Foss v Harbottle, and the key issue is whether the “wrongdoers” have control of the Body Corporate such that it cannot itself sue to vindicate its own rights. The defendants submit that Q2 involves an even narrower factual compass as it only relates to the legal effect of resolutions passed at the AGM on 10 May 2023.
[19] The plaintiffs disagree with the defendants’ contention that further discovery from the individual defendants will be avoided if the separate questions are resolved in the defendants’ favour. The plaintiffs submit that, as agents for the Body Corporate, the individual defendants are under a duty to give their principal records of transactions made during the agency.
[20] However, I do not consider that I need to determine at this stage whether discovery from the individual defendants would be avoided if either Q1 or Q2 is resolved in favour of the defendants and the individual defendants are no longer parties. The key issue regarding potential time saving is whether time would be saved at the substantive hearing.15 It seems to me that hearing time would be saved in that the Body Corporate would be the only defendant and there would be no need to adduce evidence and hear submissions on the specific issues raised by the cause of action against the individual defendants, including the issues as to alleged loss suffered by the Body Corporate.
[21] The plaintiffs also suggest that it may be appropriate for Q2 to be dealt with by way of a statement of case under r 10.15(b) with the underlying facts stated as actual facts.
[22] However, I do not consider that it is necessary for there to a statement of case in respect of Q2. It seems to me that it is appropriate and efficient for both Q1 and Q2 to be dealt with using the same procedure. As discussed below, I consider that it is appropriate and efficient for the necessary evidence and background documents for
15 Haden v Attorney-General, above n 10, at [50(c)].
both questions to be produced by way of affidavit. The background facts and documents required for Q2 are limited in scope and unlikely to be in dispute and, as submitted by Mr Wood, they can be included in a separate section of the affidavit evidence filed on behalf of the defendants; the defendants bearing the onus on Q2.
[23] Overall, I consider Q1 and Q2 should be determined as separate preliminary questions. It is apparent that the issues arising in respect of Q1 and the issues to be determined in respect of the Body Corporate at the substantive trial may not be entirely discrete. However, I do not consider this will lead to any question of issue estoppel because, in determining Q1, the Court will not be determining any of the issues for the substantive hearing.16
[24] The determination of Q1 and/or Q2, if answered affirmatively, will not bring the proceedings as a whole to an end. However, this is not determinative.17 And it seems to me that this is outweighed by the potential reduction in the number of defendants and issues to be resolved at the substantive trial.
[25] It is apparent that either the plaintiffs or the defendants may appeal the outcome of the determination of Q1 and/or Q2. This may result in some further delay to the resolution of the proceedings as a whole. However again, this needs to be weighed against the potential advantages of determining these issues in advance of the substantive trial. There would be no sense in imposing a condition that the hearing of appeals be postponed until determination of the proceeding as a whole. That is because it is desirable that these issues be determined finally prior to the substantive trial.
[26] In terms of other practical considerations, the issue of the standing of the plaintiffs to bring their claim against the individual defendants by way of derivative action has been live now for over a year. The issue needs to be resolved to avoid the inefficiency and wasted costs that would arise if the claim proceeds to trial against the individual defendants only to find at that stage that the plaintiffs did not have standing to bring claims on behalf of the Body Corporate against the individual defendants at
16 At [50(a)].
17 At [50(b)].
all. As stated by the English Court of Appeal in Prudential Assurance Co Ltd such an approach defeats the whole purpose of the rule in Foss v Harbottle and sanctions the very mischief that the rule is designed to prevent.18 This is a strong factor supporting a separate questions determination.
Should evidence required for determination of Q1 and Q2 be produced by way of affidavit, and should the proceedings otherwise be adjourned?
[27] The defendants propose that the evidence for the determination of the separate questions be produced by affidavit.
[28] The plaintiffs do not appear to oppose affidavit evidence per se. However, they contend that, given that they may need to establish their case on Q1 to a prima facie standard, evidence by affidavit would be incomplete and/or inappropriate to the extent that discovery and inspection, and potentially interrogatories, are not completed prior to the separate questions being decided.
[29] I understand from the submissions made at the hearing and the affidavit evidence before me that the defendants have already provided substantial discovery, although there are specific outstanding issues between the parties regarding the defendants’ discovery that have not yet been resolved. In the circumstances, I do not consider that it is appropriate for the determination of the separate questions to await the resolution of the specific outstanding issues in relation to discovery. As discussed above, it seems that the highest standard to which the plaintiffs will be required to make out their case for the purposes of standing is a prima facie case. The plaintiffs do not have to prove the case, including the quantum of any loss suffered by the Body Corporate. It seems to me that, as there has been substantial discovery by the defendants, there should be sufficient evidence available to the plaintiffs to meet the relevant test.
[30] Ms Chung submitted, and Mr Wood acknowledged, that if it became apparent that the fact that discovery has not been fully completed means that the plaintiffs do not have sufficient evidence to establish standing, then given the procedural flexibility
18 Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2), above n 11, 221.
in this area, this may impact on the standard to which the plaintiffs are required to make out their case to establish standing. As noted above, I do not consider that it is appropriate for me to determine the relevant standard at this stage.
[31] Further, as noted above, there has already been delay in progressing the determination of the standing issue and the longer it is left unresolved the greater the risk of inefficiencies and wasted costs, if it turns out that the plaintiffs do not have standing to bring their claim by way of derivative action.
[32] The plaintiffs rely on two cases which they say support their position that discovery and inspection and potentially interrogatories should all be completed prior to determination of the separate questions: Hammond v Elders Pastoral Ltd;19 and Commerce Commission v Qantas Airways Ltd (No. 1).20 However, these cases can be distinguished as they involved the final determination of substantive issues prior to trial rather than the determination of standing to pursue a derivative action, requiring a case to be made out at the highest to a prima facie standard.
[33] The plaintiffs also contend that it is inefficient and an unreasonable delay to adjourn the proceedings until the separate questions are determined. In particular, the plaintiffs contend that the claim against the Body Corporate is not affected by the determination of the separate questions and adjournment will delay discovery and any interrogatories and cause consequential delay to any prospective alternative or negotiated resolution. However, it seems to me that it is more efficient to complete discovery and inspection and any interrogatories after the separate questions have been determined. It will then be clear who the parties are, the pleadings can be finalised and the relevant issues determined accordingly. Completion of discovery and any interrogatories will more efficiently occur in that context. Further, it does not seem to me that it is likely that there could be any alternative or negotiated resolution of the proceedings until it has been determined whether the plaintiffs have standing to bring their claim against the individual defendants by way of derivative action.
19 Hammond v Elders Pastoral Ltd HC Whanganui CP 4/88, 2 May 1989 at 8–9.
20 Commerce Commission v Qantas Airways Ltd (No. 1) (1991) 4 TCLR 417 (HC) at 421.
[34] For the reasons set out above, I am satisfied that it is appropriate and efficient that the evidence for the determination of the separate questions be produced by affidavit, and that the proceedings should be otherwise adjourned pending the outcome of the determination of the separate questions.
Result
[35] An order is made that the following questions are to be decided separately from all other questions, and before any trial of the proceeding, under r 10.15 of the HCR:
(a)Q1: Do the plaintiffs have standing to bring, on behalf of the Body Corporate, their cause of action against the second, third, fourth and fifth defendants, including under any exception to the rule in Foss v Harbottle?; and
(b)Q2: Is the effect of certain resolutions passed at the Body Corporate’s annual general meeting on 10 May 2023 that:
(i)any liability that the individual defendants might otherwise have had to the Body Corporate has now been released and extinguished; and, thus,
(ii)the plaintiffs’ cause of action against the individual defendants no longer subsists.
[36] The evidence required for the determination of Q1 and Q2 above is to be given by way of affidavit.
[37] The proceedings are otherwise adjourned pending the determination of Q1 and Q2.
[38] The parties are to confer to agree appropriate timetabling directions for the determination of Q1 and Q2. The parties are to file a joint memorandum in this regard within 10 working days of the date of this judgment including an estimate of the time required for the hearing. If there are differences between the parties, these can be set
out in the joint memorandum. Directions will then be made as to the timetable and scheduling the matter for a hearing.
[39] The defendants have been successful in obtaining the orders sought. The plaintiffs neither opposed nor consented to the primary order as to determination of the separate questions before trial and opposed the orders as to affidavit evidence and adjournment. My preliminary view is that defendants are entitled to costs on this application on a 2B basis and reasonable disbursements. The parties are to endeavour to agree on costs. If agreement cannot be reached then memoranda may be filed (not exceeding three pages, excluding costs schedules) and the issue of costs will be determined on the papers.
Associate Judge Skelton
Solicitors:
Lane Neave, Auckland for Plaintiffs
Chapman Tripp, Wellington for Defendants
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