Love v Auburn Apartments Limited HC Auckland CIV 2009-404-725
[2010] NZHC 1062
•16 June 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2009-404-725
BETWEEN DOUGLAS LOVE, PATRICIA LOVE AND TRUSTS LIMITED
Plaintiffs
ANDAUBURN APARTMENTS LIMITED Defendant
Hearing: 28 May 2010
Appearances: Mr E St John for Plaintiffs
Mr Judd for defendant
Judgment: 16 June 2010 at 4.30 pm
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
16.06.10 at 4.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
E St John, Barrister, Auckland – Eugene.john.xtra.co.nz
S Judd, Barrister, Auckland – [email protected]
LOVE V AUBURN APARTMENTS LIMITED HC AK CIV-2009-404-725 16 June 2010
Background
[1] The plaintiff trust entered into an agreement for sale and purchase dated 11
September 2006 to buy from the defendant Unit 211 in an apartment complex which was to be constructed. The agreement contemplated that in due course the plaintiff would receive a stratum estate in freehold under the Unit Titles Act 1972. In or about 10 October 2008 the plaintiff purported to cancel the agreement for sale and purchase but that position has not been accepted by the defendant. The plaintiff seeks a declaration that the cancelation was valid. The defendant has counter- claimed. Initially the defendant sought an order for specific performance but now the apartment has been resold and the defendant claims for loss on the resale.
[2] Since the claim and counter-claim were filed receivers were appointed to the defendant and on 12 March 2010 liquidators were appointed. The plaintiff filed an application to strike out the defence put forward by the defendant. The defendant filed a notice of opposition. Included in the grounds that were initially advanced by the defendant was the assertion that the plaintiff’s proceeding against the defendant had been stayed as a result of s 248 of the Companies Act 1993. The receivers nonetheless pursued their counter-claim but I understand that this ground is no longer being pursued. The plaintiff therefore restricts itself on the strike out application to the ground that the defendant has failed to comply with an order for discovery. In the alternative, the plaintiff seeks further and better discovery. Finally, the plaintiff seeks an order for security for costs against the defendant. All of the applications are opposed.
[3] The defendant has filed and served an affidavit of documents and accepts that it was late in doing this. It says that the delays on its part were excusable.
[4] In answer to the point that was raised in the application to strike out that the counter-claim was being brought by the receivers, the defendant says that the receivers are actually acting on behalf of, and with the authority of, the liquidators. The plaintiff accepts that the receivers are acting in such capacity.
[5] The following is a summary of the relevant chronology of events:
04 February 09 Proceedings commenced by plaintiff 26 January 10 Receivers appointed over defendant 12 March 10 Liquidators appointed 10 October 08 Plaintiff purported to cancel contract mid-November 08 Vendor’s estimated completion date of apartments 30 April 09 According to vendor, the date from which the primary
funder stipulated a six month period to commence for the vendor to be ready, willing and able to settle
[6] The applications to be determined in this judgment have been brought by the plaintiff seeking:
a) Determination of whether the plaintiff ’s claim is stayed under s 248 of the Companies Act 1993 because the liquidators have not consented to its continuance and leave has not been obtained from the Court;
b)That the strike out application should succeed due to the defendant’s non-compliance with an order for discovery by 24 March 2010, being the date specified in a Court order;
c) Alternatively, orders for further and better discovery;
d) Security for costs.
Whether plaintiff’s claim is stayed under s 248 of the Companies Act 1993
[7] Section 248 of the Companies Act 1993 so far as relevant provides:
248 Effect of commencement of liquidation
(1)With effect from the commencement of the liquidation of a company,—
(a)the liquidator has custody and control of the company’s assets:
…
(c)unless the liquidator agrees or the Court orders otherwise, a person must not—
(i)commence or continue legal proceedings against the company or in relation to its property; or
(ii) exercise or enforce, or continue to exercise or enforce, a right or remedy over or against property of the company:
…
Failure to comply with order for discovery
[8] The plaintiff seeks to strike out the counter-claim on the basis of the defendant’s non-compliance with the orders for discovery. The dates relevant to this
part of the application are now set out:
24 March 10 Date by which discovery was ordered to be made 18 May 10 Date by which defendant provided discovery (7 weeks
late)
18 October 10 Date when trial commences
[9] The application is brought pursuant to r 7.48 of the High Court Rules, which provides:
7.48 Enforcement of interlocutory order
(1) If a party (the party in default) fails to comply with an interlocutory order, 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 the 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: (d) that the party in default be committed:
(e)if any property in dispute is in the possession or control of the party in default, that the property be sequestered:
(f) that any fund in dispute be paid into court:
(g) the appointment of a receiver of any property or of any fund in dispute.
(3)An order must not be enforced by committal unless the order has been served personally on the party in default or that party had notice or knowledge of the order within sufficient time for compliance with the order.
[10] I adopt the following statements from McGechan on Procedure (looseleaf ed, Brookers) at [HR7.48.02], which in my view correctly state the approach that courts take to enforcement of interlocutory applications:
The New Zealand Courts’ traditional approach to non-compliance has been benevolent. In Lees Trading Co NZ Ltd v Loveday 3/6/98, Young J, HC Christchurch CP70/96, his Honour said (at p 11):
“There is a problem matching the general demands of case management … with the provision of individual justice in each case, particularly given the aversion Judges have to dismissing claims otherwise than on their merits. For better or worse, the compromises the Courts have made are weighted very much in favour of the second of these two considerations.”
[11] The authors go on to say:
The customary sequence in New Zealand in the event of non-compliance is an application that the claim or defence be struck out, followed by belated compliance or application for adjournment and enlargement of time to enable compliance. When eventual compliance occurs, applications for enforcement generally have been dismissed, with costs to the applicant. The two exceptions are:
(a) Wilful default: Cases in which a party is wilfully endeavouring to avoid compliance: Franklin v Baycorp Holdings Ltd (1990) 4 PRNZ
258.
(b) Serious prejudice: ...
[12] Dealing with the first ground, I do not consider that there is any basis upon which I conclude that the late filing of the affidavit of documents was done deliberately. An explanation has been provided by the defendant as to why the timetable was not met. Essentially the receivers blamed the failure to comply on pressures of other work and the fact that an organisational mishap of some kind (of
which no details are provided) occurred in the receiver’s office which resulted in the delay of swearing the affidavit. The first ground does not excuse the delay and because no useful information has been provided concerning the second is difficult to regard that as an excuse either. Notwithstanding those matters, it is difficult to see what advantage the defendant would hope to achieve from late filing given that the trial in this matter is still some five months distant. My conclusion is that the breach of the timetable order was not so egregious as to justify a strike out order, nor could the degree of prejudice attributable to the breach amount to a proper ground for striking out the defence and counter-claim. The date at which the affidavit of documents was filed was exactly five months prior to the trial and in those circumstances it is impossible to argue that serious prejudice has been caused. The plaintiff received the documents in plenty of time to enable it to prepare for trial and to amend pleadings if required.
Further and better discovery
[13] This part of the application is based upon r 8.24, which provides:
8.24Order for particular discovery against party after proceeding commenced
If at any stage of the proceeding it appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered, the Judge may order that party—
(a) to file an affidavit stating—
(i)whether the documents are or have been in the party’s control; and
(ii) if they have been but are no longer in the party’s control, the party’s best knowledge and belief as to when the documents ceased to be in the party’s control, and who now has control of them; and
(b) to serve the affidavit on any other party.
[14] To invoke the rule, the plaintiff must demonstrate that:
a) There is material evidence which suggests that documents which are or were in the possession of the discovering party have not been discovered; and
b)Those documents are relevant to an issue that is to be determined in the proceeding.
Documents sought
[15] The documents that the plaintiff seeks in the alternative orders referred to in the application for further and better discovery are as follows:
(i) All applications for resource consent.
(ii) All communications with [the] Council concerning any variations to resource consent and in particular those [communications] that relate to height to boundary issues which would impact on the dimensions as referred to in the marketing material and the sale and purchase agreement to our client’s property.
(iii) All internal memoranda concerning the sale.
(iv) All plans and specifications (amended or otherwise) that were prepared and/or filed with the Council.
(vi) All communications between the defendant and its bank which touched on the completion date.
(vii) The notes of the valuer upon which the defendant relies to prove that changes to the design of the apartment has caused minimal loss in value.
[16] Mr Judd for the defendant raised the following points in relation to this part of the application:
a) Because the plaintiffs had not filed a statement of defence to the counter-claim, there were no relevant pleadings which defined the issues and therefore the Court could not determine whether discovery was insufficient;
b)Alternatively, the documents of which discovery were sought were not relevant to matters in issue in the proceeding.
[17] I do not accept that the issues are not defined in the pleadings, although I do accept that a statement of defence to the counter-claim ought to have been filed. However, the counter-claim raises issues which are the mirror image of those which were pleaded in the plaintiff’s original statement of claim which is now stayed and to which the defendant filed a statement of defence.
[18] As to the question of relevance, there is little room for argument that the Peruvian Guano test applies in New Zealand: Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co (1883) 11 QBD 55 (CA); see eg ANZ National Bank Ltd v Commissioner of Inland Revenue [2009] 3 NZLR 123.
Particulars of claim
[19] The plaintiff’s statement of claim alleges that clause 39 of the agreement provided that the agreement was entirely conditional on the apartment being built in accordance with the specified layout and plan.
[20] The plaintiff alleges that the defendant did not construct the apartment in accordance with that layout and plan; in particular:
a) The deck area was smaller;
b) Larger internal pillars were used than the plans called for;
c) Pillars were located in positions other than indicated in the plan;
d) There were other detailed differences.
[21] The statement of defence acknowledges clause 39 but notes that the plan attached to the agreement included the words “all areas preliminary only, subject to final measurements” and “dimensions may change”.
[22] In responding to the plaintiff’s statement of claim, the defendant admits that the deck area is less than the “23 square metre terrace” which the contract called for. It also accepts that the internal pillars are of a larger size than the plaintiff says the
contract called for (which stipulated dimensions of 150mm by 150mm). However, the defendant makes no comment on what the contract called for in that regard.
[23] Some of the other allegations of non-compliance with the plans appear also to have been admitted. For example, in the statement of claim it is alleged that:
(c)The trash storage/access shown on the agreed layout and plan inside the main door has not been constructed.
[24] The defendant appears to take the position that the plan did not call for such a trash storage/access and, implicitly, appears to accept that there was no such trash store/access inside the main door.
[25] Other differences or variations for the plan are impliedly denied – the defendant says that what was built is consistent with the plan, or is better than provided for in the plan. In respect to some allegations (e.g. the claim that the shower area has been reduced), the defendant states that all areas in the plans were preliminary and subject to final measurements which might change the dimensions. Additionally, the defendant does not accept that the windows as built are different from the plan; but in any case it states that the differences had no effect on the value or utility of the apartment (this being the answer to the particulars contained in paragraph [11(f) – (i)] of the statement of claim).
Discussion
[26] Dealing then with each category of document in respect of which particular discovery is sought, my conclusions are as follows
(i) Resource consent
[27] As to the resource consent (referred to at [[15](i)] above, there is no doubt that applications for resource consent would have been made with respect to the building and that such applications would have been accompanied by plans and specifications. If the plans and specifications showed an apartment of materially different qualities and specifications than that which the contract called for, then that could, in theory, assist the plaintiff in establishing that there was in fact a variance
between the apartments as warranted in the contract and what was actually built. The fact that the plaintiff may be able to prove those matters by other means is neither here nor there. The plaintiff is entitled to require discovery whether or not the Court considers that there are ample alternative sources of information which could be relied upon by the plaintiff to prove its case. The same may be said of all the other communications with the Council (at [15](ii)), which would be relevant to a matter which the plaintiff is required to prove.
[28] There is no doubt that an application for resource consent must have been in existence and was in the custody or control of the defendant.
[29] In support of his general submission that documents of this kind lacked the necessary relevance, Mr Judd said that whether or not the apartment complied with the specifications contained in the agreement for sale and purchase was a matter which could be proved by evidence being presented of the actual features and dimensions of the apartment. This could be proved by calling evidence from someone who had inspected it, such as an expert valuer. Mr St John, in response to this submission, said that Mr Judd was in effect submitting that the documents had to be “necessary”, but a necessity test had been specifically omitted from the rule when it was drafted in its current iteration. While such a requirement had been expressed in the predecessor to r 8.24, it was not any longer part of the rule.
[30] In my view, Mr Judd’s submission should not be accepted. In essence, Mr Judd is saying that the issue which the defendant will be required to prove can be proved by calling other and more cogent evidence, namely the observation evidence. The submission implies that because there is a direct means of proof available to the plaintiff the defendant ought not to have to discover documents which might provide an alternative means of proving the point. The duty to discover is not limited in the way that Mr Judd has submitted. The Court does not carry out an evaluation of what the best quality evidence would be and decline to order discovery of any other type of evidence.
[31] The issue can be tested by enquiring into what the position would be if the other hypothetical evidence (that is, the evidence of measurement and observation)
for one reason or another was not available. In such a circumstance, would the evidence of the resource consent application be discoverable? Subject to the view I express in the following paragraph, there is little doubt that if such evidence indicated that the developer planned to build an apartment that was materially different from that which the contractual description called for, then it would be relevant under the Peruvian Guano test. An allegation that a person has acted in a certain way may be thought to be more rather than less likely in circumstances where the actor actually expressed an intention to do what is alleged. If, for example, a witness who proposed to prove the “as built” dimensions were not what the contract required unexpectedly became unavailable to give evidence at trial for the plaintiff, the other evidence that the plaintiffs would call (of their observations etc) would be rendered more believable if it could be shown that the defendant’s application for consent depicted columns of the dimensions consistent with what the plaintiffs say they actually are.
[32] Whether or not the documents are discoverable in terms of the Peruvian Guano test depends, first, whether they are relevant to a matter that will need to be resolved in the proceeding. Not all of the documents that Mr St John submitted appear to actually be relevant when the above test is applied to them. For example, it is admitted in the statement of defence that the “as built” pillars are 450 mm by 700 mm, rather than the 150 mm x 150 mm pillars that the plaintiff claims were required. The plaintiffs do not therefore have to prove that fact. That matter is therefore not a relevant question in the proceeding. Whether the plaintiff is right or wrong that the pillars were supposed to be 150 mm by 150 mm is not the question that is asked at this stage. The question is whether the size of the pillars is a matter that is in controversy between the parties at this point and the answer is that it is not. It is also doubtful whether documents that bear on other matters of fact which the plaintiffs said are in issue are actually discoverable. An example concerns the trash disposal location and whether it ought to have been situated within the apartment or outside it. The place where it is actually located would not seem to be in contention. What is in dispute is whether the defendant had arranged for it to be correctly located in terms of the contract. Plans which were annexed to the contract documents would be relevant when establishing the parties’ contractual intentions. As well, it could be relevant to this last element to show that the defendant subsequently prepared plans
which were consistent with what the defendant say was the parties’ agreed intention. There may be other live factual disputes and documents such as the plans and specifications that were prepared and/or filed with the Council may indeed be discoverable: there are differences, for example, about the dimensions of the deck. Documents bearing on that issue should be discovered if the other requirements for discoverability are met
[33] Whether or not documents are discoverable in terms of the Peruvian Guano test actually exist which have not been disclosed is the next matter I consider. In the first place, judgements about whether documents are relevant in that sense are for the party giving discovery. However, under r 8.24 the Court can intervene if it appears from evidence or the nature of the circumstances of the case or from any document filed in the proceeding that documents of the above kind do exist. There is good reason to suppose that at least some documents of this type are in existence. For example, if the defendant does not accept the dimensions of the deck as built, that would be a matter in issue in the proceeding. The fact that the deck is of smaller size than the contract called for and the extent of the alleged deficiency are both live issues in the proceeding. Whether the deficiency on its own, or more likely when considered in combination with other alleged breaches, justified the plaintiffs in not perfoming the contract is at issue and relevant documents ought to be discovered. It would seem very likely that documents that bear on that issue, to name just one, would have been submitted to the council with the application that was prepared for resource consent.
(ii) Communications with the Council
[34] As to the second category of documents listed in paragraph [[15](ii)] above, (“all communications with Council concerning any variations”), there is no basis upon which I can reasonably conclude that such documents were in existence. If they were, of course, the defendant should disclose them because they are relevant in the terms that I have just explained. But it does not seem an unreasonable possibility that the defendant only ever filed the application for resource consent and that was in the amended form – amended in the sense that the plans and specifications were different from the contractual documents. That being so, there would not seem to be
any grounds for me to make an order in respect of the documents listed in [[15](ii)]
above.
(iii) All internal memoranda concerning the sale
[35] The description of “all internal memoranda” is very wide but if it is understood in the sense that I have just expressed, then such documents would be discoverable. Whether there were ever such documents in existence is a separate question. The expression would seem to recognise a distinction between “memoranda”, which suggests written communications between various persons including employees of the defendant as opposed to pictorial depictions of the apartment in the way of plans, and perhaps, “specifications”. The choice is between dismissing this part of the application or applying common sense and redefining the category of documents sought in [15](iii) so that they are restricted to documents which are relevant to any material change to the design and specifications of the apartment.
(iv) Communications with bank
[36] The plaintiff also seeks discovery of “all communications between the defendant and its bank which touched on a completion date”. Mr Judd said that any such documents have been disclosed. More importantly, there is no explicit evidence available which would support a conclusion that there are such documents that are or have been in the custody or control of the defendant which have not been discovered. Nor is an inference to that effect properly to be drawn from the circumstances of the case.
Conclusion on discovery
[37] I do not propose to make any orders at this point but to allow the defendant additional time within which to consider the matter of discovery. That is because there are grounds to believe that the defendant may not have given proper consideration to groups of documents that they ought to have because of a view, which I have no doubt was held bona fide, that they have discovered all that they are
required to. If, notwithstanding an adjournment of this matter, satisfactory discovery is not completed, then I will hear the parties further as to whether the Court ought to make any orders.
Security for costs
[38] The plaintiff seeks a security for costs order. Through its counsel, Mr St John, the plaintiff also submits that the defendants in this case are essentially receivers (although acting with the authority of the liquidators in bringing their counter-claim) and the Court is not prevented from ordering security against receivers. The defendant opposes the making of such an order
Whether security can be ordered against receivers
[39] The position of liquidators in relation to security for costs orders has always been treated as a special one: Re Pacific Wools Limited (in rec & in liq) (1990) 5
NZCLC 66,730. The authorities reviewed in Pacific Wools include Re World Style Builders Limited (in rec and vol liq) (1982) 1 NZCLC 98,401 at 98,403, in which Hardie Boyes J considered that the distinguishing features arising from the status of a liquidator is that he is exercising a statutory function primarily for the benefit of the creditors, but also having a strong public interest component. As well, other judgments have emphasised that the liquidator has a duty to perform and as long as he acts responsibly he should not be hampered in his attempts to perform it: Hilson v Commercial Bank of Australia Ltd HC Christchurch A159/81, 22 October 1985, Cooke J.
[40] In my judgment, Mr St John’s submissions are correct, though, when he says that there is no reluctance to order security for costs against receivers. That is because of the difference in the two roles. Generally, the beneficiaries of litigation brought by liquidators are the unsecured creditors.
[41] I accept that it would be wrong in principle for an opponent in litigation to, effectively, obtain security for its costs in the litigation as a priority over the other unsecured creditors.
[42] It is not necessary to refer to the various authorities that Mr St John cited. Reference need only be made to one of them. In Seabird Corporation Limited v National Securities Exchange Guarantee Corporation Limited [1989] 7 ACLC
1,263, Needham AJ stated, at 1,266:
It would be unjust to allow a secured creditor an opportunity to litigate free of any risk that, should it fail, it would not be under an obligation to pay the costs of the defendant. The receiver and manager’s duty, should he succeed in obtaining judgment, would be to apply the proceeds of the litigation towards repayment of the secured debt. In that sense, the proceedings are taken for the benefit of the secured creditor, and there is every reason, in my opinion, why the defendant should have the benefit of an order giving it some security for its costs.
[43] In the present case the parties behind the litigation are the receivers who are acting as agents for the liquidators. The receivers have been appointed by Westpac New Zealand Ltd. Their interest in the matter is in recovering property which is subject to the Banks security. Mr Judd submitted that the receivers have obligations to the general body of creditors, such as to account for any surplus. While that is no doubt true, it does not mean that the receivers are acting in the same capacity as the liquidator. In my view, the essence of the receivers’ position is that they are acting as agents of, or are entitled to an indemnity from, the Bank as a secured creditor. The arrangement is a commercial one. There are no counter-balancing considerations of public interest which would justify the Court in sheltering the receivers from an order for security for costs.
Whether an order should be made
[44] I next consider whether an order for security for costs ought to be made in this case. Before such an order may be made, there must be grounds for belief that if the defendants fail in the counter-claim against the plaintiffs, the plaintiffs will be unable, wholly or partially, to recover their costs.
[45] No attack was launched upon the general merits of the defendant’s counter- claim. Obviously, the plaintiff’s position is that the subject matter which the plaintiff would acquire were it obliged to perform the contract would be substantially different from what it contracted to buy and what it would have to pay the price of were specific performance ordered. I note the submission by Mr Judd that in fact the
plaintiff has not established that it is entitled to cancel the contract on grounds that the property is worth substantially less than it would have been had it complied with the contractual description. In answer to that contention, Mr St John said that the plaintiff would be relying upon the authority of Flight v Booth (1834) 1 Bing NC
370; 131 ER 1160. The effect of that rule is that if the misdescription affects the subject matter of the contract to such an extent that the purchaser might well not have entered into the contract if made aware of the true position, the purchaser may elect to cancel, despite the ‘no annulment’ provision contained in standard contracts for the sale of land: Property Ventures Investments Limited v Regalwood Holdings Limited [2010] NZSC 47, paragraph 10
[46] Mr Judd submitted that the counterclaim defendants had not provided any basis upon which it could demonstrate that it had bona fide defence to the counterclaim. He noted that no statement of defence has been filed to the counterclaim. My assessment of these arguments is that while it is true that the plaintiffs have not filed a statement of defence, the argument that I heard from counsel persuades me that there is substance to the defence. Mr Judd emphasised the requirements of the Contractual Remedies Act 1979 and the absence of any detailed evidence as to financial loss suffered by the plaintiffs. Against those submissions, I consider that when that dispute is approached with the principles of Flight v Booth in mind, the argument for the plaintiff’s is expected to be along the lines that they would not have entered into the contract had they been able to foresee that the apartment was quite different from what they might reasonably have expected from the terms of a contract which they entered into.
[47] The receivers did not expressly address the issue of whether they would be able to meet any order for costs but as I understand evidence given by Mr Broome for the receivers, it is to the effect that the financial state of the defendant is such that it is unlikely that even a preferred unsecured creditor such as the Inland Revenue Department will not be covered by realisations which the receivers/liquidators achieve. That can only mean that the counterclaim defendants would not recover anything if the counterclaim were to fail and an order for costs order made in their favour.
[48] Mr Judd was also critical of delays on the part of the counterclaim defendants in bringing the present application which he characterised as an "afterthought".
[49] To summarise, I conclude that:
a) the counterclaim defendants have a bone fide defence;
b)the defendant will not be able to pay costs if an order is made against it;
c) the usual reluctance to direct that a liquidator pay security for costs is not a factor which is present in this case where the litigation is essentially being driven by the secured creditor.
[50] In those circumstances there is jurisdiction to make an order for security for costs and in my view it would be a correct exercise of the discretion under rule 5.45 to so order.
[51] The duration of the trial has been estimated by the plaintiff at five days and by the defendant at approximately the same length. Viewing matters in the round, I would have thought that a provision of security for costs at $25,000 would be adequate and that is what I propose to order the defendant to pay. Security is to be staged, with half to be paid by the end of July 2010, and the balance five working days prior to the commencement of the trial.
Conclusion
[52] The application so far as it relates to discovery matters is adjourned to my
Chambers List at 2.15 p.m. on 3 September 2010.
J.P. Doogue
Associate Judge
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