Manhire v Tuatara Structures Limited

[2024] NZHC 930

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2022-409-501

[2024] NZHC 930

UNDER

the Building Act 2004

IN THE MATTER

of a claim for defective building work

BETWEEN

DEBORAH LEE MANHIRE and ALAN MANHIRE

Plaintiffs

AND

TUATARA STRUCTURES LIMITED

Defendant

Hearing:	19 April 2024
Appearances:	K W Clay and K K Montu for Plaintiffs J I Taylor and J B Fletcher for Defendant
Judgment:	26 April 2024

JUDGMENT OF ASSOCIATE JUDGE PAULSEN

This judgment was delivered by me on 26 April 2024 at 2.45 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date:

MANHIRE v TUATARA STRUCTURES LIMITED [2024] NZHC 930 [26 April 2024]

[1]    The plaintiffs (the Manhires) entered a written contract with the defendant (Tuatara) for Tuatara to plan and construct an exterior shell and midfloor of a two- storey building on their property at Mayfield. The terms of the contract excluded specific works in respect to the construction of the building. Tuatara commenced construction, but before completion of the works the Council issued a stop work notice. Code of compliance has not been achieved.

[2]    The Manhires allege they requested Tuatara to rectify the defective works but that it failed and/or refused to do so. In the statement of claim they seek damages of

$238,219 to cure the defective works as well as an amount for loss of rent for the property and general damages. However, the Manhires have since obtained expert evidence that the cost of the repairs is $861,242. Tuatara denies liability and says defects in the works do not exist or are very minor or that it is not responsible for them. It seeks to recover a balance it says is owing for the works of $25,356 excluding interest.

[3]    The Manhires have obtained litigation funding to bring their claim from Claims Resolution Service (2015) Ltd. The Manhires’ counsel advised the identity and location of the funder and that it is amenable to the jurisdiction of the New Zealand courts.1 Tuatara has also been provided with a redacted copy of the litigation funding agreement between the Manhires and the funder.

[4]Tuatara now applies for orders that the Manhires:

(a)provide security for costs in the proceeding; and

(b)disclose the full terms of the litigation funding agreement.

[5]Tuatara is seeking an order that the Manhires pay security in the sum of

$72,102 or such other sum as the Court considers sufficient.

[6]    As far as the funding agreement is concerned, Tuatara says the redacted agreement that has been provided is insufficient and the Court should require full

1      Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91 at [76].

disclosure to enable an assessment to be made as to whether the funding is champertous, an impermissible assignment of a cause of action or otherwise an abuse of process.

[7]The issues that arise are:

(a)Has Tuatara satisfied the Court of a threshold requirement for the ordering of security for costs under r 5.45(1) of the High Court Rules 2016?

(b)How should the Court exercise its discretion under r 5.45(2)?

(c)What amount should security for costs be fixed at?

(d)Should a stay be ordered until security for costs is provided?

(e)Should the Court order production of an unredacted copy of the funding agreement?

The rules and principles - security for costs

[8]Rule 5.45 of the High Court Rules relevantly provides:

5.45     Order for security of costs

(1)Subclause (2) applies if a Judge is satisfied, on the application of a defendant,—

…

(b) that there is reason to believe that a plaintiff will be unable to  pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff’s proceeding.

(2)A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.

…

[9]    Whether or not to order security, and if so the quantum of such security, are discretionary matters. The discretion is not to be fettered by constructing principles

from the facts of previous cases.2 The questions the court will usually consider in determining an application for security for costs are those set out in [8(a)–(d)] above.3

[10]   Where the party seeking security asserts there is reason to believe a plaintiff will be unable to pay costs if unsuccessful, there must be credible evidence of surrounding circumstances from which that may be inferred.4 That does not amount to proof that the plaintiff will in fact be unable to pay costs. The meaning of the word “satisfied” in r 5.45(1) does not imply any onus or standard of proof but indicates the court has come to a decision on the evidence before it.5 In Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2) the matter was put in this way:6

… there should be credible (that is, believable) evidence of surrounding circumstances from which it may reasonably be inferred that the [party] will be unable to pay the costs. This does not, of course, amount to proof that the [party] will, in fact, be unable to pay them. …

[11]   In terms of the exercise of the court’s discretion, balancing the interests of the plaintiff  and  defendant   is   the  overriding  consideration.    As  summarised  in     A S McLachlan Ltd v MEL Network Ltd:7

[15]   The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the Courts for a genuine plaintiff is not lightly to be denied.

[16]   Of course, the interests of defendants must also be weighed. They must be protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.

[12]   Finally, applications for security for costs should not be allowed to be a tactical weapon which can be abused by a defendant.8 The issue in each case should be whether there is good reason to fear that a costs order might not be satisfied.9

2      A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [13].

3      Busch v Zion Wildlife Gardens Ltd (in rec and in liq) [2012] NZHC 17 at [2].

4      Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2) [1977] 1 NZLR 516 (SC) at 519.

5      Wishart v Murray [2016] NZHC 3132 at [7].

6      Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2), above n 4, at 519.

7      A S McLachlan Ltd v MEL Network Ltd, above n 2.

8      Stills v McCormack [2023] NZHC 702 at [33].

9      Lunn v Fourth Estate Holdings Ltd (1997) 11 PRNZ 316 (HC) at 318.

Is there reason to believe the plaintiffs will be unable to pay the defendant’s costs if their claim is unsuccessful?

[13]   There are several matters relied upon by Tuatara from which it says the inference should be drawn that the Manhires will be unable to pay costs if they are unsuccessful in this proceeding.

[14]   Tuatara says the Manhires failed to, and continue to struggle to, meet the costs of construction of the building. Jordan Frizzell, the director of Tuatara, deposes that as the project progressed it became clear to him that the Manhires were struggling financially, they made several comments to the effect they did not have enough funding for certain aspects of the project and at one point the Manhires’ bank needed to pay Tuatara directly to supply materials that were outside the scope of its contract because the Manhires could not afford to do so. He says he believes the real reason construction has not been completed is the Manhires’ lack of funds.

[15]   Mrs Manhire says they had approved funding for the project and that throughout the build they would provide their bank with Tuatara’s invoices and the bank would pay Tuatara direct. She says this was the arrangement with all of Tuatara’s invoices throughout the build, not just on the one occasion referenced by Mr Frizzell. She says the project was not completed because of the defective works.

[16]   I do not put much weight on Mr Frizzell’s evidence in this regard. He is not specific about comments the Manhires are said to have made and nor is there detail of the circumstances in which they were made. I have no reason to doubt Mrs Manhire’s evidence.

[17]   Next, Mr Frizzell says the Manhires failed to pay Tuatara’s invoice on practical completion, that it has remained unpaid and this has compounded concerns about their financial position and ability to meet costs. However, Mrs Manhire deposes she never received the final invoice, and it appears from the evidence this may well be correct. Furthermore, Tuatara’s final account is genuinely disputed so that its non-payment sheds little light on the Manhires’ finances. This factor does not advance Tuatara’s position.

[18]   The third matter relied upon by Tuatara is that the Manhires have a history of seeking public crowdsource funding. They have sought crowdsource funding:

(a)in relation to a “costly fight with council over home-based car-spray business” on behalf of their son;

(b)for personal use as a result of Mr Manhire suffering a brain haemorrhage in 2018; and

(c)to fund a business known as “ZOFS Karavan Kafé” in 2018.

[19]   Related to this last matter, Tuatara also relies upon the fact that the business ZOFS Karavan Kafé closed in 2022.

[20]   It is submitted on the Manhires’ behalf that the suggestion by Tuatara that there was an “extensive history” of crowdsource funding is an overstatement. For my part, the resort to crowdsourcing to fund personal living costs and support a business that ultimately could not be kept operating reflects that the Manhires have faced financial difficulties. Mrs Manhire acknowledges this in her affidavit when she says:

14. … In 2018, Alan tried to stop a gas station robbery. As a result, he suffered a life-threatening brain haemorrhage. Since then, I have had to support and care for him. I started a give-a-little page as our financial situation was tight at the time, until he was approved for his full ACC payment.

…

16.During its operation, the business faced various adversities such as    my husband being in hospital due to his brain haemorrhage, his ACC claim taking over a year to come into effect, and covid. That is why I started the Pledge Me page. In 2022, I shut the business down as it was not profitable. However, it did not have any outstanding creditors. …

…

20. We do not have capacity to provide security in cash of the amount requested by the defendant. …

[21]   The Manhires’ counsel acknowledges that their only substantial asset is their Mayfield property. It appears they have no savings or investments. This is reflected in counsel’s submissions as follows:

13. As Mrs Manhire deposed in her affidavit, they  do  not  have  the capacity to provide security in cash of the requested amount. In doing so they have disclosed their financial circumstances. The plaintiffs do not own any other assets, except the property subject to these proceedings …

(footnote omitted)

[22]   Tuatara has obtained a registered valuation of the Manhires’ property which puts its market value without the alleged defects at $490,000, but with the alleged defects to be just $300,000. However, while the registered valuer had a report from the Manhires’ building expert as to the nature of the defects, he did not have the report from their quantity surveyor with the latest assessment of the cost of repairs which has greatly increased from the amount sought in the statement of claim. The Manhires have a mortgage secured over their property. I understand the amount owing under the mortgage is $335,125.

[23]   The final matter relied upon by Tuatara is that the Manhires have obtained litigation funding, indicating an inability to fund the litigation themselves. I do not consider it necessarily follows from the fact a party has obtained litigation funding that they are impecunious or will not be able to pay costs if unsuccessful. It is generally thought that a party’s access to litigation funding is a matter to be taken into account when the court is considering the exercise of its discretion to order security rather than in relation to the threshold issue of whether they have the ability to pay costs in the event they are unsuccessful.10 However, Mr Taylor submits (and there is some force in the submission) that, on the facts, the existence of the litigation funder reflects that the Manhires do not have the financial resources for the litigation themselves and this in turn suggests they will be unable to pay costs.

10 Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017 at [22(d)]; Scrapbook Alley Ltd v Chow [2012] NZHC 2395 at [32(d)]; Gold Star Invest Ltd v V [2021] NZHC 334 at [16].

[24]   I am satisfied there is reason to believe the Manhires will not be able to pay Tuatara’s costs if unsuccessful. As a  result  of  unhappy  circumstances,  Mr  and Mrs Manhire have suffered financial difficulties. Mr Manhire is in receipt of accident compensation. They have sought crowdfunding to pay living costs and had to close down a business. It is acknowledged their only substantial asset is their property.  It is a fair inference that the present market value of the property (with defects) may be less than the amount owing under their mortgage. In those circumstances it is difficult to see how they could pay a costs award in this proceeding.

How should the discretion be exercised?

[25]   Tuatara accepts that in determining how to exercise its discretion the Court must balance the interests of the plaintiffs and the defendant as the overriding consideration. However, Mr Taylor submits that most of the factors that are often considered by the Court at this stage of its inquiry do not apply due to the involvement of a third-party funder.

[26]   I was referred to NZ Vee Eight Entrants Group Association Ltd v Petch where the Court said:11

[24] Because VEEGA has received funding from third parties to pursue its claim, I do not give much weight to its submission that an order for security of costs may prevent it from proceeding with its claim against the defendants. VEEGA has refused to disclose the agreements with the litigation funders but neither Mr Fine nor Mr Ross depose that they cannot continue to fund the litigation. In fact, Mr Fine refers to the “strong sentiment” of the funders. Where litigation funders are involved, I am of the view that a Court should also have consideration to the difficulty in pursuing a third party for costs in the event that VEEGA is unable to pay.

[27]I was also referred to the decision of Walker v Forbes, where Lang J said:12

[33] I take a similar approach. The existence of a litigation funder in the present case is an important factor that influences the exercise of the discretion for several reasons. The first of these is that the plaintiffs will not be precluded from continuing with their claims if a significant order for security is made. Furthermore, [the litigation funder] stands to receive most, if not all, of the proceeds of any successful claim. It has no interest in the litigation beyond the profit it hopes to derive from what it clearly regards as a commercial venture. Commercial ventures generally require an investor to take risks and

11     NZ Vee Eight Entrants Group Association Ltd v Petch [2012] NZHC 2350.

12     Walker v Forbes [2017] NZHC 1212.

to incur expenditure as the price to be paid for the chance of success. [The litigation funder] should therefore be required, as a matter of policy, to contribute significantly to the defendants’ costs if the claims are unsuccessful.

[28]   While the evidence of Mr Frizzell on behalf of Tuatara appeared to raise matters challenging the reputation of the funder and its director Mr Staples, Mr Taylor did not advance any arguments concerning those matters at the hearing.

[29]   The Manhires argue that in balancing the interests of the parties it would not be just to make an order for security for costs for several reasons. First, they say their claim is meritorious. In this regard, the Court made consent directions requiring the parties to file expert evidence and for the experts to confer and file a joint experts’ report. The Manhires have filed their evidence, but Tuatara is in breach of the Court’s directions and so no expert conferral has occurred. Mr Clay impressed upon me that the expert evidence before the Court shows that the Manhires have a strong case.

[30]   Related to this, the Manhires argue that insofar as the Court considers they are not able to pay costs if unsuccessful this is due to the conduct of Tuatara. They say any loss in the value of their property, the equity in which would otherwise be available to them to pay costs, is the direct result of Tuatara’s conduct in carrying out the building work in a defective manner.

[31]   The Manhires also argue that Tuatara has delayed in applying for security for costs. The issue of security for costs was raised for the first time by Tuatara’s solicitors in March 2023 when Tuatara considered it had sufficient information concerning the Manhires’ circumstances to pursue an application. Despite that there were no directions sought for the making of an application for security for costs at the first case management conference and the application was not filed until 28 November 2023.13 It is submitted for the Manhires that the proceeding has reached a late stage where discovery is complete, inspection has taken place and there are no other outstanding interlocutory applications. The Manhires submit the courts have noted that applications for security for costs at a late stage in a proceeding will often not be successful.

13     Manhire v Tuatara Structures Ltd HC Christchurch CIV-2022-409-501, 30 May 2023 (minute).

[32]   Reference was made to McGechan on Procedure, where the authors note relevant considerations include:14

(a)Whether the application was made as soon as the defendant became aware, or could with reasonable inquiry have become aware, of the plaintiff’s likely inability to meet costs.

(b)Any needless delay, particularly if designed to prejudice the plaintiff.

(c)Whether, and if so to what extent, the delay has prejudiced the plaintiff. An obvious example is a plaintiff who has expended substantial sums, including in legal costs, to get a proceeding to the brink of trial, only to be met by an application for security, deliberately withheld to the eleventh hour.

[33]   The Manhires also rely upon the evidence of Mr Staples who deposes that there have been tens of thousands of dollars in expert and legal costs paid and there is no explanation as to why the application has been left so late.

[34]   In my view this matter is finely balanced. I accept Mr Taylor’s submission that the fact a litigation funder is involved will influence the exercise of the court’s discretion whether to order security, and generally it will result in the making of an order that security be provided. I particularly note and agree with the comments of Lang J in Walker v Forbes, referred to in [27] above, that a litigation funder with no interest in litigation other than the pursuit of profit should share the risks of having to contribute to a defendant’s costs if unsuccessful. However, there are several factors that, on balance, lead me to the conclusion that security for costs should not be ordered in this case.

[35]   First, I do not accept that the merits of the Manhires’ claim is not a significant factor because there is a litigation funder involved. McGechan on Procedure notes that the merits may still be relevant in these circumstances.15 While in most cases when considering security for costs it will be difficult to assess the merits of a claim and the court will have little more than an impression of where they may lie, here the circumstances are unusual. The Court has ordered (with the parties’ consent) the filing

14     Jessica Gorman and others McGechan on Procedure (online ed, Thomson Reuters) at [HR5.45.03(4)].

15     McGechan on Procedure, above n 14, at [HR5.45.03(6)] citing Saunders v Houghton [2009] NZCA 610, [2010] 3 NZLR 331 at [37].

of experts’ reports. The Manhires have filed their reports. Tuatara has not done so. Tuatara is in breach of the Court’s directions despite being granted an extension of time to comply. On what is before me it appears there are substantial defects in work undertaken by Tuatara and that the cost of repairs will be high. To the extent that I do not have anything from Tuatara’s experts, that is its fault (or the fault of the experts it has engaged). I am satisfied the chances of the Manhires being wholly unsuccessful in the proceeding at trial are remote. That is a factor weighing against the making of an order for security for costs.

[36]   Next, the Manhires are unlikely to be able to pay costs if unsuccessful only because there is no equity in their property due to the defects in the works. There is authority that it may be unjust for a defendant to receive security for costs if its actions, being the subject matter of the proceeding, have caused the plaintiff’s impecuniosity.16 That appears to be the case here.

[37]   It is also the case that Tuatara has delayed in making this application. The delay is both significant and unexplained. As I noted, the possibility of making the application was raised in March 2023 but no application was made until November 2023, by which time the parties had completed discovery, undertaken inspection and, at least in the case of the Manhires, engaged experts and filed reports with the Court. My assessment of the evidence is that while for some of the period of delay the parties’ solicitors were corresponding over disclosure of the funding agreement, there was no reason why the application for security should not have been filed earlier. Mr Taylor accepts that it is generally inappropriate to award security in respect to costs already incurred. Here, the amount of security which is sought substantially consists of sunk costs. This too is a factor which weighs against granting security for costs.

[38]   It follows that in the exercise of my discretion I decline Tuatara’s application for security for costs. It is not necessary in those circumstances for me to go further and consider the issues in [7(c) and (d)] above.

16     McGechan on Procedure, above n 14, at [HR5.45.03(3)].

Disclosure of the funding arrangement

[39]   There is no dispute that the court may order disclosure of a litigation funding agreement. The contest between the parties is as to when it should do so. In the leading case of Waterhouse v Contractors Bonding Ltd the Supreme Court considered the relevance of litigation funding arrangements to certain applications and the circumstances in which there should be disclosure.17 The Court concluded:

[76]We summarise our conclusions as follows:

(a)On the issuing of proceedings that are to be funded by a third party unrelated litigation funder who has no prior interest in the proceedings and whose remuneration is tied to the success of the proceedings and/or who has the ability to exercise some form of control over the conduct of the proceeding, the following details should be disclosed:

(i)the identity and location of any such litigation funder; and

(ii)its amenability to the jurisdiction of the New Zealand courts.

(b)No litigation-sensitive material need be disclosed, including the terms on which funding may be withdrawn. There is no need to disclose details of the financial standing of the litigation funder.

(c)Where an application for a stay on abuse of process grounds is made (or any other application where the terms of a funding agreement may be relevant), then the courts may order disclosure of the litigation funding agreement, subject to redactions relating to confidentiality, and litigation sensitive and privileged matters.

(d)The existence and terms of a litigation funding agreement may be relevant to an application for security for costs and to an application for costs.

…

(f) It is not the role of the courts to act as general regulators of funding arrangements. Nor is it the courts’ role to assess the fairness of any bargain between a funder and a plaintiff.

(footnotes omitted)

17     Waterhouse v Contractors Bonding Ltd, above n 1.

[40]   I was also referred to Chongqing Jinzhiran Jiabocheng Building Materials Co Ltd v Huang, where disclosure of a funding arrangement was sought on the basis that it was necessary for the Court to properly assess an application for security for costs despite the fact the plaintiffs accepted they should pay security and all that was in issue was quantum.18 Associate Judge Andrew found that the terms of the funding agreement were relevant to the issue of quantum and ordered disclosure. The Associate Judge also found that the terms of the agreement might be relevant to whether the proceeding constituted an abuse of process, notwithstanding that there was no application for a stay on this ground before the Court.19 However, that was not the basis upon which the Associate Judge ordered disclosure, as he said:

[32] … However, I agree with Mr Hollyman’s submission that security for costs is a future-looking exercise and if there is an abuse of process or something close to that, because for example of the terms of control by the funder, then the quantum or amount of security required might well be significant. …

[41]   Here, counsel confirmed that Tuatara applies for disclosure of the funding agreement so that it can consider whether to make an application for stay of the proceeding as an abuse. It disavows any need for disclosure in relation to the security for costs application. However, there is presently no application before the Court for a stay of the proceeding and I was not referred to any authority that would suggest it would be appropriate for me to order disclosure of the funding agreement in those circumstances. At the present time the funding agreement is simply not relevant to any application before the Court.

[42]   Mr Taylor has raised some issues with the redactions made to the funding agreement that has been supplied. I understand that recently further disclosure has been made as a result of discussions between counsel. It appears to me that Tuatara is presently able to assess whether there is any basis for it to seek a stay of the proceeding.

[43]   Mr Taylor also notes that the directors and shareholders of the Manhires’ solicitors appear from Companies Office records to be the ultimate shareholders of the litigation funder.  He submits they may be acting with a conflict of interest and there

18     Chongqing Jinzhiran Jiabocheng Building Materials Co Ltd v Huang [2022] NZHC 1035.

19 At [32].

is a concern as to the degree to which the funder may exercise control over the conduct of the proceeding. I am not required to decide whether it is appropriate for the Manhires’ solicitors to act and could not do so on what is before me. However, I note that if those solicitors do have a conflict of interest that can be resolved by them ceasing to act or being ordered to do so, rather than by granting a stay of the proceeding.

[44]   I therefore will not grant Tuatara’s application for disclosure of the funding agreement as there is no extant application before me to which the agreement is said to be relevant.

Result

[45]   The applications for security for costs and disclosure of the funding agreement are dismissed.

[46]   The plaintiffs are entitled to costs on a 2B basis. I do not certify for second counsel. If there is any dispute about the quantum of costs, counsel may file memoranda within 28 days which shall be no longer than six pages and I will decide the matter on the papers.

[47]   This case needs to be progressed to trial. I direct the Registrar to allocate a telephone conference before an Associate Judge within the next three weeks in consultation with counsel. Counsel shall confer and file a preferably joint memorandum of directions required to take the case to trial at least two working days prior to the telephone conference.

O G Paulsen Associate Judge

Solicitors:

Canterbury Legal, Christchurch Wynn Williams, Christchurch