McLachlan v Mel Network Ltd

IN THE COURT OF APPEAL OF NEW ZEALAND

CA39/02

BETWEEN	A S MCLACHLAN & OTHERS
Appellants

AND	MEL NETWORK LIMITED
Respondent

Hearing:	20 August 2002
Coram:	Gault P Paterson J Priestley J
Appearances:	R J Asher QC for Appellants P W David and A E Ferguson for Respondent
Judgment:	29 August 2002

JUDGMENT OF THE COURT DELIVERED BY GAULT P

This is an appeal by Mr A S McLachlan and others against a judgment of the High Court at Auckland delivered by Potter J on 11 February 2002 in which she ordered the appellants to provide security for the costs of MEL Network Limited (Network). Network is the first defendant in substantive proceedings in which Mr McLachlan and others are plaintiffs.

The underlying dispute

Mercury Geotherm Limited (Geotherm) was formed as a joint venture between Mr McLachlan together with his companies and trusts (the McLachlan interests) and Mercury Energy Limited now Vector Limited, (Mercury) to develop and operate a geothermal power station on the McLachlan farm land near Taupo. The McLachlan interests transferred nearly all their assets into the joint venture. In return they received cash and shares in Geotherm. They originally held 48.84% of Geotherm. As the result of Mr McLachlan’s need for further funds, in two transactions he transferred 3 million shares in Geotherm to Network in consideration of payments totalling $1.7m. The plaintiffs’ shareholdings were thus reduced to 34.9%. They were given the option to buy back those shares at the amount paid for them by Network.
The underlying dispute between the parties arose out of difficulties in obtaining and continuing project funding. Potter J summarised the relevant facts as follows:
While the intention of the parties as expressed in the documentation was that Westpac Bank would finance the project on a long-term basis, ultimately funding was provided by Mercury through Network. Construction of the power station and development of the project greatly exceeded budget. Network was not prepared to continue funding the project. It made demand of the plaintiffs for $80m relating to the costs of completing and commissioning the power station and purchasing equipment. Formal demand was issued in August 1998. When it was not met, Network sought to appoint receivers. This prompted an application by Mr McLachlan for an injunction to prevent the appointment of receivers. The application was heard and determined by Williams J who issued two judgments on 16 November 1998 and 9 December 1998. In the first judgment he allowed time for the McLachlan interests to purchase Geotherm’s assets. When that was not achieved he declined the injunction in the judgment of 9 December 1998. Receivership followed promptly. In 1999 Geotherm’s assets were sold by the receivers to Contact Energy Limited for $50,500,000.
It is the plaintiffs’ case that decisions taken by Network in relation to the joint venture were financially disastrous for the joint venture and that the “in-house” financing of the project by Mercury through Network and the subsequent enforcement of the debenture and appointment of the receivers resulted in the losses which the plaintiffs now claim.

The substantive proceedings

Arising out of this there are two sets of proceedings. The first alleges pre-contractual misrepresentations claimed to be made by Network prior to the McLachlan interests entering into the joint venture agreement, breaches of the joint venture agreement and breach of fiduciary duties. Network counterclaims for unpaid option fees in respect of the share option agreement already referred to. In the second set of proceedings Mr McLachlan claims under s174 Companies Act 1993 that Network has conducted the affairs of Geotherm in a manner that is oppressive, unfairly discriminatory and unfairly prejudicial to the minority shareholders.

The High Court application

In the High Court it was common ground between the parties that the McLachlan interests are impecunious and if unsuccessful are unlikely to be able to meet the defendants’ costs. Therefore it was conceded that the threshold test for an order for security for costs pursuant to High Court r60 was met. The parties further agreed that the case was a complex commercial one which will require lengthy preparation and hearing time. The Judge identified significant conflicts in the affidavit evidence. She noted that the Court would need to hear and consider all the relevant evidence including expert evidence before it would be in a position to determine the merits of the plaintiffs’ claims. She acknowledged the difficulty for the Court to assess the merits of the plaintiffs’ claims at this stage of the proceedings.
The Judge referred to the applicable principles governing the discretion to order security for costs citing Bell-Booth Group Ltd v Attorney-General (1986) 1 PRNZ 457 and Nikau Holdings Ltd v Bank of New Zealand (1992) 5 PRNZ 430. She went on to canvass the submissions for each party. For Network, counsel submitted that the plaintiffs’ claims were weak and further that they had not presented any evidence linking their impecuniosity with the conduct of the defendants. In support Network pointed to the decisions of Williams J, particularly his judgment of 16 November 1998 on the interim injunction application brought by Mr McLachlan to prevent Network appointing receivers of Geotherm’s assets. It was submitted that the grounds relied upon then (and rejected by Williams J) were essentially the same as those currently pleaded in the fourth amended statement of claim.
In opposition to the application counsel for the plaintiffs placed heavy reliance on a recent third party discovery by Vector, parent company of Network, submitting that this discovery significantly enhanced the Court’s ability to assess the merits of the plaintiffs’ claims. Mr McLachlan had filed an extensive further affidavit directed to the actions of Network in relation to the joint venture and the McLachlan interests. He contended that had Network not elected to treat with Contact Energy for the supply of steam rather than proceed with an agreed drilling programme, and had Network not adopted a strategic plan to divest generation plants including the McLachlan power station in a manner prejudicial to the joint venture partners, the plaintiffs would not be in the impecunious position in which they now find themselves.
Having reviewed the evidence, Potter J concluded that the plaintiffs’ claims were not strong. She agreed with the defendants that the statement of claim and the arguments presented by the plaintiffs in opposition to the application for security for costs largely reproduce the matters considered by Williams J on the application for injunction. The Judge added that the exhibited information produced by Vector on third party discovery did not suggest that there was new material that would convince her to take a different view of the merits. She concluded:
But even if the evidence in relation to the Mercury strategic plan had been entirely new it would not have persuaded me that the merits of the plaintiffs’ case should be viewed in an entirely new light. Any inferences the Court may eventually draw from the evidence, including the evidence concerning the Mercury strategic plan and its relevance in relation to developments concerning Geotherm, may properly and fairly be drawn only after the Court has had the opportunity to hear full evidence in the case and to consider these aspects in a context of the whole picture. It is too early by far for the Court to draw conclusions or even assessments, on whether the commercial venture in which the parties became involved pursuant to the joint venture agreement was one which proved with the benefit of experience not to be viable or whether in fact Network acted to the detriment of the McLachlan interests as the plaintiffs claim. At this stage, I am not satisfied that the link for which the plaintiffs contend, between their impecuniosity and the actions of Geotherm, has been established as a reasonable probability.
I conclude therefore that the first defendant is entitled to security for costs. While the plaintiffs are clearly entitled to bring and pursue their claim it is an inevitable consequence that the defendants will be involved in the cost of defending which in the circumstances of this case, given the complexity of the causes of action and the factual situation, will be time consuming and expensive. If ultimately the plaintiffs are unsuccessful then the first defendant is entitled to be protected for its costs.
Balancing all the relevant factors and considering that the successful party would claim costs on a category 3C basis, the Judge ordered security in the sum of $250,000.

Submissions

For the appellant Mr Asher QC made a number of criticisms of the findings of Potter J. In particular he submitted that the Judge erred in adopting the statement made by Williams J concerning the strength of part of the appellants’ case. This alleged error was said to be compounded by the Judge’s failure to give sufficient weight to the newly discovered evidence in relation to Mercury’s strategic plan. He argued that the Judge’s approach was contradictory in that she recognised the difficulty in assessing the merits of a complex commercial case but then went on to conclude that the plaintiffs’ claim was weak. In relation to the Judge’s findings as to the cause of the plaintiffs’ impecuniosity, Mr Asher submitted that there was ample evidence on which to justify a conclusion of causation in the context of an application for security for costs. He was also particularly critical of the Judge’s apparent acceptance that Mr McLachlan received $12.7m cash as well as shares in Geotherm. He argued that this submission was unsupported by the evidence.
In the event that the Court refuses to overturn the decision to order security for costs Mr Asher submitted that the quantum of security is too high and might well have the effect of preventing the litigation from proceeding.
In reply Mr David sought to emphasise the nature of the appeal, being one against the exercise of a discretion. He submitted that Potter J clearly formed her own opinion on the basis of the evidence and simply expressed a view on it which accorded with that of Williams J. Counsel submitted that her findings were plainly open to her on the evidence and that there was therefore no basis on which an appellate court could interfere. He accepted that there was no basis for contending that the McLachlan interests received $12.4m in cash, the unavailability of which needed to be explained. He submitted, however, that it was open to the Judge to conclude that no link was established between the admitted pecuniosity of the McLachlan interests and the alleged actionable conduct of the defendants. He referred to sums totalling $2.4m paid to Mr McLachlan. These were the funds paid in 1996 and 1997 on the two transfers of shares referred to in para [2] amounting to $1.7m. There was also $700,000 of the moneys paid initially on the establishment of the joint venture which counsel said were not “accounted for”. He argued that because the unavailability of this sum of $2.4m could not be linked to the alleged conduct of the defendants, it could not be said that the impecuniosity of the McLachlan interests was so linked.

Decision

Rule 60(1)(b) High Court rules provides that where the Court is satisfied, on the application of a defendant, that there is reason to believe that the plaintiff will be unable to pay costs if unsuccessful, “the Court may, if it thinks fit in all the circumstances, order the giving of security for costs”. Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing “principles” from the facts of previous cases.
While collections of authorities such as that in the judgment of Master Williams in Nikau Holdings Ltd v Bank of New Zealand (1992) 5 PRNZ 430, can be of assistance, they cannot substitute for a careful assessment of the circumstances of the particular case. It is not a matter of going through a check list of so-called principles. That creates a risk that a factor accorded weight in a particular case will be given disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.
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.
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.
In this case evidence and argument were directed to whether the likelihood that the McLachlan interests would be unable to meet an award of costs could be causally linked to the alleged conduct for which remedies are claimed. It is, of course, open to the Court to order security for costs whether or not such a link exists. Potter J indicated in her judgment that if she had been satisfied of the linkage, that would have justified some reduction in the amount of the security ordered. It is not entirely clear from her judgment why she found the link “has not been established”. That conclusion is preceded by a passage in which she said it is too early to tell whether the joint venture was not viable or whether Network acted to the detriment of the McLachlan interests. This suggests that the link was not established because the McLachlan interests had not shown that their claims are sustainable. If that is what was intended, linkage could not be established until after trial and investigation on an application for security would be pointless.
If the Judge reached her view in the belief that the McLachlan interests had received $12.4m which was unaccounted for she presumably would have questioned the concession for the defendants of impecuniosity.
Mr David’s argument that the Judge’s conclusion could be justified because of the amounts totalling $2.4m that were not shown by the McLachlan interests to be unavailable seemed initially to be a challenge to what he had conceded. He emphasised, however, that his submission was that because the unavailability of these moneys (for whatever reason) could not be linked to the alleged conduct of Network, it could not be said that the McLachlan interests’ acknowledged impecuniosity was linked to Network’s conduct. There is, in fact, evidence of the application of these moneys, but in any event, this argument seems to reflect too narrow a view. Almost all the assets of the McLachlan interests were invested in the project. The claims are that its failure and the loss of opportunity to benefit from that investment resulted from the alleged actionable conduct of Network. That is a factor to be weighed in considering the application by network for security for costs. That the McLachlan interests may have spent money on other things seems irrelevant in the circumstances.
Before leaving this point we simply note that in expressing her conclusion as she did (‘the link … has not been established as a reasonable possibility”) the Judge has given the impression of imposing a burden of proof on the plaintiffs and setting a high test. The authorities reviewed by Eichelbaum J in Weld Street Takeaways & Fisheries Ltd v Westpac Banking Corpn [1986] 1 NZLR 741, 743 indicate both are open to question.
The second principal ground on which the judgment was challenged relates to the assessment of the merits of the McLachlan claims. We do not find in Potter J’s judgment a basis for the contention that she adopted the assessment of Williams J in his judgment on the earlier interlocutory injunction application. But even if she had done that, we would not find that inappropriate in this case. On the application for security for costs there were placed before the Judge the same extensive affidavits and even more extensive exhibits as had been before Williams J. In that situation, on another interlocutory application, we can see no objection to the Judge relying on the earlier assessment of the apparent strength of the claims appearing from the affidavits. At best, in such a complex matter, assessment at the interlocutory stage can be no more than impression and cannot be a definite indicator of the ultimate outcome after trial. Williams J had reviewed the evidence then available and had written a lengthy judgment on his assessment of it. It would have been quite reasonable (as Mr Asher accepted) for the Judge on the application for security to focus on any additional evidence and argument that might present a case different to that previously considered. In fact there was further evidence but Potter J determined it did not raise significantly new issues.
It was submitted that, to the extent that the Judge adopted the views of Williams J, she misunderstood his judgment. Whereas she concurred with his assessment of the “non-financial matters” that the plaintiffs’ case, while not baseless is not strong, she overlooked the view reached on the “financial matters”. It was said Williams J found greater strength in the claim that Network had exercised its powers under its debenture in an arbitrary way inconsistent with its obligations under its joint venture partners. It is correct that Williams J saw “some force” in the submission to this effect and Potter J did not refer to that. But we note that Williams J discharged the interim injunction restraining the appointment of receivers after a short period.
We have read the evidence and considered the claims in the light of the submissions of counsel. Like the Judges in the Court below, we find the claims lacking in specificity. That was said by Mr Asher to be a consequence of all matters being within the knowledge of Network and related companies to which access will be obtained only after discovery. We can accept that only up to a point. In the lengthy background to this matter there has been some discovery by the parent company of Network (the subject to the lengthy affidavit of Mr McLachlan sworn on 30 November 2001) and, before that, opportunity for revision of pleadings resulting in a long fourth amended statement of claim. We are mindful also that throughout Mr McLachlan was a director of the joint venture company and, it would seem, party to some of the decisions he now challenges.
One aspect, not addressed in the judgments in the High Court and acknowledged by Mr Asher to have had little attention to date, is the likelihood of recovery of significant damages should the McLachlan interests make out the breaches they allege. We can find no foundation in the evidence for likely recovery for other than loss of a chance. There is no basis for assessing what might have been the position of the McLachlan interests had Network not breached its obligations as alleged. We cannot speculate on what the state of the joint venture now would be, who would own the shares, what would be their value, what dividends it would be paying. Financial modelling done on assumptions that may or may not have been justified are no satisfactory guide. The impact of such major factors as the changed structure of the electricity industry, issues of resource consents, and the availability of continuing assured steam resources cannot be estimated by the Court. It is sufficient to say that the McLachlan interests face very significant evidential burdens not yet addressed.

On the causes of action presently pleaded, we agree with both Williams and Potter JJ that it is not possible to form any firm view of the merits of the claims. We can however, as they did, form impressions on the basis of the material presently before us. We find ourselves similarly unconvinced that the claims are strong. Certainly they cannot be regarded as baseless or totally lacking in merit. We note that in the interlocutory injunction proceedings Network accepted there were serious questions to be tried. Some might be given real strength by discovery of Network’s documents.
We think it would be harsh on a joint venture partner in proceedings alleging that conduct of the other joint venture partner led to failure of the joint venture, to make an order so onerous as to likely prevent the matter going to the stage of inspection of documents. After that, a realistic evaluation of the merits should be possible. At that point the interests of the defendants may well warrant greater emphasis. Until then, we consider that the order made, particularly as it takes no account of the link between the alleged conduct of Network and the impecuniosity of the McLachlan interests, goes further than is necessary at the present time.
The amount of security is not necessarily to be fixed by reference to likely costs awards: National Bank of New Zealand Ltd v Donald Export Trading Ltd [1980] 1 NZLR 97, 103. It is rather to be what the Court thinks fit in all the circumstances.
Potter J favoured a staged approach – she ordered the security to be given in the amount of $150,000 within a month of her judgment with the balance of $100,000 two months prior to trial. We think that approach is appropriate. However, rather than attempting now quantification for the litigation as it may develop after discovery, we prefer that to be left until the case is better focussed. Network should then be at liberty to apply again. What is then required should more easily be assessed. On the other hand, should it transpire that the claims are not clearly defined, or if Network and the other defendants face a trial in which the plaintiffs’ case is to be presented by Mr McLachlan in person (as has been hinted at) with the risk that it will be unfocussed and prolonged, any order will be able to take those matters into account.
Accordingly, conscious as we are that Potter J as the Judge assigned to this litigation is fully familiar with the background in this and related proceedings, and conscious as we are that we are interfering with the exercise of a discretion, we are disposed to allow the appeal and vary the order made.
Security in the sum of $50,000 is to be given within one month of the delivery of this judgment. The proceedings are stayed until that security is provided. Thereafter the defendants should promptly make discovery. Within three months of having completed discovery the defendants may apply for further security. Any party may apply to the High Court for directions.
The appellants are entitled to costs in this Court which we fix at $5,000 together with disbursements approved, if necessary, by the Registrar. The order for costs in the High Court stands.

Solicitors
Edwards Clark Dickie, Auckland, for Appellants
Wilson Harle, Auckland, for Respondent

[2002] NZCA 215

29 August 2002