Nicon Limited v Tower Insurance Limited
[2016] NZCA 66
•14 March 2016 at 10 am
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA571/2015 [2016] NZCA 66 |
| BETWEEN | NICON LIMITED |
| AND | TOWER INSURANCE LIMITED STREAM GROUP NZ PTY LIMITED |
| Hearing: | 18 February 2016 |
Court: | Harrison, Fogarty and Toogood JJ |
Counsel: | P B McMenamin for Appellant |
Judgment: | 14 March 2016 at 10 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe respondent is entitled to costs.
____________________________________________________________________
REASONS OF THE COURT
(Given by Fogarty J)
The appellant (Nicon) appeals against a decision of the High Court at Christchurch (Dunningham J) ordering Nicon to give security for costs in the sum of $35,000.[1]
[1]Nicon Ltd v Tower Insurance Ltd [2015] NZHC 2132.
Nicon has operated as a demolition contractor. It has a sole director and shareholder, Mr Giltrap. The first respondent (Tower) is, as its name suggests, an insurance company. The second respondent (Stream) is a company which specialises in managing high volumes of insurance claims and has been retained by Tower to manage earthquake claims on Tower’s behalf.
In 2011, Stream and Nicon entered into an agreement. Nicon was to provide quotes for demolition work on claims managed by Tower, to be allocated by Stream. Nicon says this agreement was a contractual commitment to appoint Nicon as the preferred contractor, creating an obligation on Stream to offer to Nicon all the demolition work for which Nicon had provided assessments. Stream and Tower dispute this. They say it was a good faith agreement but did not impose obligations. Nicon has sued for damages. In the first cause of action it seeks damages for loss of demolition work of $5,135,670. In the second, for loss of fees to provide further demolition quotes of $390,000.
The pleading does not support precisely how the larger claim is made up. It is agreed that no principal documents, required by r 8.4 of the High Court Rules, were filed with the pleadings. These must exist given the precision of the sum claimed.
Application for security of costs
Both Tower and Stream applied to the High Court for security of costs, a stay of proceedings and for further and better particulars of claim. The application pleaded a number of grounds, from which we select those which are relevant to the issue on this appeal:
2.1The sole director of the plaintiff is resident out of New Zealand.
2.2There is reason to believe the plaintiff no longer trades and will be unable to pay the costs of the defendants if the plaintiff is unsuccessful in the pleadings.
...
2.3.6The plaintiff advised the defendants in October 2012 that it was quitting the demolition market in Christchurch.
...
2.5There is nothing in heads of agreement or plaintiff’s action which supports its loss of profits claim in excess of $5m. No basis for this calculation has been pleaded and no relevant initial disclosure has been provided, nor have particulars been provided on request.
Mr Norriss, the former Chief Executive of Stream, and now a consultant to Stream, filed an affidavit deposing that the sole director and shareholder of Nicon, Mr Giltrap, had advised Stream that Nicon was ceasing demolition operations in Christchurch. He also says that Mr Giltrap contacted Stream in late 2015 and advised he was living in Vanuatu and had a boat yard.
This affidavit evidence is hearsay. Mr Giltrap did not speak directly to Mr Norriss. It is also multiple hearsay because Mr Norriss was relying upon information passed within Stream and from a company, Stonewood.
Nicon’s notice of opposition did not directly respond to the application. It did not deny that Mr Giltrap was resident out of New Zealand. It did not deny that Nicon had advised the defendants in October 2012 that the company ceased trading in October 2012, a time which coincides with the pleading at paragraph 15 of the statement of claim that the request by Stream for Nicon to provide quotes was between February 2011 and September 2012.
Notice of opposition
The appellant filed an affidavit by Mr NJK Lay, the principal purpose of which was to attach a statement of financial position as at 31 March 2015 and a schedule of fixed assets and depreciation schedule for the same date. In his brief, Mr Lay says he is an accountant who has prepared the annual accounts for Nicon since 2010.
Mr Lay deposes that the statement of financial position shows that the company has assets to the value of $544,619 and liabilities of $57,177 for a net position of $487,442. He believes these accounts accurately reflect the current state of the company.
Nicon ran two principal arguments before the High Court. First, that Mr Norriss’ evidence was inadmissible hearsay. Second, even if his evidence were admitted, it would not prove Nicon would be unable to pay and the Court should rely on evidence from Nicon’s company accounting, in particular the balance sheet for the year ended 31 March 2015 showing the net asset position of the company being $487,442.00.
Dunningham J in the High Court admitted the hearsay evidence under s 18 of the Evidence Act 2006 because she considered it reliable in the circumstances and Mr Giltrap was unavailable as a witness.
Argument on appeal
Mr McMenamin’s argument before us was a traditional argument against allowing hearsay evidence, reinforced as being double hearsay as Mr Norriss was reporting on information received within Stream and from Stonewood.
In making this argument, we think Mr McMenamin has overlooked that the maker of the hearsay statement is his client: the other party to this litigation. Limited liability companies can only act through their directors and this company has only one director, Mr Giltrap. The rule against hearsay is directed to avoid the mischief of a party not being able to test the evidence of the maker of the prejudicial statement. Here the maker is the plaintiff’s sole director.
Evidence in interlocutory hearings
Dunningham J pointed out that in an interlocutory hearing on commercial matters it is commonplace for the rules of evidence to be stretched to receive practical information enabling fair and efficient pre-trial judgments to be made; this practice accords with the desirable object of lessening cost, delay and inconvenience.[2]
[2]At [28], citing Bell v John Holland Properties (New Zealand) Ltd (1990) 3 PRNZ 536 (HC) at 538; and Makin v Hayward (1991) 5 PRNZ 139 (HC) at 141-142.
Mr McMenamin relied heavily upon the decision of Thomas J in the High Court in New Zealand Kiwifruit Marketing Board v Maheatataka Cool Pack Ltd.[3] That case related to the loss of kiwifruit which had been frozen instead of chilled. Dobsons Refrigeration, as the third party to the proceedings, sought security for costs against the defendant. The defendant’s solicitors had told them that their client’s future financial viability would be jeopardised should the proceedings not be dealt with expeditiously. Thomas J declined security for costs due to inadequate evidence of the defendant’s ability to pay. Importantly to this case, he also observed:[4]
But I at once allow that there may be cases where the circumstances are such that it would be reasonable to expect a response from the plaintiff, or the defendant in a case where the third party is the applicant, and the failure to provide any information could properly give rise to an inference which, perhaps added to other factors, could provide the Court with reason to believe that the party would be unable to pay costs in the event of it being unsuccessful.
[3]New Zealand Kiwifruit Marketing Board v Maheatataka Cool Pack Ltd (1993) 7 PRNZ 209 (HC).
[4]At 211–212.
The relevant threshold requirement for an order for security for costs in the present case is set out in r 5.45(1)(b):
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.
Where a procedural rule requires a finding of fact on the probabilities, the law of evidence will apply directly, and so the law as to hearsay and exceptions to hearsay will apply. But here the test does not require a finding of fact on the probabilities that the plaintiff will be unable to pay the costs — rather, “reason to believe” is sufficient.
Furthermore, an order for security for costs requires an assessment by the Judge as to the ability of a party to pay and whether an order would prevent a meritorious claim being advanced. The Court of Appeal in McLachlan v MEL Network Ltd said:[5]
[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.
[5]McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA).
When determining whether the threshold requirement of “reason to believe” (r 5.45(1)(b)) or the standard “is just in all the circumstances” (r 5.45(2)) is met, the Court is not required to make findings of fact according to law. It follows that the findings of fact made in respect of these standards are not sufficient to create an issue estoppel between the parties.
It follows from our discussion that it is an error of law to refuse to admit reasonable commercial indicators as establishing a reason to believe on the grounds that they rely on hearsay statements. It was not necessary for Dunningham J to receive the evidence by applying s 18 of the Evidence Act, though we agree that the requirements of the section can be satisfied, as set out below.
We are satisfied that Stream did have reason to believe from October 2012 that Nicon had ceased trading and that Mr Giltrap, its sole director and shareholder, was now residing overseas; in these circumstances, there was reason to believe that Nicon will be unable to pay costs. Having rejected Mr McMenamin’s hearsay argument, we do not have to address Mr McMenamin’s submission that in the absence of any admissible evidence raising doubt about his client’s ability to pay, his client is not obliged to provide any financial information.
Application of s 18 of the Evidence Act
In any event, we agree that Dunningham J was correct to admit the hearsay evidence by applying s 18 of the Evidence Act, which provides:
18 General admissibility of hearsay
(1) A hearsay statement is admissible in any proceeding if—
(a)the circumstances relating to the statement provide reasonable assurance that the statement is reliable; and
(b) either—
(i)the maker of the statement is unavailable as a witness; or
(ii)the Judge considers that undue expense or delay would be caused if the maker of the statement were required to be a witness.
(2) This section is subject to sections 20 and 22.
(Sections 20 and 22 do not apply in the present case.)
The Judge held:
[29] I am satisfied that in this case, s 18(1)(b) is met. To ensure no element of hearsay, the defendants would have had to subpoena Mr Giltrap himself to give evidence. Whether or not he is in Vanuatu, it would be entirely unreasonable to put the defendants to that trouble when he is represented by counsel, and could file his own affidavit evidence if he took issue with those statements. Indeed, as Mr Forsey reminded me, the reason for giving the plaintiff four weeks in which to file any affidavit evidence in opposition to this application was because Mr Giltrap was overseas and additional time was required.
[30] For exactly the same reasons I do not consider it was reasonable to require Mr Bryce Edwards (who now apparently no longer works at Stonewood) to be required to give separate affidavit evidence of his hearsay statement nor to require the individual or individuals within Stream to give their own evidence repeating the hearsay statement of Mr Giltrap. I consider that the cost, delay and inconvenience involved in obtaining affidavits from those deponents, when it would still amount to hearsay evidence, would be out of proportion to the reasonable necessities of this case.
[31] In any event, I am satisfied that the circumstances relating to the making of these statements provide reasonable assurance that the statements are reliable. First, Mr Norriss occupies a senior position within Stream. There is nothing to suggest that he is motivated to inaccurately relay the communications Stream staff have had with Mr Giltrap. Furthermore, they are consistent with the factual evidence before the Court. These include that Nicon ceased carrying out assessments and providing quotes to Stream at the end of September 2012. This is entirely consistent with the advice Stream received in October 2012 that Nicon was ceasing demolition operations in Christchurch. It is also consistent with the fact that the statement of assets of the company show that, by early 2014, the company no longer owned the digger and truck it said it acquired for $290,000 for the purpose of undertaking this work. It is also consistent with the request by Nicon’s counsel for four weeks in which to complete affidavit evidence because his client’s director was overseas.
[32] For all these reasons, I am satisfied that the hearsay evidence as to Mr Giltrap’s intentions for the company is admissible under s 18. It is also evidence the company is no longer trading and has not been since late 2012, so I am satisfied there is reason to believe the company will be unable to pay its debts.
We respectfully agree with Dunningham J’s analysis. Stream had established reasons to believe that Nicon would be unable to pay a costs award because:
(a)Mr Giltrap, Nicon’s sole shareholder and director, is resident overseas;
(b)Nicon does not appear to be trading;
(c)Nicon’s asset base is comprised solely of old plant of questionable value; and
(d)Mr Giltrap has failed to swear an affidavit in answer to these compelling circumstances.
Relief
We dismiss the appeal.
On the findings made in this Court, Nicon’s solicitors were in error of law in their appreciation of the nature of the “reason to believe” standard, being the threshold requirement for an order for security for costs. As a result, we consider there is a very real danger that the plaintiff’s solicitors have missed the opportunity to examine more realistically the need for a costs order in favour of the defendants in the sum of $35,000. Leave is reserved to apply to the High Court to vary or split that sum if the trial proceeds on liability alone in the first instance.
Costs
The respondent is entitled to costs.
Solicitors:
K J McMenamin & Sons, Christchurch for Appellant
Duncan Cotterill, Christchurch for Respondent
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