Nicon Limited v Tower Insurance Limited
[2015] NZHC 2132
•4 September 2015
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2015-409-111 [2015] NZHC 2132
BETWEEN NICON LIMITED
Plaintiff
AND
TOWER INSURANCE LIMITED First Defendant
AND
STREAM GROUP NZ PTY LIMITED Second Defendant
Hearing: 31 August 2015 Appearances:
P McMenamin for the Plaintiff
J Forsey for the First and Second DefendantsJudgment:
4 September 2015
JUDGMENT OF DUNNINGHAM J
[1] This is an application by the defendants for security for costs and a stay of proceeding. It is brought because the defendants say that the plaintiff’s claim is unmeritorious, and there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if it is unsuccessful in this proceeding.
Background
[2] The plaintiff (Nicon), was a demolition contractor undertaking demolition and site clearance of earthquake damaged houses in Christchurch.
[3] The second defendant (Stream), is a company which specialises in managing high volumes of insurance claims, and has been retained by the first defendant
(“Tower”) to manage earthquake claims on Tower’s behalf.
NICON LIMITED v TOWER INSURANCE LIMITED [2015] NZHC 2132 [4 September 2015]
[4] In February 2011, Stream and Nicon signed a document entitled “Heads of Agreement”. It set out certain arrangements between Stream and Nicon for the provision of quotes by Nicon for demolition work on claims managed by Tower, and which would be allocated by the Stream management team.
[5] The parties diverge strongly on the effect of this document. Nicon says that this was a contractual commitment to appoint Nicon as the “preferred contractor” and it created an obligation on the defendants to offer Nicon all the demolition work for which it had provided assessments. Nicon says it provided quotes for the demolition and clearance of 1,406 properties in Christchurch, but only was offered demolition work on 186 properties. It claims lost profit on the remaining
1,220 properties it provided quotes for, which it says totals just over $5,000,000.00.
[6] The defendants, on the other hand, dispute that the Heads of Agreement created any binding contractual commitments on the parties. They note that the obligation recorded in the document is simply to “act in good faith to meet all intended objectives and outcomes of this agreement”, rather than be bound to meet them. In any event, they say;
(a) Nicon dramatically overstates how many demolition quotes it provided, saying only 683 properties were quoted for by Nicon;
(b)Demolition tenders were awarded to Nicon in accordance with the intentions recorded in the Heads of Agreement;
(c) Nicon was awarded the work for 196 demolitions, which was the highest number awarded to any one contractor; and
(d)42 per cent of the properties that Nicon provided quotes for did not proceed to demolition in any event, for a number of reasons including that the claim was cash settled, or that a repair option was elected.
[7] In the alternative, Nicon claims that, by letter dated 21 July 2011, it stipulated as a condition for carrying out the task of providing further demolitions quotes, that
it should be paid a fee of $350.00 plus GST. It says the defendants should be held to have accepted that term and contracted for payment of the fee when they commissioned a further 1,114 assessments and quotes from Nicon. The damages claimed under the second cause of action total just under $390,000.00.
[8] Again, the defendants strenuously deny that an agreement was reached to pay the fee requested. They say the letter from Nicon is simply a proposal which was never accepted. That is supported by the fact that at no stage after sending the letter did Nicon deduct the fee from completed demolitions, or purport to invoice for it. The defendants therefore deny that there is any obligation to make that payment.
[9] It is in those circumstances, that the application for security for costs arises.
The legal principles applying to application for security for costs
[10] Applications for security for costs are governed by r 5.45 of the High Court
Rules. The relevant part of that reads:
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.
…
[11] The principles to be applied in determining whether an order for security for costs should be made are well settled. In this case the Court must first determine whether 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 proceeding. If this threshold test
is met, the Court will then go on to consider whether to exercise its discretion to order security.1
[12] The Court therefore has a discretion both as to whether to make an order for security for costs and also in respect of the amount of such security. There is no burden of proof or predisposition one way or the other.2 Rather, it is a discretion the Court will exercise having regard to all the circumstances of the case.3
[13] The interests of both the plaintiff and the defendants must be considered. The Court should not allow the rule to be used oppressively to deny a plaintiff with limited means of the ability to bring his case before the Court. On the other hand, an impecunious plaintiff must not be allowed to use its inability to pay costs to act oppressively or to place unfair pressure on a defendant. Overall, a balancing of a number of factors is required.
[14] Bearing these principles in mind I turn to the current application.
The application
[15] The application is supported by affidavit evidence by Mr David Norriss, who was formerly the Chief Executive of, and is now a consultant to, Stream. He is authorised by both defendants to swear affidavit evidence in support of the application.
[16] In his affidavit he deposes that Mr Giltrap, the sole director and shareholder of Nicon, advised Stream that Nicon was ceasing demolition operations in Christchurch because the business was low on work and not making any money. He also says that Mr Giltrap contacted Stream in late January 2015 and advised that he lived in Vanuatu and had a boat yard. Furthermore, Mr Bryce Wilson, who worked at Stonewood Homes Ltd, the company which introduced Nicon to Stream, also advised Mr Norriss that Mr Giltrap now resides in Vanuatu and that he operates a
boat charter business there.
1 Lunn v Fourth Estate Holdings (1997) 11 PRNZ 316 (HC).
2 Nikau Holdings Ltd v Bank of New Zealand (1992) 5 PRNZ 430 (HC).
3 National Bank of New Zealand Ltd v Donald Export Trading Ltd [1980] 1 NZLR 97 (CA).
[17] Mr Norriss annexes correspondence to his affidavit from Stream’s solicitors to Nicon, sent on 24 March 2015 and 8 May 2015, which flagged their concerns about Nicon’s ability to meet costs and warned that a formal application seeking security for costs would proceed in the absence of a response to those concerns. No response was received to address the defendants’ concerns about Nicon’s ability to meet costs. He also gives evidence to support the statement of defence filed to the claim, including on the matters set out at [6] above.
[18] It is on the combination of those factors that Mr Norriss deposes to his belief that Nicon is impecunious and is unlikely to be able to pay the defendants’ costs if Nicon is unsuccessful.
[19] Nicon opposes the application, asserting that there is no reason to believe Nicon would be unable to pay the costs of the defendants. More specifically, Nicon says:
(a) Mr Norriss’ evidence as to Mr Giltrap’s intentions for Nicon comprise hearsay statements which are inadmissible in that they do comply with the requirements of s 18 of the Evidence Act 2006, nor r 9.76 of the High Court Rules.
(b)Even if the assertions were admitted in evidence, they would not amount to evidence that Nicon would be unable to pay, particularly when Nicon has filed evidence from Mr Michael Lay, Nicon’s company accountant, who produces the balance sheet of the company for the year ending 31 March 2015 which shows that the net asset position of the company is $487,442.00.
[20] There are then two issues to determine in deciding whether the threshold test in r 5.45 is met:
(a) Should the hearsay evidence of Mr Norriss be admitted?
(b)If it is, and it is considered to support the application, does the evidence of Mr Lay rebut it?
Is the threshold test met?
Admissibility of evidence of Mr Norris
[21] The evidence which the defendants rely on is contained in the affidavit of David Norriss dated 20 May 2015. In it he reports that, in October 2012, Mr Giltrap, the plaintiff’s director, “advised Stream that he intended for Nicon to cease demolition operations in Christchurch” and “was low on work [and] not making any money”, and that in late January 2015 Mr Giltrap “contacted Stream and advised that he lived in Vanuatu and had a boat yard”.
[22] He also records that:
I have also been advised by Mr Bryce Wilson formerly of Stonewood Homes that Mr Giltrap now resides in Vanuatu and that he operates a boat charter business.
[23] Mr McMenamin argued that all of these statements are plainly hearsay, as the statements which Mr Giltrap is alleged to have made were not made to Mr Norriss personally, but rather to third parties. It is this factor which Mr McMenamin suggests makes them hearsay statements.
[24] However, they would also be hearsay statements even if they were made to
Mr Norriss himself, as a hearsay statement is defined as:4
… a statement that-
(a) was made by a person other than a witness; and
(b) is offered in evidence at the proceedings to prove the truth of its contents.
[25] Here, Mr Giltrap who made these statements is not a witness in these proceedings. However, the defendants are relying on the content of those statements
being true to support the assertions that the company is no longer trading and its sole
4 Evidence Act 2006, s 4.
director and shareholder no longer resides in New Zealand, and there is, therefore, a risk that the company will not be able to meet the cost of this proceeding if it is unsuccessful. Thus, whether Mr Norriss deposed that the statements were made to him directly, or via a third party, they are still hearsay statements.
[26] The real issue is whether the evidence is admissible under s 18(1)(a) of the
Evidence Act. That subsection provides:
(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.
[27] Mr McMenamin argues that there is no attempt to meet the requirements of s 18 and these statements cannot be admitted in evidence. Specifically he says the evidence is “remarkable for the lack of detail”. There is no evidence as to when the statements were made, the form which they took, nor why whoever imparted the information to Mr Norriss is unavailable as a witness.
[28] Before discussing the specifics of this affidavit, I note that it has long been held that rules permitting what might otherwise be inadmissible evidence have been “interpreted liberally”, in interlocutory hearings on commercial matters.5 In Makin v Hayward, Master Williams QC observed:6
It is common place for deponents in interlocutory applications to stretch the strict rules of admissibility in relation to the evidence which they give. In many cases, as the authorities show, there can be no objection to such a course. It promotes the speedy resolution of interlocutory applications. It avoids the proliferation of affidavits. And it accords with the desirable objects of lessening “cost delay and inconvenience”.
5 Bell v John Holland Properties (New Zealand) Ltd (1990) 3 PRNZ 536 (HC) at 538.
6 Makin v Hayward (1991) 5 PRNZ 139 (HC) at 141-142.
That said, of course, the rules of evidence cannot be ignored altogether and, in each case, it is a matter of applying the rules in a common sense way to achieve the objectives of the High Court Rules.
[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. Furthmore, 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.
Does the affidavit of Mr Lay address the concerns about the plaintiff’s ability to
pay?
[33] The only evidence the plaintiff has provided in response to the plaintiff’s concerns is a brief affidavit from Michael Lay, who says that he is an accountant who has prepared the annual accounts for Nicon since 2010. He annexes an unsigned single page statement of financial position and also a schedule of fixed assets of Nicon Limited for the year ended 31 March 2015. He deposes that the statement of financial position of the company for the year ended 31 March 2015 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 then baldly states “I believe these accounts accurately reflect the current state of the company”.
[34] While, normally, the statement of financial position contained in the annual accounts of a company would provide satisfactory evidence as to the company’s solvency, I have a number of concerns with the evidence in this case.
[35] First, there is no suggestion that Mr Lay is authorised by the plaintiff to give the affidavit evidence on its behalf. If he is to give evidence for the plaintiff company, he should make it clear that he is able to comply with r 9.82 which requires that he:
(a) knows the relevant facts; and
(b) is authorised to make the affidavit.
The mere assertion that the plaintiff is “a client of this firm” does not go so far.
[36] Second, the statement of financial position is not signed and there is no way of knowing whether these are draft or final accounts. If the accounts are not approved by the company, the weight I can place on them is reduced.
[37] Finally, and most importantly, there is no explanation for Mr Lay’s statement of belief. The financial statement will normally have been prepared based on information provided to the accountant by the plaintiff and notes or disclaimers recording this are commonly recorded on annual accounts prepared for companies. The Court has not been provided with the full accounts for Nicon so it has no knowledge of whether such provisos apply in this case. There is no evidence that the plaintiff has approved the statement, nor that Mr Lay himself has verified that the assets listed are still held by the company, or have the value attributed to them in the schedule of assets. Curiously, the list of assets described as motor vehicles all have a book value as at 1 April 2014 which equates with their cost price (being sums which range between $2,500 and $20,000). It is not clear why their values were not depreciated between the date of purchase and 1 April 2014. Furthermore, there is no evidence that, even if this was the position as at 31 March 2015, this remains the position six months later.
[38] Additionally, the dramatic reduction in the current assets of the company from $438,921 in 2014, to $75,000 in 2015 appears to support the assertion that the company is withdrawing from active trading. What has happened in the subsequent six months since March 2015 is unknown.
[39] I also draw an adverse inference from the fact that no authorised representative of the plaintiff has been prepared to swear an affidavit supporting the company’s ability to meet costs if it is unsuccessful.
[40] For all these reasons, I find that the affidavit evidence of Mr Lay does not satisfy me that Nicon has the ability to pay costs if unsuccessful. The jurisdictional threshold for an order is therefore met.
Exercise of the discretion
[41] Given the threshold test is met, the next question is whether the Court should, in its discretion, order that Nicon is to pay security for costs and if so, for what amount.
Merits of the claim
[42] In considering this, the defendants have made much of the fact that the plaintiff’s claim is unmeritorious. In particular, Mr Norriss gave evidence in his initial and reply affidavit demonstrating that Nicon overstated the number of quotes given and the number of demolition jobs which it did not get.
[43] Mr McMenamin for the defendants objected to the second affidavit of Mr Norriss, saying it was not strictly evidence in reply, but rather, it elaborated on the analysis contained in Mr Norriss’ first affidavit. Mr Forsey, in response, said that the affidavit came in the category of updating evidence, as it reflected updated analysis of the claim based on the further initial disclosure produced by the plaintiff.
[44] I accept that the second affidavit of Mr Norriss is in the nature of updating evidence, and there is no prejudice in it being admitted as it simply puts more accurate numbers on the position pleaded by the defendants in their statement of defence and raised in Mr Norriss’ first affidavit.
[45] In assessing the merits I observe that the proceedings are at a very early stage and any assessment of the merits at this stage must be qualified by the self-evident observation that it may change with the provision of further evidence. However, as Master Williams QC noted in Nikau:7
(3) As far as it is possible [to do so] at what is, usually, a fairly early stage of a case, the Court should endeavour to assess the merits of the statements of claim and defence and endeavour to form some view as to the respective prospects of success. If the claim appears weak, that may increase the likelihood of an application for security for costs being successful so as to avoid the prospect of a plaintiff of limited means bringing a weak claim, persisting with it, and so exerting pressure on a defendant
7 Nikau Holdings Ltd v Bank of New Zealand, above n 2 at 437.
either to offer settlement or to incur the cost of a trial when such cost cannot be recouped if the plaintiff is unsuccessful.
[46] In the present case, I only have access to the plaintiff’s pleadings, and not to the key documents relied on to support the plaintiff’s claim. However, as pleaded, it is not clear to me how an agreement to offer Nicon the opportunity to undertake demolition work for the defendants “as a preferred contractor” translates into an obligation to allocate all its demolition work to it. Furthermore, based on the defendants’ affidavit evidence, it seems highly likely that the claim overstates the number of properties quoted for, and fails to take into account circumstances such as the demolition work not proceeding at all.
[47] The statement of claim is also scanty in its provision of particulars, for example by stating simply that “the plaintiff’s anticipated profit ... was twenty per cent of the quoted figure”, and therefore, estimating its losses at a little over
$5,000,000, saying it “will be more precisely quantified prior to trial”.
[48] Accordingly, while I cannot say the two claims are unarguable, on the material before me at this point there are clearly grounds to suggest the claims are overstated, and there are robust defences to both claims. In short, I cannot conclude that the claims have strong prospects of success and that bears on my decision as to whether to order security.
Complexity of proceedings
[49] A further factor I consider is relevant to the exercise of my discretion in this case is the likely complexity of the proceedings. While on their face they are straight-forward contractual claims, they will involve a time consuming and extensive discovery exercise, because of Nicon’s assertion that there have been over
1,200 quotes it has provided which should have led to demolition work, and which did not. Each quote will have to be looked at to determine, among other things:
(a) whether it replicates or replaces an existing quote by Nicon for that property;
(b) whether, in fact, demolition proceeded;
(c) where the work was allocated to another contractor, why that work was so allocated.
[50] For all these reasons, the claim is likely to involve a significant amount of “upfront” work by the defendants, where costs may not be recoverable if the plaintiff is impecunious.
Other factors
[51] The plaintiff has raised no factors which it says should have a bearing on the exercise of my discretion. Its submissions were focused on the threshold test. However, I do not ignore that the interests of both the plaintiff and the defendants should be considered and I should not allow the rule permitting an order for security for costs to be used oppressively or shut out a genuine claim by a plaintiff on limited means.8
[52] In the present case, given the concerns I have about the merits of the plaintiff’s claim, and the significant costs the defendants will be put to through the discovery process, I consider this is a proper case in which to order security for costs.
Amount of security
[53] The quantum of security to be ordered is also a discretionary decision.9 That means the amount of security is not necessarily fixed by reference to a likely costs award, but is to be what the Court thinks fit in all the circumstances. However, in this case, I do consider that the potential costs award is a relevant consideration. Nicon has estimated that one week’s hearing time is required, and I have already alluded to the relatively complex discovery process which will be required to uncover the factual circumstances in which demolition quotes were sought, and awarded, in over 1,200 insurance claims. Even on a 2B scale costs calculation, a costs award is likely to be around $40,000, although there may be scope for arguing that some steps in the proceeding should be located in band C.
[54] Mr Forsey sought an award of $35,000 to $40,000 referring to the orders of similar magnitude made in cases such as Ruthan Ltd v Forsyth Barr Group Ltd,10 and Suisse International Ltd v Monk.11 I accept that in the circumstances a costs award of $35,000 is appropriate.
[55] As is common practice, I consider security should be ordered on a two-stage basis, with $20,000 to be paid now and the balance of $15,000 to be paid on or before the setting down date.
[56] I also think it appropriate that the proceedings be stayed until payment of the first sum is made.
Orders
[57] I make the following orders:
(a) the plaintiff is ordered to give security for costs to the defendants, on a staged basis, in the sum of $35,000;
(b)security is to be given by paying $20,000 of that sum into Court, or by giving security for that sum in another form to the satisfaction of the Registrar;
(c) if security is not provided to the Registrar’s satisfaction for the sum of
$20,000, within 15 working days of the date of this judgment, the proceedings shall be stayed until security is given;
(d)if security is not given to the satisfaction of the Registrar within six months of the date of this judgment, the proceedings shall be deemed to be struck out;
(e) the balance of the order for security for costs, being $15,000, is to be provided on or before the close of pleadings date;
(f) if that further security is not provided to the Registrar’s satisfaction,
the proceeding shall be stayed until such security is given.
Costs
[58] The defendants are entitled to an order of costs. Those costs include for the appearance at the call-over on 15 June 2015, where I expressly reserved costs at Mr Forsey’s request.
[59] Normally 2B costs would be awarded. However, I note the defendants signalled to the plaintiff that if an application needed to be made, that increased costs would be sought. If costs cannot be agreed then:
(a) the defendants are to file and serve any memorandum on costs by
18 September 2015;
(b) the plaintiff is to file and serve any memorandum in response by
25 September 2015;
(c) any memorandum in reply, is to be filed and served by
30 September 2015;
(d) submissions are not to exceed five pages. [60] Costs will be determined on the papers.
Solicitors:
KJ McMenamin & Sons, Christchurch
Duncan Cotterill, Christchurch
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