Oxygen Air Ltd v LG Electronics Australia Pty Ltd
[2018] NZHC 945
•4 May 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2015-404-2184
[2018] NZHC 945
BETWEEN OXYGEN AIR LIMITED
Plaintiff
AND
LG ELECTRONICS AUSTRALIA PTY LIMITED
Defendant
Hearing: 4 May 2018 Appearances:
M C Black for the Plaintiff
R Hollyman and T Kelderman for the Defendant
Judgment:
4 May 2018
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Craig Griffin Lord, Auckland, for the Plaintiff Hudson Gavin Martin, Auckland, for the Defendant
Counsel:
Michael C Black, Auckland, for the Plaintiff
Robert Hollyman, Auckland, for the Defendant
OXYGEN AIR LIMITED v LG ELECTRONICS AUSTRALIA PTY LIMITED [2018] NZHC 945 [4 May 2018]
[1] The defendant applies for security for costs. It proposes that the plaintiff should provide security totalling $112,594.95 made up as follows:
$30,643.95 to be paid within 10 working days of the court’s order; $37,351.00
to be paid into court by the date fixed for the plaintiff to file its statement of defence to the defendant’s amended counterclaim; and
$44,600.00
to be paid into court 10 working days before the trial starts.
The defendant also seeks leave to adjust the security payable but it does not in its application expressly seek a stay of the proceeding.
[2] The plaintiff accepts that the threshold under r 5.45(1)(b) has been met:1 there is reason to believe that the plaintiff will not be able to pay the defendant’s costs if the plaintiff is unsuccessful in its claim. The plaintiff says, however, that the court should not order security: it should not be prevented from bringing its claim or defending the counterclaim; it is likely to succeed on the merits and security should not be ordered when the merits are strong; its impecuniosity is the result of the defendant’s conduct; the defendant has delayed in applying for security and it would now be oppressive to require security; and even if security is ordered, the proceeding should not be stayed.
[3] I will order security but in a form different from that proposed by the defendant. The security will require Mr Rotteveel, the director and sole shareholder of the plaintiff, to give a binding undertaking to the defendant that if the plaintiff is unsuccessful in its claim against the defendant, he will answer for any costs that are awarded against the plaintiff on its unsuccessful claim. That undertaking will not require him to answer for any costs that relate solely to the plaintiff’s opposition to the defendant’s counterclaim. I will give my reasons after reviewing the circumstances of the case.
[4] The defendant, LG Electronics Australia Pty Ltd, is the Australasian supplier for a South Korean corporation that makes a wide range of electrical goods including
1 High Court Rules 2016, r 5.45(1)(b).
air conditioning systems, heat pumps and solar panels. It is an Australian corporation registered in New Zealand on the overseas register and carries on business supplying LG products in Australia, New Zealand and the Pacific.
[5] The plaintiff, Oxygen Air Ltd, used to distribute and install LG air conditioning and heat pump systems in New Zealand. Its sole director and shareholder is Mr Eddy Rotteveel. The company is no longer actively trading. I have referred to the plaintiff under the name under which it was incorporated, Oxygen Air Ltd. It now has another name, LG Air Ltd. It would be confusing for this case if I were to refer to it by its new name. It is more convenient to refer to it by its original name. While Oxygen Air Ltd is no longer actively trading, Mr Rotteveel has incorporated another company, Oxygen NZ Ltd. Oxygen NZ Ltd uses the name Oxygen Air for trading purposes. Oxygen NZ Ltd does not distribute LG products but is a distributor of other air conditioning and heat pump systems including Panasonic and Fujitsu. Its advertisement says that it is Fujitsu’s leading air conditioning distributor.
[6] In February 2010, LG Electronics and Oxygen Air made a written supply and distribution agreement. The products under the agreement are described as:
Various heating and air conditioning products including (without limitation) residential and commercial heat pumps and ducted air conditioning.
LG Electronics gave Oxygen Air an exclusive distributorship to sell the products in New Zealand and the Pacific (but with certain carve-outs). The term was four years with two further rights of renewal every four years unless otherwise agreed in writing. The agreement has some special features. Oxygen Air Ltd was given an express right of set off. There are unusual default and termination provisions and an unusual provision for the consequences of termination. Clause 5.1(c) says:
Termination by either party: Either party may terminate this agreement:
a. This agreement shall remain in full force and effect including to any successor or assignor of the Supplier and irrespective of the supplier selling, transferring or otherwise dealing with its shares or business including to a third entity or purchaser who may acquire or control the business, the subject of this Distribution Agreement.
b. The supplier hereby grants and confirms the right to the distributor to transfer this distributorship to another (new) party without consulting the supplier (provided there is no conflict of interest with the new party and its
products). All rights within this agreement will automatically be transferred to the party appointed by the supplier.
c. This agreement shall not be terminated unless one of the following events occur:
i. The supplier or distributor materially and substantially defaults in performing any of the obligations specified herein and that default has first been the subject of a written notice to rectify that default allowing not less than 40 working days for the party receiving the notice to remedy the default.
ii. That following the 40 working day period, the parties shall then refer the dispute and matters giving rise to the default, to mediation and failing resolution at mediation, that the dispute be referred within 14 days to resolution / determination by a sole arbitrator appointed pursuant to the provisions of the Arbitration Act 1996. Such arbitration is to occur in New Zealand, there being no right of appeal.
iii. The distributor can in its sole discretion (and for any reason) give 40 working days written notice that it is no longer willing to continue with the distributorship and perform the terms specified herein. If the distributor elects to give such notice then no compensation or any amount by way of damages shall be payable by the distributor.
And cl 6, the consequences of termination says:
6 Consequences of Termination
6.1 Continuing of Obligations: On termination of this agreement, all provisions that are intended to do so will continue in full force and effect and the Supplier agrees and acknowledges that the Distributor at its election shall have a further 3 year period (from the date of termination of this agreement) to be the sole supplier to the business customers of the Distributor.
6.2 During this period, the Supplier is also restrained directly and indirectly from supplying the distributor’s business customers, wholesalers or independent installers and/or affiliated companies / individuals that install heat pumps/air conditioning, any products (the subject of this Distribution Agreement), whether directly or indirectly.
6.3 Compensation: By entering into this agreement the supplier acknowledges and confirms that the distributor has expended significant costs on marketing, advertising, promotion, and other expenditure of and incidental to the distributor implementing, carrying out and performing this agreement.
In the event that this agreement be terminated by any default by the supplier, the supplier agrees to pay reasonable compensation to the distributor for the expenditure incurred. In addition, the distributor shall be entitled to receive compensation representing the net profit for products that could have been supplied under this agreement for a period of two years following termination. The amount of compensation payable for future product supplies shall be determined from reviewing the distributor’s previous two years trading figures.
In determining the quantum of compensation, the parties agree that 20% of the purchases for each year (comprising a total of two years) fairly represents the reasonable compensation payable by the supplier to the distributor in fulfilling this clause.
[7] Oxygen Air says that LG Electronics breached the supply and distributorship agreement in a number of ways: it did not deliver products on time; it did not deliver products in accordance with orders placed by Oxygen Air; it delivered mismatched stock; stock delivered missed essential components; it had a substandard warranty system which did not allow warranty claims by authorised service centres to be dealt with efficiently; it failed to provide promotional and technical training and support; there were wi-fi issues; and it did not provide an energy rating star system for the products it supplied. For those breaches, Oxygen Air claims lost profits of
$691,860.23. That is based on the formula in the contract of a profit margin of 20 percent from two years’ total expected purchases estimated at $3,459,301.13. In addition, there is a claim for expenditure which I take to be a wasted expenses claim said to total $945,651.52. While relying on the contractual provisions, Oxygen Air Ltd also claims those sums as common law damages independently of the contract. Those are the claims in the first cause of action.
[8] The second, third and fourth causes of action deal with a separate matter: an alleged distributorship for solar panels. Oxygen Air says that in October 2013, LG Electronics granted it an exclusive New Zealand distributorship for LG solar panels. In breach of that, LG Electronics Ltd gave the distributorship to another company, one of Oxygen Air’s longstanding and largest customers. It claims losses of $987,376.00. That is said to be two years loss of profits. I understand the case to be that when a distributorship is granted without an express termination provision, the law will allow reasonable notice to be given. Oxygen Air’s claim is that two years’ notice had to be given to constitute proper notice and it is entitled to loss of earnings for that period. The claim is made under three causes of action; one for breach of contract, another for breach of a collateral agreement and a third for misleading and deceptive conduct under the Fair Trading Act 1986.
[9] LG Electronics denies all the breaches of the distributorship agreement for the air conditioning and heat pumps. It also denies that it agreed to give Oxygen Air any
distribution rights for its solar panels in New Zealand. It counterclaims for some
$553,000 for unpaid invoices which now appear to be more than three years old. It claims that Oxygen Air was required to hold the proceeds of sale on trust and it sues for breach of trust and breach of fiduciary obligation. It has more recently filed an amended statement of defence and amended counterclaim which I am informed raises a new issue as to the validity and enforceability of a restraint of trade provision.
[10] Oxygen Air began this proceeding in September 2015. Case management has been more involved than might initially be expected. There was a lengthy period to deal with discovery issues, including time to frame appropriate terms for a tailored discovery order. In the end, the discovery required of LG Electronics was very extensive, requiring it to obtain documents not only from New Zealand but also from Australia. I was required to give a ruling on some of the discovery issues in August 2017.2 LG Electronics applied for security of costs in November 2017.
[11] During the hearing, it has become apparent that there are some other issues that will need to be resolved as well as the security for costs. Oxygen Air recently filed an amended statement of claim, which not only gave fuller particulars of the relief it was claiming but added new allegations. LG Electronics Ltd says that it requires particulars. I direct LG Electronics to file and serve an application for further particulars no later than 5.00 pm Tuesday 8 May 2018. The application is to be called in my chambers list on Friday 11 May 2018 at 2.15 pm. I hope that the parties will have resolved many of the particulars issues but if they have not, I will give directions for a hearing at short notice to give rulings on any outstanding issues.
[12] The close of pleadings date is 14 May 2018. There is accordingly some urgency in finalising interlocutory matters. It is disruptive for both parties to have to deal with interlocutory matters after the close of pleadings date. There is a 13 day hearing beginning 29 October 2018.
[13] As to security for costs applications, the principles are well established. I need only refer to the Court of Appeal’s decision in AS McLachlan Ltd v MEL Network Ltd
2 Oxygen Air Ltd v LG Electronics Australia Pty Ltd [2017] NZHC 1857.
and Kós J’s decision in Highgate on Broadway Ltd v Devine.3 Once the threshold has been passed, the court has a discretion under which it must weigh, on the one hand, the interest of the plaintiff in having its case heard in court, and the need to protect a defendant from being drawn into unjustified litigation, particularly where it is overcomplicated and unnecessarily protracted. Ordering security may be oppressive in denying the plaintiff the opportunity to have its case heard in Court. Equally, the successful party to a proceeding is entitled to costs for having succeeded. There is an injustice if a successful party is not paid costs. Costs have a two-fold purpose. On the one hand, they are partial compensation to the successful party for the expenses they have incurred in the proceeding. On the other hand, they act as a check in the conduct of litigation. Parties focus closely on costs. The prospect of an adverse costs order encourages parties to conduct their cases sensibly and to pursue issues only if they have good chances of success. There is a risk of irresponsible litigation if a party can conduct a proceeding without having to worry about the costs consequences.
[14] Oxygen Air accepts that the threshold under r 5.45 has been met because there is reason to believe that it would be unable to pay any costs to LG Electronics if it fails. Its own evidence confirms that. There is an affidavit by Mr Lockhart, a chartered accountant who provides accountancy services to Oxygen Air. He is not a forensic accountant. His practice prepares financial statements for Oxygen Air. He has attached to his affidavit financial statements for the year ended 31 March 2016. The statement of profit and loss shows that Oxygen Air made a loss of $500,000. That was on sales of $1,200,000 and a gross profit of $69,000, a gross profit margin of 5.6 percent. Expenses put the company into loss. That contrasts with the year before where sales were $2.7 million. The gross profit from trading was $1 million. The gross profit margin was 38.8 % and the net profit was $210,000. The balance sheet shows net liabilities of $434,000, negative equity. The current assets include a shareholder’s overdrawn account of $288,000. The next significant asset is accounts receivable. I take it that, by now, accounts receivable will have been paid. In other words, apart from this proceeding, Mr Rotteveel’s shareholder’s account liability may be the only significant asset of the company. The schedule of current accounts shows an opening balance for that year of $235,000 owed by Mr Rotteveel with an end of
3 AS McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [13]–[16]; Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017.
year balance of $288,000. In short, during that year, Mr Rotteveel has been treated as having drawn out approximately $50,000 more than he put into the company. The year before shows an opening balance of $194,000.
[15] There is also good evidence that the company is no longer trading. LG Electronics Australia Pty Ltd makes the point that the last order that it received from Oxygen Air was in March 2016 for a minor piece of equipment. Oxygen Air does not claim to be still trading and its only reason for remaining in existence is to bring this proceeding. While Oxygen Air Ltd has ceased commercial activity, I note that Mr Rotteveel has had a second company incorporated to carry on a distributorship business in competing air conditioning and heat pumps. At the discovery hearing in July 2017, counsel for LG Electronics raised these matters and indicated LG Electronics’ concern that Oxygen Air may not be good for costs. The present application was filed in November that year.
[16] LG Electronics Ltd also has put in evidence Mr Rotteveel’s association with other failed companies in the past. Those go back more than 10 years. The evidence shows that he has been the director of three companies that have gone into insolvent liquidation: Cite Solutions Ltd (April 2007), Cite Documents Solutions Ltd (April 2007) and The Copier Warehouse Ltd (March 2006).
[17] There are some procedural issues. Oxygen Air filed a further round of evidence shortly before the hearing. That was evidence in reply to reply. It claimed that new issues had been raised in the LG Electronics reply evidence which in turn required a response. In the end, LG Electronics Ltd chose not to press any objection to that evidence. I regard that concession as appropriate to allow the Court to consider the matter at large. While I do not necessarily share the view that LG Electronics’ reply evidence raised new matters, I am grateful to counsel for not requiring a ruling on the point.
[18] There was substantial evidence. LG Electronics’ bundle of documents, which did include some authorities, runs for over 1200 pages and Mr Black tendered a further bundle of some 110 pages. It is important to exercise some sense of proportion on security for costs applications. Both sides were keen to press on the court the
respective merits of their cases. It is important to bear in mind that in a security for costs application, the court can only come to a broad overview of the case and is not required to make detailed findings of fact and law. In the end, because of the order I propose, I do not regard a detailed examination of the issues as essential.
[19] Oxygen Air complained that LG Electronics’ evidence came primarily from an in-house counsel in LG Electronics’ Sydney office. The point was taken that she had not had first hand dealings with Oxygen Air during the distributorship and her evidence is largely hearsay. Mr Black accepted that the hearsay evidence was admissible. That is correct: see r 7.30 of the High Court Rules and s 20(1) of the Evidence Act 2006. Because the court takes a broad overview of each side’s case, undue expense and delay would be caused if each side were required to adduce all the evidence it proposed to give at trial. The rules allow a shortcut. Mr Black noted, however, that Oxygen Air Ltd had obtained first hand evidence from those who will give evidence at trial and greater weight should be given to that evidence than to the evidence from an in-house lawyer with no direct personal knowledge of the matters.
[20] Now for the order that Mr Rotteveel provide a personal undertaking to pay any costs that Oxygen Air Ltd should pay if Oxygen Air Ltd is unsuccessful in its claim against LG Electronics. I am ordering that in preference to requiring Oxygen Air Ltd to pay funds into court and to stay the proceeding until that security is provided. Funds paid as security are held to await the outcome of the case, and as such they are frozen. Oxygen Air Ltd has limited resources. Given its legitimate interest in wanting to take its case to court, it is in its interest that it should be able to fund this proceeding. Requiring it to put funds otherwise available for the proceeding into court as security would seriously impede its ability to bring this case to a hearing. In short, an alternative to requiring funds to be paid into court will operate more efficiently for Oxygen Air in running its proceeding. Its access to the court will not be impeded.
[21] I am looking to Mr Rotteveel to provide that assurance that costs will be paid, because the company is, in effect, his alter ego. He is the sole director and shareholder of the company. The company is no more than his nominee. Requiring him to give a personal undertaking is consistent with his duties as a director of the company. I refer to s 136 of the Companies Act 1993:
A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.
[22] When the company began the proceeding in 2015, it incurred a contingent obligation to pay costs if it lost the case. Mr Rotteveel, as the sole director, must have authorised the proceeding and, in doing so, he came under the obligation in s 136. We now know that the company has a negative equity and does not have the funds to meet any order for costs made against it. As matters now stand, Mr Rotteveel cannot have reasonable grounds to believe that the company will be able to pay any costs order made against the company if its claim against LG Electronics Ltd fails. So, requiring Mr Rotteveel to give his undertaking ensures that he will comply with his obligations under s 136 of the Companies Act. He is not being asked to do anything more than the law requires. A supporting factor is his overdrawn shareholder’s account of
$288,000. That is money he is required to put back into the company.
[23] Mr Black submitted that Mr Rotteveel may be not be good for all the costs that might be ordered. Notwithstanding that, I regard an order that Mr Rotteveel answer for the costs as still valuable, even if he does not have the funds in hand at present. Mr Rotteveel as a businessman is bound to want to avoid personal bankruptcy, even if he were unconcerned about Oxygen Air going into insolvent liquidation. The prospect of personal bankruptcy tends to motivate many people to meet their liabilities. If Oxygen Air Ltd were to go into liquidation and Mr Rotteveel had not given an undertaking as to costs, any liquidator would look to him under s 136 to make good under his duty to the company for arranging for the company to conduct the litigation without being able to meet its liability for costs. Requiring Mr Rotteveel to provide an undertaking now short-circuits any need for liquidation of the company and the expenses that would go with that.
[24] Mr Rotteveel’s undertaking is only for Oxygen Air’s liability for costs to LG Electronics on Oxygen Air’s claim. I am not requiring him to give security for costs for LG Electronics’ claim against Oxygen Air. That is because the Court does not have power under r 5.45 to require a defendant to give security for costs that might be awarded against it for failing in a defence. That will require an apportionment of any order for costs. That will be a job for the judge who has to decide costs. But I
indicate this for the parties’ guidance. Mr Black says that on the counterclaim, Oxygen Air Ltd will be raising defences independently of the matters raised in its statement of claim. It will, for example, contend that orders were not supplied or that the wrong goods were delivered. Those may be matters that can be raised in defence of a debt claim independently of the matters raised in Oxygen Air’s statement of claim. The division can be done this way: if a matter can be run as a defence by way of set off on LG Electronics’ claim against Oxygen Air and Oxygen Air has pleaded that matter in its statement of claim against LG Electronics, Mr Rotteveel will be answerable for the costs on that issue. If a matter cannot be a set off but is only a defence to the counterclaim, Mr Rotteveel will not have to pay the costs of the defence under his undertaking.
[25] I regard that solution as appropriate for the circumstances of this case in providing a more efficient means of security. It also means that I am not required to enquire deeply into the other matters that were argued on the security for costs application. I mention them only to show that I have not overlooked them.
[26] The point was taken that LG Electronics Ltd had delayed in applying for security. Delay in applying for security may be relevant if it causes unfairness to a plaintiff. The circumstances that come to mind are when a plaintiff has committed effort, resources and time to conducting a case, but when the case is close to trial, the defendant tries to stymie the plaintiff by a late application for security to prevent the case going to hearing and thereby causes wasted costs to the plaintiff. Mr Black submitted that LG Electronics Ltd could have ascertained his client’s financial position earlier than it did. The evidence shows that LG Electronics was alive to the issue from about July 2017. It raised the matter in correspondence and then formally applied in November. Mr Black contended that documents made available on inspection would have shown his client’s true state. He was unable, however, to point to any document that would have given the show away for his client. All that I understand the discovery showed was orders tailing off but the fact that Oxygen Air was no longer placing orders with LG Electronics does not, by itself, point to an inability to pay costs if Oxygen Air were unsuccessful at trial.
[27] In short, I accept that LG Electronics only became alive to the issue during 2017 and it applied in time. The undertaking by Mr Rotteveel is not unfair to Oxygen Air because it remains able to conduct its case to trial in the same way as if it had not been ordered to pay any funds into Court. In other words, the timing of the application does not become an issue.
[28] The parties reviewed the merits. They did not require me to go through all the 1200 pages of documents and examine every contested issue of fact. Instead, LG Electronics Ltd selected certain allegations for examination and pointed to the evidence on its side which supported its case to say that the allegations made against it had no foundation. Equally, Mr Black rose to the challenge and pointed to evidence in reply that also provided an answer to LG Electronics’ position on each of those matters. I was left with the impression that all the issues which the parties put up were contestable. It will require a Judge sitting at trial to give a carefully crafted decision why one side should be preferred to the other, where both sides seem to have good arguable cases. It would be ambitious for me to make any predictions as to the likely outcome of the case.
[29] All the same time, I make one observation. Parts of the case for Oxygen Air seem to be overstated, at least in terms of relief. The claim that the damages for an exclusive solar panel distributorship should be two years loss of profits seems very optimistic, given that the contract as claimed never matured into a full operating distributorship. It was nipped in the bud and hopes were dashed a very early stage, admittedly after some negotiations. At this stage, Oxygen Air has not given evidence of any wasted costs incurred as a result of not getting the contract.
[30] Equally, the damages claimed for the breach of the distributorship seem to have some difficult elements as well. In the discovery hearing in July 2017, LG Electronics complained that the distributorship agreement was still in full force. That was frustrating for it because it was not able to supply products to anyone in New Zealand as Oxygen Air still had an exclusive distributorship, yet Oxygen Air was no longer ordering products from it. Today I was advised that Oxygen Air has just given a notice of termination. It is apparently not alleged that any notice of termination had been given any earlier. In the absence of any earlier notice of termination, it may be that
the consequences of termination in cl 6 do not operate. I simply indicate that there seem to be some difficulties in the way of Oxygen Air in claiming damages as extensively as it has. If it cannot use the contractual provisions and is thrown on the common law, its case will point to a lot of breaches of contract. It will then have to somehow make the case that the contract itself came to an end without either side having cancelled it and it may recover damages because of having lost a valuable contract. Those are puzzling features of the case. They may mean that the damages may not be as extensive as Oxygen Air has pleaded. I emphasise, however, that those are only preliminary views and that the matter needs fuller argument at trial.
[31] I am not required to consider the argument that LG Electronics Ltd caused the impecuniosity of Oxygen Air. Even if it had made that case, it would not be relevant to the security I will order. That is because the company is independently impecunious because of Mr Rotteveel’s drawings from the company. There is no reason why he should not make good on his outstanding shareholder’s account.
[32] Accordingly, I will require Mr Rotteveel to give an undertaking. That will need to be drawn up to reflect the terms of my decision. I adjourn this hearing to Friday 11 May 2018 at 2.15 pm. I expect the parties to confer and agree upon the terms of undertaking. I emphasise that Mr Rotteveel is not himself required to give any security over any of his assets. This is to be binding on him personally only. If the parties are unable to agree on the terms of the undertaking, I will hear counsel. LG Electronics Ltd will take first responsibility for drawing up the undertaking with Oxygen Air to have the opportunity to respond. I trust that the draft undertaking can be sent to Mr Black by 5.00 pm on Tuesday. I will settle any outstanding differences as to the undertaking. I will also hear the parties on the consequences of the undertaking not being signed. That may involve ordering a stay of Oxygen Air’s claim while not restraining LG Electronics Ltd from proceeding on its counterclaim.
[33] I award costs to LG Electronics on the application. That is because it has succeeded. Oxygen Air has been required to give security when it opposed giving security at all. Costs are category 2. I do not certify for second counsel. I do not make any directions as to the appropriate bands but I trust that counsel will be able to
confer and agree on costs. If they cannot agree, I will give rulings next Friday at
2.15 pm.
……………………………….
Associate Judge R M Bell
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