Plumpton v Terry
[2016] NZHC 988
•16 May 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-562 [2016] NZHC 988
BETWEEN KEVIN IAN PLUMPTON
First Plaintiff
UCFX LIMITED Second Plaintiff
AND
JAMES TERRY First Defendant
BRENT DAVID COLBERT Second Defendant
SCOTT MAYNARD Third Defendant
Hearing: 16 May 2016 at 10:00am Appearances:
J V R James for Plaintiffs
S O McAnally for First Defendant
No appearances for Second and Third DefendantsJudgment:
16 May 2016
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Antony Harper, Auckland, for Plaintiff
Keegan Alexander, Auckland, for First Defendant
Armstrong Murray, Takapuna, for Third Defendant
KEVIN IAN PLUMPTON v JAMES TERRY [2016] NZHC 988 [16 May 2016]
[1] The plaintiffs apply under r 8.19 of the High Court Rules for further and better discovery of documents by the first defendant. Specifically, they target personal emails of the first defendant and also documents relating to an entity called “FEDER8”.
[2] At the outset, the plaintiffs sought orders against all defendants. The second and third defendants filed affidavits in response. Their affidavits showed that they had no documents in their control within the scope of the plaintiffs’ application. The plaintiffs accept that and therefore seek no orders against them. The first defendant, on the other hand, opposes the application but he has not filed any affidavits.
What the case is about
[3] To understand the discovery application, it is necessary to set out background to the plaintiffs’ claims and the course of this proceeding so far. UCFX Ltd says that it carries on business in New Zealand as a provider of hosted unified communication services. The first plaintiff, Mr Plumpton, is a director and CEO of the company and its majority shareholder. The defendants are all shareholders and worked in the company up until March 2015.
[4] The plaintiffs plead their case against all the defendants as directors of the company. Mr Terry and Mr Maynard were never formally directors of the company but the plaintiffs say that they were de facto directors under s 126(1)(a) of the Companies Act 1993. Mr Terry’s background is in human resources. Mr Colbert was marketing director and Mr Maynard was a principal consultant. He apparently has an IT background.
[5] The plaintiffs’ case is that towards the end of 2014 and in the early part of
2015 (up until March 2015) the defendants were disenchanted with UCFX Ltd. Mr Plumpton became aware that Mr Terry was actively soliciting investors for a new venture. The defendants had met with a prospective client of UCFX Ltd, Westcon, on 13 March 2016 to pitch for investment opportunities in an entity to be established by the defendants. That was done without Mr Plumpton’s knowledge. At that
meeting documents were used which were almost identical to the UCFX documents. The defendants are also alleged to have told Westcon that UCFX was winding up and restructuring, but that the new company they were establishing and UCFX were one and the same. The achievements and accolades that UCFX had achieved and client testimonials could be credited to the new company they were establishing. The defendants used UCFX client data and information contacts which they passed off as data of the new company about to be established, and other information alleged to be confidential to UCFX. The plaintiffs also allege that the defendants encouraged UCFX employees to leave and to sign up with their new company; and they targeted prospective clients of UCFX whilst holding themselves out as directors and agents of UCFX. In particular one key employee of a partner of UCFX was targeted to work for the new company. They told current staff that they had secured that key employee and that all the staff were to move to the new company.
[6] The plaintiffs began this proceeding on 19 March 2015. They applied without notice for an interim injunction. Their statement of claim has four causes of action:
1 breaches of duty under ss 131 and 145 of the Companies Act;
2 a concurrent claim for breach of fiduciary duties;
3“intentional interference with contractual relations”, said to be interference with contractual relations with clients of UCFX and also employees of UCFX; and
4 oppressive or unfairly prejudicial conduct under s 174 of the
Companies Act.
[7] On 19 March 2015 Brewer J had made orders on a without notice application, issuing an interim injunction restraining the defendants from directly or indirectly canvassing, soliciting or attempting to solicit, serve or act for any present client of UCFX.1 That was to include clients listed in a schedule. That order was to last only
until 26 March 2015 unless renewed. It was extended. Brewer J heard the application for an interim injunction on notice on 24 April 2015, and gave his decision on 20 May 2015. He was relevantly satisfied that there was a serious question to be tried and that the balance of convenience favoured the plaintiffs. He issued a “springboard” injunction. He made these orders: 2
1The defendants will not, directly or indirectly, canvass, solicit, attempt to solicit, serve or act for any present client of UCFX including, but not limited to, those set out in Schedule A to the ex parte interlocutory application for interim injunction orders dated
19 March 2015. This injunction will expire two calendar months from the date of this judgment.
2The defendants will not contact any present client of UCFX including, but not limited to, those set out in the said Schedule A. This injunction will expire two calendar months from the date of this judgment.
3The defendants will cease to use any and all confidential information belonging to UCFX pending resolution of the substantive proceeding.
4 The defendants will deliver up all confidential information of UCFX
in their possession pending resolution of the substantive proceeding.
5The defendants will not act as directors of UCFX pending further order of the Court.
6 The defendants will not hold themselves out as directors of UCFX
pending further order of the Court.
The orders in (a) and (b) ran for two months. The orders (c) to (f) do not have any time limit and apply pending further order of the court. I was advised that the defendants did not object to the orders (c) to (f), and contested only whether the first two orders should be made.
[8] Since that decision, the plaintiffs have not amended their statement of claim. There has been no suggestion so far that the defendants have breached any of the orders. There is no suggestion that they presently engage in any conduct in breach of any of the duties pleaded in the statement of claim. Mr McAnally advises that the second and third defendants resigned as employees in March 2016 and they were subject to restraints of trade which expired in June 2015.
[9] In my case management minute of 17 September 2015 I recorded the parties’
agreement as to the matters in issue:3
1 Has the second plaintiff been properly joined to the proceeding?
2Whether the defendants were, at the material times, directors of the second plaintiff or otherwise owed it duties as directors.
3If so, whether the defendants breached any such duties to the second plaintiff (as set out at ss 131 and 145 of the Companies Act) and/or any such fiduciary duties by
(i) Utilising the second plaintiff’s confidential information for
unauthorised/improper purposes.
(ii) Attempting to divert opportunities from current and/or prospective clients of the second plaintiff to another entity (“NewCo”).
4Whether the defendants interfered with the contractual relationship between the second plaintiff and employee and/or its clients/customers?
5Whether the affairs of the second plaintiff have been conducted by the defendants in a manner which is unfairly prejudicial to the first plaintiff as a shareholder of the second plaintiff?
6 Whether, if any such breaches are established:
(i) either the first or second plaintiff (if properly joined) have suffered any loss, or
(ii) any form of permanent injunctive relief is available to the plaintiff(s) generally and in light of the interim orders made by Brewer J?
7Whether the conduct of the first plaintiff has caused the second plaintiff to conduct its business in a manner which is unfairly prejudicial to the defendants as shareholders of the second plaintiff?
8If so, is the relief sought by the defendants appropriate and, if it is, what is the consideration the first plaintiff should supply to acquire their shares in the second plaintiff?
In the same minute, I directed standard discovery under r 8.7 of the High Court
Rules.
The absence of allegations against the defendants for current breaches of duty
[10] The plaintiffs sued the defendants on the basis that they were directors or de facto directors of UCFX Ltd. It is clear now that are no longer directors. In particular, Mr Terry and Mr Maynard were at best only de facto directors. Once this proceeding started they ceased to have any influence on the management of the company. That was reinforced by the orders of Brewer J.
[11] Following termination of their employment and directorships, the defendants have limited if any obligations to UCFX Ltd. The obligations of resigning directions are summarised in the English case, Hunter and Kane Ltd v Watkins, which sets out
11 propositions as to restraints after resignation: 4
1 A director, while acting as such, has a fiduciary relationship with his company. That is, he has an obligation to deal towards it with loyalty, good faith and avoidance of the conflict of duty and self-interest.
2 A requirement to avoid a conflict of duty and self-interest means that a director is precluded from obtaining for himself, either secretly or without the informed approval of the company, any property or business advantage, either belonging to the company or for which it has been negotiating, especially with the director officer, is a participant in the negotiations
3 A director’s power to resign from office is not a fiduciary power. He is entitled to resign even if his resignation might have a disastrous effect on the business or reputation of the company.
4 A fiduciary relationship does not continue after the determination of the relationship which gives rise to it. After the relationship is determined, the director is in general not under the continuing obligations which are the feature of the fiduciary relationship.
5 Acts done by the directors while the contract of employment subsists but which are preparatory to competition after termination are not necessarily “in themselves” a breach of an implied term as to loyalty and fidelity.
6 Directors, no less than employees, acquire a general fund of skill, knowledge and expertise in the course of their work, which is plainly in the public interest that they should be free to exploit it in a new position. After ceasing the relationship by resignation or otherwise a director is in general (and subject of course to any terms of the contract of employment) not prohibited from using his general fund of skill and knowledge, the “stock in trade” of the knowledge he has acquired while
a director, even including such things as business contacts and personal connections made as a result his directorship.
7 A director is however precluded from acting in breach of the requirement at 2 above, even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any maturing business opportunities sought by the company and where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired.
8 In considering whether an act of a director breaches the preceding principle, the factors to take into account will include the factor of position or office held, the nature of the corporate opportunity, its rightness, its specificness and the director’s relationship to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or indeed even private, the factor of time in the continuation of the fiduciary duty, where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the breach was terminated, that is whether by retirement or resignation or discharge.
9 The underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity of the company is that the opportunity is to be treated as if it were the property of the company in relation to which the director had fiduciary duties. By seeking to exploit the opportunity after resignation, he is appropriating to himself that property. He is just as accountable as a trustee who retires without properly accounting for trust property.
10 It follows that a director will not be in breach of the principle set out as point 7 above where either the company’s hope of acquiring the contract was not a “maturing business opportunity” and was not pursuing further business orders, nor whether the director’s resignation was not itself prompted or influenced by a wish to acquire the business for himself.
11 As regards breach of confidence, although while the contract of employment subsists a director or other employee may not use confidential information to the detriment of his employer, after it ceases the director/employee may compete and may use know how acquired in the course of his employment (as distinct from trade secrets – although the distinction is sometimes difficult to apply in practice).
[12] Relevantly for this case, any restraint of trade period has expired, and any fiduciary obligations or obligations under s 131 of the Companies Act came to an end with the end of the directorships on or about 19 March 2015. I asked Mr James whether the plaintiffs could allege unfairly prejudicial conduct under s 174 against the defendants for their actions after March 2015. He contended that they could, but I have to query whether that could be the case when they clearly had no part in the conduct of the affairs of the company once they ceased to be employed or hold any directorships in it. Apart from the reference to the meeting with Westcon as a
prospective customer of UCFX Ltd, there is nothing in the plaintiffs’ pleadings showing that the defendants had diverted any maturing corporate opportunity to themselves, at least since 19 March 2015.
[13] The plaintiffs’ case does not identify any particular information for which it claims confidentiality. It has not pleaded any use of confidential information by the defendants since March 2015. Similarly the plaintiffs have not alleged breach of copyright by the defendants since March 2015.
[14] I have set out those matters because I accept the submission for Mr Terry that as it is presently pleaded this case is very much concerned with events up until
19 March 2015, but there are no relevant allegations of conduct or breach of obligations to the company for anything done by the defendants after 19 March
2015.
Mr Terry’s discovery
[15] Mr Terry swore an affidavit of documents on 25 November 2015. The affidavit follows the standard form G37 of the First Schedule to the High Court Rules. That means that Mr Terry has sworn that he understands the obligations imposed by the discovery order; that to fulfil those obligations he has diligently searched for documents required to be discovered under the order; and he has searched all relevant physical and electronic documents belonging to him and within his control. In his affidavit there is a section headed “James Terry files”. He has listed approximately 70 documents under this head. Most of them are emails up to and including 19 March 2015. He has not included any documents that came into existence after 19 March 2015.
The plaintiffs’ application under r 8.19
[16] Rule 8.19 of the High Court Rules says:
8.19Order for particular discovery against party after proceeding commenced
If at any stage of the proceeding it appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered, the Judge may order that party—
(a) to file an affidavit stating—
(i) whether the documents are or have been in the party’s
control; and
(ii) if they have been but are no longer in the party’s control, the party’s best knowledge and belief as to when the documents ceased to be in the party’s control and who now has control of them; and
(b) to serve the affidavit on the other party or parties; and
(c) if the documents are in the person’s control, to make those documents available for inspection, in accordance with rule 8.27, to the other party or parties.
[17] On applications under r 8.19, the starting position is a presumption that the sworn affidavit of documents is conclusive. The party seeking further discovery has to establish that the existing affidavit is incomplete by showing grounds to believe that the other party has not discovered documents that should have been discovered.5
A party required to make discovery is required to disclose documents only if they are
relevant to an issue in the proceeding. The pleadings set the bounds of discovery. And in assessing relevance, it is the case of the party seeking discovery that is assumed to be true, not just the case of the party required to make discovery.6
[18] In this case I ordered standard discovery. The plaintiffs contend that even under standard discovery the court may make orders for discovery on a “train of enquiry” basis as laid down by the English Court of Appeal in the Peruvian Guano case.7 In support, they cited the decision of the Court of Appeal in ANZ National
Bank v Commissioner of Inland Revenue:8
5 McCullagh v Robt Jones Holdings Ltd [2015] NZHC 1462 at [7].
6 Robert v Foxton Equities Ltd [2014] NZHC 726 at [8]; Kawarau Village Holdings Ltd v Yuen
[2015] NZHC 1379 at [38].
7 Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co [1894] 3 Ch 690 (EWCA).
8 ANZ National Bank v Commissioner of Inland Revenue [2009] NZCA 150, [2009] 3 NZLR 123 at [5].
Relevance for discovery purposes is not necessarily the same as relevance in terms of s 7 of the Evidence Act 2006... … In particular, it is sufficient in the former case that a document may lead a party to a train of enquiry which enables that party to advance its own case or damage its adversary’s case.
[19] That dictum has been overtaken by the changes to discovery in Part 8 of the High Court Rules. The Peruvian Guano test no longer applies under standard discovery. The effect of the “train of enquiry” test was to require disclosure of documents on the off chance that it might help an adversary even though there was no prospect of those documents being used in evidence. In practice, it turned out to be burdensome, time-consuming and extremely expensive while producing relatively insignificant benefits.
[20] The purpose of standard discovery is to cut down on the range of documents to be disclosed. New Zealand has taken the standard discovery test from the English Civil Procedure Rules. It had its genesis in the proposals by Lord Woolf in his report Access to Justice, Final Report:9
My recommended solution involved the identification of four categories of documents which at present have to be disclosed. These are:
(1) The parties’ own documents, which they rely upon in support of
their contentions in the proceedings;
(2) Adverse documents of which a party is aware and which to a material extent adversely affect its own case or support another party’s case;
(3) Documents which do not fall within categories (1) or (2) but are part of the “story” or background, including documents which, though relevant, may not be necessary for the fair disposal of the case;
(4) Train of enquiry documents: these are documents which may lead to a train of enquiry enabling a party to advance his own case or damage that of his opponent.
[21] Lord Woolf recommended that standard disclosure be limited to documents within categories (1) and (2) only, while allowing for applications for specific disclosure in exceptional cases. That has been largely carried through under the new discovery rules in Part 8 of the High Court Rules, as introduced under the 2011 amendments.
[22] Under standard discovery, documents are to be disclosed if they or the information in them are capable of being used in evidence – either because they support the case of the party making discovery or of any other party, or because they are adverse to the case of the discovering party or any other party. That does not mean that the documents will be bound to be used in the hearing.
[23] In further support of his contention that the court could still order “train of enquiry” discovery under r 8.19 when standard discovery had been ordered, Mr James cited Associate Judge Osborne’s decision in Westpac v Adams.10 Mr James relied on the principles set out in paragraph [27] of that decision. That was a case of non-party discovery. Associate Judge Osborne set out general discovery principles as being relevant to any order for non-party. He acknowledged that Peruvian Guano discovery may be ordered. He did not specifically state that as being tailored
discovery but he surely meant that Peruvian Guano discovery is ordered as a departure from “adverse documents.” Any order for discovery on a Peruvian Guano basis is tailored discovery under r 8.8 of the High Court Rules. I am only concerned to identify Mr Terry’s obligations on an adverse documents basis under r 8.7.
Mr Terry’s personal emails
[24] The plaintiffs complain that Mr Terry has not disclosed emails on his personal email account. Mr Plumpton’s affidavit attaches an email chain dated
19 March 2015. The parties are Brent (whom I take to be Mr Colbert, the second defendant) and Stefan Schulz. These are emails on the evening of 19 March 2015. There are references in the emails to “James.” I share Mr Plumpton’ view that that may refer to Mr Terry. Relevantly, those emails were work emails, using work email addresses. They do not appear to be personal email addresses although Stefan Schulz did ask Brent (Mr Colbert) for his personal email address. The document by itself does not lead me to believe that Mr Terry used his personal emails to correspond with others.
[25] As to context, this was where the plaintiffs contend that all three defendants were acting in breach of their obligations as directors and employees of USFX Ltd.
It was just before Brewer J ordered his first interim injunction. The plaintiffs’ case is that all three defendants were acting in blatant disregard of their fiduciary obligations. They would communicate behind Mr Plumpton’s back and accordingly they would not use their work email addresses for secret communications. Against that, I am faced with Mr Terry’s sworn affidavit of documents. He has already deposed that he has checked for documents in his control which are relevant to the matters in issue in the proceeding.
[26] The plaintiffs say that if only Mr Terry had sworn a further affidavit in the same way that the second and third defendants had, directing his attention to the particular classes of documents for which they are seeking further discovery, that would have satisfied them. As a matter of practice, many respondents to applications for further discovery do reply by swearing affidavits deposing as to whether they hold further documents sought in the application under r 8.19. They do that to allow the application to be addressed on its merits. But there is no obligation on a party served with an application under r 8.19 to file any evidence in response. The burden remains on the applicant to make out its case that there are relevant grounds to believe under r 8.19. Mr Terry is entitled to file a notice of opposition and then to contend that the plaintiffs have not made out their grounds. It is very much a matter of judgment in the particular whether to take that course or to file a further affidavit. I assess the case on the basis of Mr Plumpton’s evidence and in the absence of any evidence from Mr Terry except his affidavit of documents. Even so, the plaintiffs have not led me to believe that Mr Terry has failed to discover documents which should have been discovered. It is no more than conjecture that Mr Terry may have used personal emails to communicate with other people.
[27] There is support for Mr Terry’s position in the affidavits sworn by Mr Maynard and Mr Colbert. Both of them have deposed that they do not have any relevant personal emails. Presumably if they had communicated with Mr Terry by email, they would have identified those either in their initial affidavits of documents or in their further affidavits in response to the present application. I note that they are independently represented. The absence of any such documents identified by them supports Mr Terry’s position that he did not communicate with them by personal email.
[28] Mr James also submitted that Mr Terry had communicated with others besides the second and third defendants. Again, that is simply conjecture. I am not persuaded there are grounds to believe that there must be something else awaiting discovery in terms of Mr Terry’s personal emails.
Feder8 documents
[29] The plaintiffs also seek documents relating to Feder8. In his affidavit, Mr Plumpton exhibits an email chain between Mr Colbert and a Ms Gemma Schofield. In the chain the following appears:
Why Feder8. It’s a slant on Federate. The product we are looking at selling across Asia is a new product being launched in four weeks called “Skype for Business” … Essentially Skype as you know and love it today but also allows companies to replace their entire phone system and use Skype for all their calling as well as providing multi-party video conferencing capability to (10,000+) users.
[30] There was a subsequent email in which, in response to logos provided by
Ms Schofield, Mr Colbert has said:
Let me run them past the boys.
The dates of those emails are 9 April and 17 April 2015.
[31] Mr Plumpton says that the product/service is similar to the type of product/service offered by UCFX. He accordingly claims that this may be relevant to any use of UCFX’s confidential information in setting up this entity. He also says that Mr Maynard is listed as owner of the domain name, He notes that an email has been sent to Mr Terry at the address [email protected].
[32] Mr Maynard has explained that while he registered the Federe8me.com address on 24 April 2015, he did it on behalf of Mr Terry. He said he was looking to set up business specifically for recruitment. Mr James points out the inconsistency between the claim that the business was set up for recruitment and the Skype product.
[33] Documents relating to the establishment of Feder8 might be relevant if there were any relevant pleading putting that in issue. The case as it stands at the moment does not involve any allegations against any of the defendants for misuse of confidential information after 19 March 2015. Up until May 2015 the defendants were restrained from approaching any customers of UCFX Ltd. After Brewer J’s decision in May 2015 they were under a restraint not to use any confidential information of UCFX Ltd. The restraint on the use of confidential information was not limited to two months but was indefinite. It would be remarkable, given that the defendants did not contest being enjoined from using confidential information, that they would then make use of confidential information after the order had been made. The Feder8 email addresses were in the period after the first injunction was ordered\, and before the second injunction.
[34] If the plaintiffs wish to contend that notwithstanding the terms of that injunction, the defendants have acted in breach of it, they need to put that in issue in this proceeding. It is important, of course, that any such allegations be properly articulated. It is trite, of course, that there can be no restraint on the defendants competing with the plaintiffs in the same line of business except when they are subject to valid restraints of trade and so long as they do not breach any confidence. In the absence of any pleading showing a case for breach of confidence after
19 March 2015, there is no basis in which I can order discovery of any documents relating to Feder8.
Outcome
[35] That means that I cannot make the orders sought by the plaintiffs. I dismiss
the plaintiffs’ application with costs to the first defendant.
[36] It may turn out that the plaintiffs will amend their pleadings, particularly if they have a basis for alleging ongoing breach of confidence by the defendants. If they were to amend their pleadings, the defendants, who have ongoing discovery
obligations, will be required to reassess the adequacy of the existing discovery.11
11 High Court Rules, r 8.18(2).
Mr McAnally acknowledged that that would be the case if the pleadings were to be amended.
[37] I also make this point. In Jones v Monte Video Gas Company,12 the English Court of Appeal held that an affidavit of documents was conclusive and could not be disregarded in the light of a contentious affidavit sworn by another party. While noting that, the court went on to hold that it is open to a party faced with a conclusive affidavit of documents to interrogate. That remains an option open to the plaintiffs in this case.
Case management considerations
[38] During the hearing I have discussed the plaintiffs’ pleadings. I note these matters for the plaintiffs’ consideration. Insofar as the plaintiffs wish to claim a duty of confidence as an obligation to which the defendants are subject after resignation, it should be separately pleaded as a distinct cause of action. The information alleged to be confidential should be identified and there should be a relevant pleading as to the misuse of that information. Out of caution, the plaintiffs may wish to plead that as an obligation arising under both s 145 and the common law. I say that because there is room for argument whether the obligation under s 145 survives resignation as a director.
[39] As to the third cause of action, I invite the plaintiffs to reconsider that cause of action in the light of the decision in the House of Lords in OBG Ltd v Allan.13
[40] The plaintiffs will also need to finalise the quantum of the financial relief they seek. Mr James advises that the plaintiffs are working on that. He also advises of the plaintiffs’ intention to administer interrogatories. Properly, the sequence should be that amended pleadings go first, and interrogatories should follow.
[41] I direct that this case is to be called in my chambers list on Friday 12 August
2016 at further case management. I hope that by then the plaintiffs will have finalised their pleadings and interrogatories will have been administered. I shall
12 Jones v Monte Video Gas Company [1879] QBD 556 (EWCA).
13 OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1.
wish to consider whether directions can be given for hearing. It may be that questions will arise as to interrogatories and further discovery. If the parties seek further directions they should file memoranda and a telephone conference will be convened at short notice.
………………………............
Associate Judge R M Bell
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