Rice v Heaney

[2014] NZHC 1833

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-000063 [2014] NZHC 1833

BETWEEN

HELEN MARIA RICE

Plaintiff

AND

DAVID JONATHAN HEANEY QC First Defendant

SUSAN ANNE THODEY Second Defendant

Hearing:	24 July 2014
Appearances:	John Billington QC for the Plaintiff Michael Ring QC and Martin Smith for the Defendants
Judgment:	6 August 2014

RESERVED JUDGMENT OF MOORE J [Application for Discovery]

This judgment was delivered by  on 6 August 2014 at 12:00pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

Date:

RICE v HEANEY QC & ANOR [2014] NZHC 1833 [6 August 2014]

Introduction

[1]      The plaintiff, Ms Helen Rice, was a partner in the Auckland law firm known as Heaney & Co.  She joined the partnership on 1 April 2001 having been a staff solicitor for a number of years.

[2]      When she joined, the other partners in the firm were the first defendant, Mr David Heaney and the second defendant, Ms Susan Thodey.   They had been practising together for five years.

[3]      It was a highly successful and profitable firm.

[4]      The firm developed a particular expertise and reputation in leaky building litigation.  Legal work from this source grew steadily between 2000 and 2005.  From

2006 it expanded significantly and the firm developed proportionately to meet the growing demands.  Staff were recruited and the firm moved to new premises in the PWC Tower in October 2012.

[5]      On 3 May 2013, in compliance with the partnership deed, Mr Heaney gave his partners 28 days’ notice to terminate the partnership.

[6]      Ms Rice alleges that on the same day he made contact with clients of the firm to advise them that she would no longer be a partner of the firm after May.   It is alleged that on various dates during that month Mr Heaney wrote to other clients of the firm advising them the partnership was restructuring and that as from 1 June

2013, he and Ms Thodey would be joined in partnership by three associates of the firm but Ms Rice would not remain as a partner.

[7]      The letter expressed an anticipation of “greater enthusiasm from within the firm” and the new structure would, it was expected, “… provide … clients with the assurance that the firm is here to serve [the clients] for the long term, delivering the same high standard of legal advice that has been evident over many years.”

[8]      The letter went on to reassure that the structure would have no detrimental effect on the firm’s ability to manage the clients’ needs, and that “… morale at Heaney & Co is high and there is optimism for the future.”

[9]      The firm’s website was  also amended to announce the new partners.   It recorded Heaney & Co would continue to practice from its PWC premises.

[10]     Under the notice Ms Rice ceased to practice as a member of Heaney & Co on

31 May 2013.   The following day a new partnership was constituted by the defendants, named Heaney & Partners.

[11]     The new practice continued largely as its predecessor had.  Staff of the old firm were re-employed by the new.  The practice remained in the same premises and the client base was largely the same.

[12]     Ms Rice claims that as a partner of Heaney & Co she, with her other partners, had a beneficial interest in a bundle of rights and interests.  These included the firm’s fixed assets, long and established relationships with key clients providing a degree of certainty as to future instruction, existing instructions providing ongoing and significant income, structures and procedures for the efficient and effective management of litigation against local bodies (including employment relationships with experienced staff), the database, precedents, high partner/staff gearing, business premises and infrastructure as well as obligations of utmost good faith between partners.

[13]     Ms Rice claims that any partner wishing to dissolve the firm owed a duty to their other partners to ensure the partners received the maximum value for the bundle of rights, not to damage the value of the bundle pending the winding up of the firm and not to appropriate any of the rights without the agreement of the other partners.

[14]     Ms  Rice  claims  that  from  the  time  of  giving  notice,  Mr  Heaney  and Ms Thodey acted in breach of their duties to Ms Rice by approaching clients and staff,  assuming  control  of the firm’s  assets  and  remaining in  occupation  of the premises.

[15]     In essence, she claims the defendants appropriated the business of the firm to the new firm and in all material respects the new firm is simply the reincarnation of the old, but without Ms Rice.

[16]     She claims the conduct of the defendants continued from the post-notice phase   into   the   post-dissolution   period.      The   defendants,   she   claims,   have appropriated the value of the bundle of rights to themselves.

[17]     Ms Rice also claims that as a result of these breaches she has suffered loss while the defendants have continued to earn similar income levels as previously; a consequence derived wholly or partly from  their control and use of  partnership assets.  She also claims that her interest in the firm’s assets includes goodwill.

[18]     The defendants’ position is straightforward.  Any partner of Heaney & Co was entitled to give notice of dissolution for any reason. After notice was given both Ms Rice and Mr Heaney made approaches to Ms Thodey to practice with them.  She chose to continue to practice with Mr Heaney and the three new partners.  As for clients of the former firm, those clients have either requested the new firm to apply to join their panel of legal providers or have confirmed instructions for existing or new work in favour of both Ms Rice and the defendants.

[19]     The defendants deny there was any goodwill held in the firm beyond that held individually by the partners.

This application

[20]     Ms Rice seeks further and better discovery.1

[21]     In particular, she seeks:

Documents that are or may be relevant to the reasons for the first defendant dissolving the partnership of Heaney & Co and the first and second defendants deciding to form the partnership of Heaney & Partners.

1 High Court Rules, r 8.7 and 8.9.

[22]     Mr Billington QC for Ms Rice submits that because the firm, in essence, continued as before, it is relevant to her case to know if either Mr Heaney or Ms Thodey “contrived this outcome” in order to profit improperly at the expense of the firm  or  Ms  Rice.    He  submits  it  is  relevant  to  enquire  whether  that  was  the defendants’ desired outcome and whether, in fact, it was achieved.  If the dissolution was for the improper motives of profiting at the expense of other partners, such actions on the part of any partner would be relevant even if they pre-dated the giving of the notice of dissolution.

[23]     For the defendants, Mr Ring QC submits the application is misconceived because it is speculative.   He emphasises that in an application of this sort the starting point must be the pleadings.   These dictate the scope of discovery.   The plaintiff’s application is not based on her currently pleaded case but on her desire to ascertain whether there is a basis for her to plead a new and different claim.  The cause and purpose of Mr Heaney’s decision to give notice of dissolution is not pleaded.   This, no doubt, is because Heaney & Co was a partnership at will dissolvable on notice without any requirement to give cause.   Mr Ring submits it cannot be the law that a partner breaches their fiduciary duty to the firm by giving notice unless that notice is objectively in the best interests of the firm.  If that was the case it would have the most unfortunate consequence of operating in a way where only undesirable partners could leave and the effective, valuable and contributing partners would be locked into practising in the firm indefinitely.  That could never be in the best interests of any firm.

[24]     Mr  Ring  submits  that  in  any  event  the  substantive  proceedings  are misconceived.    The  defendants  do  not  dispute  what  Mr  Ring  describes  as  the orthodox position; if they have used the firm’s assets for their private purposes following notice of dissolution they will be liable to account.2   Such a remedy is not dependant on the plaintiff establishing the defendants contrived this outcome.

[25]     On the question of goodwill, Mr Ring submits that it is by nature personal. Ms Rice separated from her other partners.  They attracted the same employees as

were formerly employed with Heaney & Co.   The partners continued to trade off

2 Refer Partnership Act 1908, s 32.

their personal goodwill.  Ms Rice was not going to earn the same level of income as her former partners and, furthermore, he submits, she had no right to.  The whole purpose of giving notice is to provide a period during which the partners can rearrange their professional affairs and take their personal goodwill in order to trade somewhere else.   He submits this was emphasised by the fact the new firm has a similar list of clients to the old and produces a similar level of revenue as the old. This,  he  submits,  underscores  the  defendants’ proposition  that  Ms  Rice  had  no goodwill other than her own.  He says it does not prove that there was some form of

conspiracy to defraud her of the firm’s goodwill.3

[26]     Mr Ring points out that the present pleadings are exclusively focused on post-notice conduct.  Fraud or improper conduct must be specifically pleaded with full particulars.  There is a duty on counsel to have a good faith basis to make such a claim.    Mr  Ring  also  submits  that  it  is  plainly  wrong  in  principle  to  bring  a speculative  application  for  discovery in  the  hope  of  obtaining  disclosure  which would determine whether the speculation may actually have some foundation in fact.

[27]     He describes the present application as a “fishing expedition”, not relevant to any pleaded cause of action but which might reveal material which could provide the basis of a new head of claim.  Such tactics are not to be condoned.4

[28]     Finally, Mr Ring submits that locating and discovering the documents sought would be both oppressive and disproportionate.  He observes that at some point in the 12 years of partnership, Mr Heaney came to the realisation he no longer wished to continue to practice with Ms Rice.  He issued a notice.  The scope of potentially relevant documentation would span the entire 12 year period they had practiced together.  Locating such documents would thus be oppressive.

Would an order be oppressive?

[29]     I shall first deal with the defendants’ claim that to grant Ms Rice’s application

would amount to oppression.  Obviously, questions of oppression involve balancing

3 Reliance was also placed on Short v Gray, CIV-2008-404-2232, 9 June 2010.

4 AMP Society v Architectural Windows Ltd [1986] 2 NZLR 190. See also Intercity Group (NZ) Ltd v

Nakedbus Ltd [2013] NZHC 1054 at [34].

considerations of time and cost against the potential value of discovery.5   The Court has always had a discretion to refuse discovery if compliance would be oppressive having regard to the proportion between the value of the rights in issue weighed against the volume and cost of compliance.6

[30]     The defendants claim that in order to properly comply the whole of the documentary record represented by the 12  years the parties were in partnership would need to be trawled through. This exercise would be disproportionate when the cost and time is balanced against the potential value of disclosure.

[31]     However, in the course of argument, it became apparent that the nature and class of documents sought could be refined and the relevant period within which such documents may have been received or created was capable of circumscription.

[32]     I am satisfied that any order would not need to extend beyond 18 months prior to the issuing of the notice of dissolution.  This is because evidence of any plan or strategy (if it exists) to create a new firm from the old and to compromise the legitimate interests  of Ms Rice,  is  unlikely to  have been  hatched  more than 18 months before the giving of notice.  In any event, if there was such a strategy, the plans surrounding its implementation would have been made and communicated at a time reasonably proximate to the giving of notice.

[33]     Furthermore, defining the nature of documents which fall into this class and are discoverable does not create a difficulty.  It need only include documents relating to a possible dissolution of the firm created or received by either defendant or any member of the staff of Heaney & Co.  Such an order would not include documents received  or  created  by  clients  during  this  period  because,  as  acknowledged  by Mr Ring, this class was included in the original order for discovery.

[34]     I am satisfied that this more narrowed, focused and refined approach would operate to avoid oppression. As counsel observed, the number of such documents, if

they exist, would be modest.

5 Jones v Auckland Council [2012] NZHC 29 at [34]-[37].

6 Karam v Fairfax New Zealand Ltd [2012] NZHC 887 at [142].

Would such documents be relevant to the case and thus discoverable?

[35]     Rule 8.7 of the High Court Rules requires each party to disclose documents that are or have been in that party’s control and are documents on which the party relies, or are documents that adversely affect that party’s own case.   While  the assessment is generally regarded as narrower in scope than that under Compagnie Financiere et Commerciale du Pacifique v The Peruvian Guano Co7 (known commonly as Peruvian Guano), the documents must still relate to the “case”. However,  considerations  of  relevance  remain  applicable.     It  is  important  to distinguish relevance to the case and relevance in the context of admissibility.8   The latter is a matter for the trial Judge.  The rules clearly contemplate that the obligation to make discovery does not turn on admissibility but rather that the documentation is relevant in the sense it relates to the wider concept of “case”, under the “adverse documents  test”.    This  means  that  the  documents  must  potentially  bear  some

relevance to a matter in issue arising from the pleadings.

[36]     Resolution of the issue of whether goodwill was an asset of the firm is not determinative of Ms Rice’s proceedings.  It is merely a part, albeit a significant part, of the claim.   There are other partnership assets which Ms Rice claims were misappropriated.

[37]     Furthermore, while the defendants’ submission that what lead Mr Heaney to dissolve the partnership is irrelevant because there is no requirement to give cause, this does not mean that the reasons for terminating the partnership by notice may not bear some relevance to the claim that either or both the defendants breached their fiduciary or other claimed duties to Ms Rice or otherwise acted in breach of their duties as partners.

[38]     Three time periods were identified as being relevant or potentially relevant to these proceedings; the pre-notice period; the notice period; the post-dissolution period.  Plainly, the conduct of the parties during the 28 day notice period and the

time which followed the dissolution of the partnership are relevant timeframes which

7 Compagnie Financiere et Commerciale du Pacifique v The Peruvian Guano Co (1882) 11 QBD 55 at 63.

8 Evidence Act 2006, s 7-8.

arise on the pleadings.   However, it is the period preceding the giving of notice which  Mr  Billington  asserts  is  also  relevant.    The  defendants  submit  that  the breaches pleaded only engage the latter two periods.  Any documentation created or received prior to the giving of notice (the pre-notice period) is irrelevant because it does not arise on the pleadings.

[39]     I  am  satisfied  the  documents  created  in  the  pre-notice  period  could, potentially, be relevant to the breaches alleged to have occurred in the latter two periods.  If there was evidence of an intention, plan or strategy to take control of the assets of the business, or to obtain a future commitment from staff or, in fact, an intention  to  act  in  any of the  ways  particularised  in  clause 31(a) to  (e) of the seconded amended statement of claim, this would be relevant to an assessment of the actions of the defendants after notice of dissolution was actually given.

[40]     It goes directly to the proof of Ms Rice’s claims.  It is thus relevant to the case and would also likely be admissible at trial although that is an issue for the trial Judge.

Result

[41]     In terms of r 8.19 I direct the defendants to: (1)          (a)           file affidavit/s stating:

(i)whether  the  documents  (more  precisely  described below) are or have been in the defendants’ control; and

(ii)if they have been but are no longer in the defendants’ control, the defendants’ best knowledge and belief as to when the documents ceased to be in their control and who now has control of them; and

(b)       to serve the affidavit/s on the plaintiff; and

(c)      if the documents are in the defendants’ control to make those

documents available for inspection in accordance with r 8.27. (2)      The affidavit/s is to be filed and served by 17 September 2014.

(3)For the purposes of this order the documents in question are  any documents relating to the possible dissolution of the firm known as Heaney & Co, created or received by either defendant or any staff member in the period of 18 months preceding the giving of the notice of dissolution on 3 May 2013.

(4)      Leave is reserved for either party to seek further orders or directions.

(5)Costs are awarded to the plaintiff on a 2B basis together with disbursements as fixed by the Registrar.

Moore J

Counsel:
Mr Billington QC, Auckland

Mr Ring QC, Auckland