RVGR Trustees Limited v Perry & Associates Limited HC Wellington CIV-2010-485-1454

[2011] NZHC 62

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2010-485-1454

BETWEEN  RVGR TRUSTEES LIMITED Plaintiff

ANDPERRY & ASSOCIATES LIMITED Defendant

Hearing:         16 February 2011 (Heard at Wellington)

Counsel:         E. Grove - Counsel for Plaintiff

J. Morrison - Counsel for Defendant

Judgment:      28 February 2011 16:00:00

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This judgment was delivered by Associate Judge Gendall on 28 February

2011 at 4.00 pm under r 11.5 of the High Court Rules.

Solicitors:           Graeme Skeates Law, Solicitors, PO Box 56179, Dominion Road, Auckland 1015

Knight Coldicutt, Solicitors, PO Box 124133, Wellington 6142

RVGR TRUSTEES LIMITED V PERRY & ASSOCIATES LIMITED HC WN CIV-2010-485-1454 28 February

2011

Introduction

[1]      The defendant, Perry & Associates Limited, applies for an order for security for costs against the plaintiff, RVGR Trustees Limited.

[2]       The plaintiff is in liquidation and it appears it has no assets. The present application is opposed on the ground that an order for security for costs would not be just in all the circumstances.

Background

[3]      The  plaintiff  is  the  corporate  trustee  and  operator  of  the  Daly  Street

Development Trust, which was used for the development of an apartment complex at

12 Daly Street, Lower Hutt. The plaintiff engaged the defendant to provide architectural  services  in  relation  to  the  design  of  the  apartments.  A  Design Agreement to that effect was entered into in October 2007.

[4]      The plaintiff alleges that the defendant’s drawings contained an error, in that they exceeded the total allowable gross floor area for the apartment complex by five per cent. The alleged result of this error was that the drawings did not comply with the resource consent which had been obtained, and that the project required significantly more labour and materials than had been estimated based on the defendant’s resource consent drawings and marketing floor plans. The error was not realised until April 2009, after the contractor had noticed that the estimated total build cost of $12,260,000 varied significantly from its own calculations which were in excess of $13,000,000. This latter figure was based on pricing and quotes from sub-contractors in accordance with the defendant’s non-compliant drawings.

[5]      The  alleged  damages  sustained  as  a  result  of  the  error  are  substantial, amounting to a total claim of $2,573,885.87. Plans and drawings had to be revised, with the plaintiff’s engineers, Connell Wagner, charging $96,343 plus GST in fees for these revisions. In addition, it is claimed that there were material increases in the prices of construction materials during the period of delay allegedly caused by the error,  which  meant  that  the  contractor  was  no  longer  prepared  to  build  the

apartments at a fixed price of $12,500,000 contemplated earlier. The plaintiff instead accepted a construction tender at a total cost of $13,600,000.

[6]      The plaintiff further alleges that the ANZ National Bank then withdrew its first finance arrangement offer as a result of the delays. A less favourable and more costly second finance arrangement was entered into, but this was again withdrawn in March 2009. The bank apparently considered that the delay had triggered “sunset” clauses entitling apartment purchasers to cancel their agreements for sale and purchase, which meant that one of a number of pre-conditions for financing was no longer satisfied.

[7]      Ultimately, the plaintiff says it was unable to undertake development of the apartments  due  to  lack  of  funding.  On  12  June  2009,  it  sold  the  property  for

$718,750. It now claims that the defendant breached an implied term of the Design Agreement, and breached its tortious duty of care to exercise reasonable skill and care when providing its architectural services. The claimed damages are made up of Connell Wagner’s fees ($108,385.87); additional financing interest costs, rates payments and project management and administration fees ($505,000 in total); legal fees incurred in relation to the negotiation of new financing ($45,000); an upfront fee payment required by ANZ National Bank ($50,000); and other expenses, including design and consultancy expenses ($1,981,000).

[8]      The plaintiff is in liquidation.   It owes approximately $2,347,588.29 to its creditors, including the Inland Revenue Department.

[9]      No statement of defence has yet been filed.

Counsel’s Submissions and My Decision

[10]     Rule 5.45 of the High Court Rules provides that a judge may order the giving of security for costs if there is reason to believe that a plaintiff will be unable to pay the costs of the defendant, assuming the plaintiff is unsuccessful, and if the judge thinks that an order is “just in all the circumstances”:

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.

(3)  An order under subclause (2)—

(a)  requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient—

(i)         by paying that sum into court; or

(ii)        by giving, to the satisfaction of the Judge or the Registrar, security for that sum; and

(b)  may stay the proceeding until the sum is paid or the security given.

[11]     It is accepted in this case that the threshold requirement of impecuniosity in subs (1)(b) is established. The only issue is whether the Court should exercise its discretion to make an order for security for costs.

[12]     In AS McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747, the Court of Appeal emphasised that the ordering of security is a discretionary exercise, not to be fettered  by  constructing  principles,  but  that  it  is  necessary to  weigh  up  all  the relevant factors in each particular case:

[13] ... Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing “principles” from the facts of previous cases.

[14] While collections of authorities such as that in the judgment of Master Williams in Nikau Holdings Ltd v Bank of New Zealand (1992) 5 PRNZ 430, can be of assistance, they cannot substitute for a careful assessment of the circumstances of the particular case. It is not a matter of going through a check list of so -called principles. That creates a risk that a factor accorded weight in a particular case will be given disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.

[15] The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that  an  order  for  substantial  security  may,  in  effect,  prevent  the  plaintiff  from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the courts for a genuine plaintiff is not lightly to be denied.

[13]     Relevant considerations may include the merits of the plaintiff’s claim; any reasonable probability that the impecuniosity of the plaintiff has been caused by the acts of the defendant which are the subject of the proceeding; the means of interested shareholders and creditors, and their ability to assist with the provision of security; and the possibility that an order for security might prevent the plaintiff from proceeding with a bona fide claim: see Nikau Holdings Ltd v Bank of New Zealand (1992) 5 PRNZ 430; Bell-Booth Group Ltd v Attorney-General (1986) 1 PRNZ 457.

Merits

[14]     Addressing first the merits of the plaintiff’s claim, the defendant submits that this is an appropriate case for security to be ordered because it maintains the plaintiff’s claim is entirely implausible. It submits that the claim - that a drawing error derailed a $16,000,000 project causing losses in excess of $2,500,000 - is “little short of fantastic”. The defendant argues that the error was discovered and addressed in a three to four months period from May to August 2008; and that the second finance arrangement was withdrawn because of delays that had nothing to do with this May to August 2008 period. In relation to the plaintiff’s damages particulars, the defendant submits that the pleaded figures seem to include duplications; that time- based claims in respect of additional costs to June 2009 cannot be causally linked back to an error remedied over a three-month period to August 2008; and that the unspecified  “other  expenses”  by  far  exceed  the  total  particularised  amount  of

$707,885.87.

[15]     The plaintiff notes that the defendant appears to concede that an error in its drawings did cause some delay in the construction project. It submits that it took about four months for Connell Wagner to complete its revised drawings and that, provided the error is an actionable one, there must be a reasonably arguable case that at  least  the  losses  alleged  to  have  resulted  from  this  four  month  delay  are recoverable.  As  pleaded,  these  losses  would  include  Connell  Wagner’s  fees  of

$108,385.87  and  additional  rates,  project  management  and  finance  costs.  The plaintiff notes that Connell Wagner’s fees alone amount to almost twice the defendant’s estimated 2B costs sought as security here amounting to $55,084.

[16]     The basis of the defendant’s proposed defence is unknown. At this stage, it is not conceded that the error gives rise to a prima facie right of recovery. Instead, counsel’s submissions seem to focus on the argument that the error could not have caused the losses alleged by the plaintiff. The plaintiff acknowledges that the claim is complex and that the consequential losses are widely pleaded. However, it submits that the defendant knew or ought to have known that their architectural drawings would be used to calculate construction costs and obtain financing for the development, and that any error in the drawings would thus lead to delay. On that basis, the plaintiff contends that it remains reasonably arguable that the defendant’s negligence put the whole of the apartment development at risk.

[17]     It has been stated many times that any assessment of the merits of a claim in the early interlocutory stages of a proceeding is necessarily preliminary in nature, and often does not amount to more than a general impression of the strength or weakness of the plaintiff’s claim: see A S McLachlan at [25]. With no statement of defence, or indeed affidavit evidence, having been filed at this stage, there are of course very real limitations to the reliability of any such assessment.

[18]     However, to the extent that the defendant seems to concede an error was made, I am of the view that the plaintiff might well have a good case for recovery of at least some of its alleged losses. The defendant did not make any submissions on the plaintiff’s ability to establish its causes of action for breach of contract and negligence in principle, save as to dispute the causal link between the error and the damages claimed. In these circumstances, it seems to me that the plaintiff has an arguable case at least for recovery of the alleged losses flowing directly from the initial period of delay.  It is impossible, however, to form a view on the merits of the plaintiff’s more general claim that the defendant was ultimately responsible for the failure of the apartment development.

Inability to pursue claim

[19]     The plaintiff submits that it will be unable to continue the proceedings if ordered to pay security. In assessing the significance of this factor, it is relevant whether an impecunious plaintiff is likely to have access to outside funds. The

defendant refers here to Birnie Capital Property Partnership Ltd v Birnie HC Auckland CIV-2010-404-3000, 29 October 2010, where Asher J said at [28]:

... Will an order for security and an order for stay until security is provided mean that the plaintiff cannot proceed and the case will fail? This will be the case if there are no funds of the plaintiff, and no access to funds of those who support the plaintiff. Or is there a third party who stands to benefit from the litigation and has funds which could be used to pay security? There is a well established line of authority where the Courts have ordered security be paid by impecunious companies knowing that those who have an interest in the company will meet the order. The Court is able to look behind the resources of the plaintiff company itself, and consider who is behind the litigation and who is funding it, to gain an accurate commercial assessment of who might meet a security for costs order.

[20]     The plaintiff denies that it has a “litigation funder” here. It says that the proceedings are undertaken by the plaintiff’s counsel and solicitor on a “wait and see” basis, invoicing the plaintiff’s liquidator for their time with no payment required until, if and when the plaintiff makes a recovery. Similarly, the plaintiff’s liquidator apparently will receive no payment for his services unless there is a recovery in these proceedings.

[21]   The plaintiff further points out that its secured creditors have entirely relinquished their security interests so that the proceedings are for the equal benefit of all its creditors, and that there is no reasonable prospect that the creditors can or would agree to contribute towards any required security for costs. One of the creditors, Merge JV Limited, has agreed that it will not prove as an unsecured creditor. The plaintiff also submits that, even if its claim was to succeed, it appears unlikely that there would be any material surplus available for its shareholders.

[22]     In response, the defendant maintains that it does not necessarily follow from the absence of any litigation funder that there is no one who could provide security for costs. Contrary to the plaintiff’s submission, the defendant suggests that some of the plaintiff’s substantial creditors might well be willing to do so, and that there is therefore no support for the contention that an order for security would prevent the plaintiff from continuing the proceeding. In particular, the defendant notes that two of the main creditors, ANZ National Bank and Merge Property Investment Fund No

1 Limited, are owed 80 per cent of the plaintiff’s overall debt, and that any unwillingness on their part to fund the claim “speaks volumes” about its prospect of success. It appears too that Merge Property Investment Fund No. 1 Limited (which is

said to be a creditor to the extent of $750,000.00) is a related party to the plaintiff company.

[23]     The defendant further submits, in reliance on Nelson Gambling Task Force Inc v Nelson City Council HC Nelson CIV-2010-442-368, 2 December 2010, that resultant inability to pursue a claim is not a bar to an order for security. In that case, the plaintiff had provided no evidence in relation to its inability to raise funds, with the result that a denial of access to justice was “a possible but not demonstrated outcome of any security order”. Asher J ultimately determined that any such possibility could be accommodated through a reduction in the level of security to be paid.  And, in A S McLachlan at [15], the Court considered that it might be unjust to order security where it would bring to an end a plaintiff’s ability to proceed:

The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the Courts for a genuine plaintiff is not lightly to be denied.

[24]     Although the plaintiff contends that it will be unable to pursue the claim if ordered to pay security, I am not satisfied that this will necessarily be the case. The plaintiff suggests that financial support from its creditors or shareholders is out of the question. However, given that the proceedings are brought essentially for the benefit of those creditors, one could expect there to be some incentive for creditors to provide assistance with a security payment. The possibility that the plaintiff might not be able to pursue the proceeding if ordered to pay security is an important factor, but is not in itself determinative. As well as having regard to the plaintiff’s right of access to justice, the Court must give adequate weight to the defendant’s potentially vulnerable position. To refuse the defendant’s application here would require the defendant to defend a relatively complex proceeding with no prospect of recovery of costs.

Security for costs against liquidators

[25]     The plaintiff submits that, where proceedings are brought by a liquidator for

the benefit of an insolvent company’s creditors, and the ordering of security against

the company would prevent the proceedings from continuing, security for costs will only be awarded in exceptional circumstances. The plaintiff refers here to Tasman Charters   Incorporated   v   Kamphuis   HC   Auckland   CIV-2002-404-1642,   24

September 2004 at [33], where Williams J said:

That is not to overlook the submissions made in relation to the liquidators’ position. Though Pacific Wools and the authorities discussed in that case indicate Courts’ long- standing disinclination to order security for costs in cases brought by companies in liquidation, those authorities make clear the practice is  founded on the  fact that liquidators are bringing or supporting proceedings to maximise returns for the benefit of all creditors and should not be inhibited in their statutory obligations in that regard by being in jeopardy of orders for security. However, such orders can be made in exceptional cases, as acknowledged in Pacific Wools and as actually made in Cory- Wright & Salmon.

[26]     In Cory-Wright and Salmon Ltd v KPMG Peat Marwick [1993] 2 NZLR 701, the Court ordered security to be paid by the liquidator because the proceedings were funded by creditors, who themselves were not at risk for costs, and the defendants would have no assurance of recovering the amounts they were obliged to outlay in a proceeding that was likely to be exceedingly expensive. The Court concluded that the secured creditors were in a position that was unduly favourable when compared to that of the defendants, and ordered security on that basis.

[27]     In the present case, the defendant submits that a distinction must be drawn between cases brought by the liquidator in his own name, and cases brought by the liquidator in the name of the company.  In these latter cases, the defendant suggests the court’s reluctance to order security for costs does not apply. This may overstate the position however. In Tasman Charters, Williams J upheld a decision to order security by Associate Judge Lang, who had referred to comments made by Master Thomson in Pascoe Ltd (in liq) v DFC Overseas Investments Ltd HC Wellington CP153/93, 13 October 1993 in the following terms:

In that case the learned Master accepted a submission that in determining security applications the Courts do not always appear to have given sufficient weight to the distinction between a case being brought by a liquidator in the name of a company and the case brought by the liquidator in his or her own name. The very fact that the proceeding has been brought in the name of the company rather than the liquidators means  that  the  defendants are  likely  to  face  an  added  difficulty in  obtaining a worthwhile order for costs in the event that they are ultimately successful.

[28]     In Pascoe Ltd, Master Thomson had said:

The authorities are clear that it is not usual to make an order for security for costs when a company is in liquidation. It is considered that a liquidator suing responsibly, usually after legal advice, should not be hampered in carrying out his duties by having to meet a security for costs order. A factor which has always weighed with the Court is that if the liquidator sues in his own name, he may be liable for costs. This is particularly the case where a liquidator brings misfeasance actions against directors.

[29]     Based on these authorities, I accept that it is clearly a relevant factor, in assessing the overall fairness of making an order against a liquidator, if the proceeding is brought in the name of the company.  In cases where this occurs, it has the result that the liquidator is not personally exposed to a costs award. Nevertheless, the approach outlined in Cory-Wright & Salmon v KPMG Peat Marwick, as summarised by Williams J in Tasman Charters, continues to apply. Although courts are  conscious  of  the  need  to  acknowledge  the  liquidator’s  special  position  by limiting orders for security to exceptional circumstances, it is clear that an order for security should be made where this is necessary to do justice between the parties.

Cause of insolvency

[30]     Finally,  the  plaintiff  suggests  that  the  defendant’s  error  has  caused  the plaintiff’s insolvency, but goes on to concede that, in the absence of expert evidence, the merits of this submission probably cannot be resolved. The defendant submits that there is no evidence to support the contention to the required standard of “reasonable probability” (see Davey v Howell (1993) 7 PRNZ 141).  I agree.

Balancing of these factors

[31]     The plaintiff submits that it would not be “just in all the circumstances” to make an order for security, in light of the defendant’s apparent concession that it did make  an  error  which  resulted  in  a  three  month  delay,  and  what  it  says  is  the likelihood that it will have to abandon its claim if security is ordered.

[32]     It has already been noted that the plaintiff’s potential inability to pursue the proceeding here must be weighed against the risk to the defendant of being unfairly exposed to unrecoverable costs. I have concluded that at least part of the plaintiff’s claim may well be arguable.  This is a factor that weighs in favour of the plaintiff. It

is not, however, a decisive or even particularly significant factor, given that I have not been able to form a view on the merits of the plaintiff’s wider allegations. Another consideration that would seem to favour the plaintiff is that the liquidator “should not be inhibited in [his] statutory obligations” in bringing “proceedings to maximise returns for the benefit of all creditors” (Williams J in Tasman Charters).

[33]     Having regard to  all  these factors,  I nevertheless  conclude that  this  is  a situation in which it would not be just to require the defendant to go on without the protection of security. There is a clear imbalance in terms of the parties’ ability to recover costs. Without security, the defendant will face exposure to the costs of a trial that is estimated to take five days, with no recourse to recovery in the case of a successful defence. The plaintiff, on the other hand, incurs no risk of liability for the defendant’s costs, but is able to bring the proceedings because of the approach adopted by its liquidator, solicitor and counsel (I note in passing that before me counsel for the defendant made brief mention of a possible allegation of maintenance and champerty, but this argument was not pursued in any way). The plaintiff will also presumably be able to recover against the defendant, should its claim succeed.

[34]     In addition, I am not satisfied that the plaintiff will necessarily be unable to pursue  the  claim  if  security  is  ordered.  Some  of  the  plaintiff’s  creditors  are substantial companies (and one at least a related party) and they are owed large amounts of money. If, however, the creditors are in fact unwilling to provide any financial support, I consider that this is a factor that may lessen the overall unfairness that would otherwise arise from the making of an order for security.   The present proceeding is typical commercial litigation which one would normally expect to be funded in the expectation of commercial return, and, in my view, it is reasonable that those who would be called upon to fund or assume the risk from this litigation should have the usual costs risks exposure attendant on such litigation.

[35]       For these reasons, I have come to the conclusion that an order for security is  appropriate  here,  but  that  the  amount  of  security  ordered  should  reflect  the position of the plaintiff as a company in liquidation. The amount of security is in the Court’s discretion. As McGechan on Procedure notes in part at HR 5.45.07:

“(The amount of security) is not necessarily to be fixed by reference to likely costs awards.   Rather it is to be what the Court thinks fit in all the circumstances:  AS McLachlan Ltd ...”.

[36]     In  this  case,  The  defendant  seeks  an  order  for  $55,000,  based  on  an assessment of likely 2B costs for a five day hearing. The plaintiff accepts that a five day hearing is required and that for such a hearing, the figure for costs of $55,000.00 is realistic.  In all the circumstances here, however, I consider that a lower amount of

$35,000.00 would be more appropriate.

Conclusion

[37]     An order is now made that the plaintiff is to provide security for costs of

$35,000.00 by paying this sum into Court or by giving, to the satisfaction of the

Registrar, security for that sum.

[38]     An order is also made that this proceeding is stayed until such security as ordered has been properly given.

[39]     As to costs, the defendant has succeeded in its present application and, in my view, is entitled to an award of costs in the usual way.  Costs on this application are awarded to the defendant on a 2B basis together with disbursements as fixed by the Registrar.

‘Associate Judge D.I. Gendall’