Scrapbook Alley Limited v Chow
[2012] NZHC 2395
•14 September 2012
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
CIV 2011-454-141 [2012] NZHC 2395
BETWEEN SCRAPBOOK ALLEY LIMITED Plaintiff
ANDDAN CHOW, FAI CHOW AND DAVID ALAN LEA
Defendants
Hearing: 3 September 2012
Counsel: G A Paine for Plaintiff
T G A Manktelow for Defendants
Judgment: 14 September 2012
JUDGMENT OF THE HON JUSTICE KÓS (Security for costs)
Introduction
[1] The plaintiff, Scrapbook Alley Limited, is unlikely to be able to pay costs if it loses. Notwithstanding that, an Associate Judge concluded that security for costs should not be awarded to the defendants.
[2] The defendants submit that the Judge erred in his discretion in two respects. First, in concluding that there was a reasonable probability that it could be shown that the plaintiff’s impecuniosity resulted from the defendants’ actions the subject of the proceedings. Secondly, in failing to conclude that the plaintiff’s prospects of success were poor.
[3] I am asked to review, and reverse, the Judge’s decision.
SCRAPBOOK ALLEY LIMITED v CHOW & ORS HC PMN CIV 2011-454-141 [14 September 2012]
Background
[4] The plaintiff is a scrapbook retailer. Scrapbooking is a hobby activity in which the participants collect and retain ephemera in books. The plaintiff was described by its counsel, Mr Gordon Paine, as itself something of a hobby activity. It was not a large enterprise. It operated via two branches. Its main branch was in Palmerston North. A smaller branch was established in Pahiatua. It is that branch with which we are concerned here.
[5] In February 2010 the plaintiff leased a shop in a small block owned by the defendants in Pahiatua. The defendants were, therefore, the plaintiff’s landlord. The rent was small: $5,200 per annum or $100 a week. Also payable were certain outgoings (20 per cent of the rates and insurance premium payable in respect of the premises by the defendants).
[6] In May 2010 there was a fire. It appears to have been caused by an electrical fault in the building. The plaintiff says that the fire caused some $62,000 damage to the plaintiff’s stock. The plaintiff was given access immediately after the fire to remove salvageable items. There appears to be an issue about whether they had completed removal by the time they reopened in the new premises. The director of the plaintiff, Ms Patricia Street deposes:
At the end of the first week work started on the damaged premises and our shop was completely cleared out of all remaining items. This must have been done by the defendants and/or agents as we were not advised about the clearing of the premises nor consulted about any of the remaining shop contents which were taken by the defendants may well have been destroyed, or it is possible that the defendants sold those items and have retained the proceeds.
[7] After the fire the defendants terminated the lease. There is no argument about whether they were entitled to do so. The premises were no long tenantable. The defendants assisted the plaintiff obtain alternative temporary premises in Pahiatua. They moved into those premises within a week of the fire. The tenancy was a week-by-week one, because there was a possibility of the plaintiff resuming its original tenancy once the fire-damaged premises were reinstated.
[8] Since then, however, the plaintiff has ceased to trade altogether.
[9] These proceedings were issued on 4 March 2011. The initial statement of claim alleged three duties: a fiduciary duty to keep the plaintiff ’s chattel and stock safe (2) a contractual duty to maintain insurance cover sufficient to meet the plaintiff’s stock, plant and chattels and (3) an unspecified duty of care to “maintain the premises and ensure that no electrical faults ensued”.
[10] In August 2011 the defendants applied for summary judgment or strike out, and for security for costs in the sum of $15,000. On 5 September 2011 an Associate Judge dealt with the summary judgment application. He concluded there was a tenable basis to argue that at least the general duty cause of action might succeed. He reached that conclusion “only by a fine margin”. He said the claim needed to be amended. Summary judgment was refused.
[11] An amended statement of claim was then filed in October 2011. A judicial settlement conference took place, but did not produce a settlement. Further submissions were then given on the strike out application. In July 2012 the Judge struck out the plaintiff’s first cause of action (breach of fiduciary duty) and its sixth cause of action (escape of fire). The remaining causes of action (negligence, breach of contractual duty, trespass and conversion) were not struck out.
Decision challenged
[12] The Judge went on in his July 2012 decision to consider the security for costs application.
[13] First, the Judge dismissed an objection by the plaintiff to an affidavit sworn by the defendants’ solicitor on the record, Mr Peter Lindstrom. It deposed to the apparent impecuniosity of the plaintiff company. The objection was based on rule
13.5.2 of the Rules of Conduct and Client Care for Lawyers made under the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008, which provides:
If, after a lawyer has commenced acting in a proceeding, it becomes apparent that the lawyer or a member of the lawyer’s practice is to give evidence of a contentious nature, the lawyer must immediately inform the Court and, unless the Court directs otherwise, cease acting.
However, the Judge held that the evidence was of a purely machinery nature, and would be received.
[14] Secondly, regardless of the objection, the Judge held:
[49] In my view, however, what evidence is before the Court (and the plaintiff has essentially provided no financial material of any substance) does provide reason to believe that the plaintiff will be unable to pay the costs of the defendant if it is unsuccessful. It seems to be accepted that the plaintiff is no longer trading, it appears to have no assets of any kind and it seems it may have been involved in difficulties over unpaid taxation with the Inland Revenue Department. In addition, [the defendant] has put forward no real evidence to counter these suggestions by the defendant that it is impecunious.
It followed that the defendants met the “will be unable to pay” threshold for the making of an order for security of costs in High Court Rule 5.45(1)(b). The Court was then seized of a discretion to grant or refuse to make such an order under rule
5.45(2).
[15] The Judge then quoted a passage from the Court of Appeal’s decision in A S McLachlan Limited v MEL Network Limited:1
[50] In determining whether to exercise the discretion to order security for costs against the plaintiff, I am required to balance the interests of the plaintiffs with the interests of the defendants. That balancing exercise was summarised by the Court of Appeal as follows:
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.
Of course, the interests of defendants must also be weighed. They must be protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.
1 A S McLachlan Limited v MEL Network Limited (2002) 16 PRNZ 747 (CA) at [15]–[16].
[16] The Judge then referred to five particular discretionary considerations:
(a) the apparent merits of the plaintiff’s claim (but being careful not to
make detailed findings);
(b) whether the plaintiff’s impecuniosity was caused by the defendants’
actions;
(c) the means of anyone associated with the proceeding who may be able to assist the plaintiff;
(d) any delay on the part of the defendant in bringing the application; and
(e) whether the making of an order might prevent the plaintiff from proceeding with a bona fide claim.
[17] As to each of these factors:
(a) Merits: The Judge held that four remaining causes of action existed.
They were largely fact-dependent. The evidence available did not enable the Court to assess whether those causes of action would be successful or not. Nor should the Court engage in that analysis. The Judge said that he could not “really reach any firm conclusion as to the merits and prospects of success of the plaintiff ’s claim”.
(b) Cause of impecuniosity: I will set out the Judge’s conclusions on
impecuniosity in more detail in the next paragraph.
(c) Third party aid: There was no evidence that anyone associated with the plaintiff were in a position to assist the plaintiff to meet costs.
(d)Delay: There had been no material delay by the defendants in bringing the application.
(e) Bona fide claim: The plaintiff had a bona fide claim to advance, as the Judge had already found at (a). But he did not reach a final view on this final, fifth consideration.
[18] I turn now to the Judge’s findings on the question of whether the plaintiff’s
impecuniosity was caused by the defendants’ actions. The Judge said this:
[56] In the present case, the plaintiff contends that its impecuniosity has been caused solely by the cessation of its business resulting from the fire to its premises and the defendants’ actions ultimately in terminating its lease. There is no evidence before me as to whether the plaintiff may have carried insurance against such risks. It is presumed in light of the present proceeding that no such insurance was carried. The impact of this aspect on the plaintiff’s impecuniosity is not, however, entirely clear. It is suffice to say at this point that it would be usual in cases such as the present for a tenant of a retail shop such as the plaintiff to consider carrying its own full and comprehensive insurance against the risk of fire with respect to all its stock, plant and business continuation.
[57] In light of this, it might be said that it is hard to accept here that the plaintiff’s impecuniosity has resulted directly from the actions of the defendant regarding the fire. But, what is clear is that the defendants chose to terminate the plaintiff’s lease after the fire occurred and this, together with the plaintiff’s loss of its plant, stock and business, resulted in a situation where its principal asset being the retail business had gone.
[58] I find therefore that there is a reasonable probability here which could be established by persuasive evidence that the plaintiff’s impecuniosity has resulted from the defendants’ actions complained of in this proceeding. In my view, this is a clear factor which militates against security being granted. In balancing all the interests of the parties here, the defendants’ security for costs application is to be refused.
It appears that the conclusion in [58] was the decisive consideration in exercising discretion against awarding security.
Jurisdiction to review
[19] High Court Rule 2.3(4) provides that in this case (there being a reasoned decision following a defended hearing), the review proceeds as a rehearing. Therefore:
(a) the applicant (here the defendants) bears the burden of persuading the
Court that the Associate Judge’s decision was wrong. Only if the
High Court Judge considers the Associate Judge’s decision to be
wrong should it be interfered with;2
(b)as the Associate Judge’s decision involves the exercise of a discretion the applicant must show that the Judge had acted on a wrong principle, that the Judge failed to take into account a relevant matter or took into account some irrelevant matter, or was “plainly wrong”;3 and
(c) where the decision being reviewed is a chambers decision, without oral evidence, the High Court on review is not required to defer to the decision of the Associate Judge. It can weigh the evidence as readily as the Associate Judge could. If the High Court Judge thinks the Associate Judge is wrong, the reviewing Judge should say so forthrightly.4
[20] In support of its application for review, the defendants submitted a further affidavit from one of their number, Mr Lea. It simply produces a letter from the Inland Revenue Department to the defendants’ solicitors stating that the plaintiff owes the Revenue the sum of $135,081. That letter was not received until after the security for costs hearing had concluded. The defendants did not become aware of it until the day before the decision was delivered. Although objection was taken to the receipt of that affidavit, I am satisfied that it is admissible. It is updating evidence and the Court may receive such evidence under r 2.3(4)(b). More importantly, it goes to a point that is really not contentious: that the plaintiff is impecunious, if not
in fact insolvent.
2 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103; [2008] 2 NZLR 141 at [4].
3 Wilson v Neva Holdings Limited [1994] 1 NZLR 481; (1993) 6 PRNZ 654.
4 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103 [2008] 2 NZLR 141 at [3] and
[16].
Analysis
Impecuniosity reasonably probably caused by fire?
[21] Mr Toby Manktelow, for the defendants, submits first that the Judge’s conclusion expressed at [58] of his judgment is in error. Mr Manktelow submits that the Judge misdirected himself as to the threshold of evidence “required of a plaintiff” in these circumstances. Specifically, he submits, it is not enough to say that the plaintiff’s impecuniosity could be established by persuasive evidence. Rather, and relying on the decision of Asher J in Birnie Capital Property Partnership Limited v
Birnie:5
... there should be a “reasonable probability” established by persuasive evidence that the plaintiff’s impecuniosity has arisen from the defendant’s actions complained of in the proceeding.
[22] Mr Manktelow points to the absence of evidence from the plaintiff, a memorandum from the plaintiff indicating that such evidence might otherwise have been forthcoming, the obtaining of new premises referred to earlier, and the option available to move back into premises once reinstated. So, in essence, the immediate effects of the fire were limited to loss of the stock that could not be removed to the new premises (because burned or removed by the Fire Service or insurance assessors) and the associated disruption of shifting.
[23] As I explained in a recent judgment (delivered after argument in this case), Highgate on Broadway Limited v Devine,6 the question of probable causation is really a question of linkage, rather than an occasion to further examine the merits.7
Ordinarily a Court considering a security for costs application does so without close examination of the substantive merits. As the Court of Appeal said in A S McLachlan Limited v MEL Network Limited8 in a complex case it is not appropriate
on a security for costs application to form more than “an impression” of the merits.
5 Birnie Capital Property Partnership Limited v Birnie HC Auckland CIV 2010-404-3000,
29 October 2010 at [51].
6 Highgate on Broadway Limited v Devine [2012] NZHC 2288.
7 At [23](a).
8 AS McLachlan Limited v MEL Network Limited (2002) 16 PRNZ 747 (CA) at [21].
In a less complex case, presumably, the Court might be able to go beyond mere impression.
[24] In this case the Judge did go beyond impression as to merits, because he was seized of the defendants’ application for summary judgment and strike out. After two careful judgments on those applications he concluded that four of six causes of action were arguable and would not be struck out. There was no application by the defendants to review that conclusion. The question then posed by the Judge – whether the impecuniosity reasonably probably resulted from the actions of the defendants – was not an invitation to re-examine the prima facie merits of a claim, on which the Judge had already pronounced. Rather it was simply a question of linkage between the (presumed arguable) cause of action and the state of financial embarrassment under which the plaintiff now labours.
[25] On an application for security for costs, the onus lies on the applicant to produce evidence to show that the respondent will be unable to pay costs in the event of an adverse outcome. The respondent does not necessarily have to produce any evidence at all as to its means. There are however many instances where a Court has commented adversely on the silence of a respondent in circumstances where the
applicant has put forward prima facie evidence of impecuniosity.9 Where however
the plaintiff respondent seeks to rely on the events forming its cause of action as the reason for its impecuniosity, it may have to do more than simply point to the pleadings as the basis for that submission.
[26] In this case the plaintiff was in a small way of business. It operated two branches. One in a metropolitan area (Palmerston North), and one in the country (Pahiatua). Within a week of the fire at Pahiatua it was operating again from new premises in that town. The city branch continued to operate as always. The Judge was not therefore entirely right to say that the termination of the lease after the fire (itself an uncontentious act)10 ended the plaintiff’s business. In these circumstances it does not appear to me that a compelling link is made between the fire and the
impecuniosity of the plaintiff. Certainly the fire will have caused loss of stock and
9 See Sharda Holdings Limited v Gasoline Alley Services Limited HC Auckland CIV 2008-004-
000539, 13 November 2009 at [7].
10 See [7] above.
disruption at the Pahiatua branch. But it is difficult to understand how the fire caused a debt to the Revenue of some $135,000. That begs a serious question as to whether the plaintiff ’s impecuniosity truly is attributable to the fire.
[27] In my view this is not a case where the plaintiff could just stay silent in the face of the evidence adduced by the defendants. If (as it does) it wants to persuade the Court that its inability to pay costs in these circumstances is attributable to the fire (that being itself the subject matter of the claim), it had to explain its financial position in more detail. Given the wider issue over the solvency of the plaintiff (and its very large tax bill) and its failure notwithstanding the possession of new premises and the continuing city branch, I am unable to conclude that it is reasonably probable that the fire caused the plaintiff’s financial woes. It is more probable that the plaintiff’s apparent insolvency is not directly related to the fire. I therefore must reluctantly depart from the conclusion reached by the Judge on this question. In
taking that view, I follow the approach taken by Barker J in Davy v Howell.11
[28] I therefore conclude that the Judge erred in concluding that there was a reasonable probability that the plaintiff’s impecuniosity was the consequence of a cause of action in the claim. It is a possibility but, given the silence of the plaintiff, not a probability. As that premise was fundamental to the Judge’s reasoning, it will be necessary to re-evaluate the defendants’ application later in this judgment.
Prospects of success
[29] Mr Manktelow’s second argument was that the Judge should have concluded that the prospects of success of the plaintiff’s claim were “poor” and that that factor should have militated in favour of ordering security for costs.
[30] I do not accept that argument. The Judge had addressed the merits on two occasions – a decision on summary judgment in September 2011 and the present judgment on strike out in July 2012. Four causes of action remain. So an arguable case exists against the defendant. The Judge did say that he dismissed the summary
judgment application “by only a fine margin”, but that concerned the earlier pleading
11 Davy v Howell (1993) 7 PRNZ 141 at 145.
and no such expression accompanied the strike out decisions. In fact, he noted that “no real issue” was taken with three of the four causes of action that withstood the application (conversion, trespass and negligence). As to the other – breach of contract – the Judge set out difficulties standing in the way of the plaintiff, but did not strike that cause of action out either.
[31] The Judge reached a reasoned view that the plaintiff’s claim was not so hopeless as to require strike out. There was no application to review that conclusion. It follows that this second argument cannot succeed.
A re-evaluation
[32] In Highgate I suggested eleven questions that might usefully be considered on a security for costs application where the rule 5.45(1)(b) plaintiff impecuniosity threshold has been crossed:
(a) Is the plaintiff a nominal one?
(b)Is there evidence of the plaintiff disposing of assets to avoid meeting an adverse costs order?
(c) Is the plaintiff’s substantive claim prima facie unmeritorious?
(d) Does the plaintiff have access to third party funding?
(e) Would the denial of security for costs in the circumstances of this litigation be oppressive to the reasonable interests of the defendant and parties other than the plaintiff?
(f) Is it reasonably probable that impecuniosity was caused by the defendant?
(g)Would ordering security deprive the plaintiff of the capacity to advance a prima facie meritorious claim?
(h) Has the applicant delayed unduly in applying for security? (i) Is the conduct of either party relevant?
(j) Are there any other relevant considerations?
(k) How should the respective interests of the parties best be balanced? [33] By way of cross-check, I now consider the same questions.
(a) Is the plaintiff a nominal one? Not applicable.
(b)Is there evidence of the plaintiff disposing of assets to avoid meeting an adverse costs order? Not applicable.
(c) Is the plaintiff ’s substantive claim prima facie unmeritorious? The Associate Judge has held that it is not, and there is no challenge to that conclusion. That is not, however, to say that the plaintiff’s claim does not labour under potential difficulties of proof. As a matter of impression, the claim is sustainable but not strong.
(d)Does the plaintiff have access to third party funding? There is no evidence either way on that issue.
(e) Would the denial of security for costs in the circumstances of this litigation be oppressive to the reasonable interests of the defendant and parties other than the plaintiff? It cannot be said that this litigation is unjustified, unmeritorious, overcomplicated or
unnecessarily protracted.12 There have been difficulties as to the way
in which the plaintiff’s case was pleaded, but at the end of the day four causes of action have been sustained despite summary judgment
and strike out applications.
12 See A S McLachlan at [15].
(f) Is it reasonably probable that impecuniosity was caused by the defendant? I have differed from the Judge on this question and found that there is more reason to believe that impecuniosity existed regardless of the defendants’ actions complained of in the proceedings.
(g)Would ordering security deprive the plaintiff of the capacity to advance a prima facie meritorious claim? As I said in Highgate,13 access to justice is an essential human right. The cost of exercising that right is the payment of costs in the event of failure. The right of a successful defendant to costs in that event is arguably subordinate to the plaintiff’s right to be heard. Strong social policy considerations favour the use of Courts as an accessible forum for the resolution of disputes and grievances of almost all kinds. Only where a clear
impression can be formed that the plaintiff’s claim is altogether without merit – so that in the alternative it would be amenable to being struck out – would it be right for security to be ordered where to do so would bring the plaintiff’s claim to dead halt. In cases where the claim is being seriously misconducted (with undue complexity or expense), or where other grounds exist that balance in favour of ordering some security, orders short of effective termination of the claim may be appropriate. In this case I am concerned that the ordering of substantial security may bring the plaintiff’s claim to a dead halt. The surrounding solvency issues make progress in this case difficult in any event. It also raises real concerns for the defendants in the event that the claim – which both the Judge and I have noted has difficulties of proof – will therefore go unmet in terms of costs. I will return to this topic.
(h)Has the applicant delayed unduly in applying for security? There has been no undue delay in this case.
13 At [23](b).
(i)Is the conduct of either party relevant? There is no relevant conduct which would tend either in favour of, or against, security.
(j) Are there any other relevant considerations? No.
(k) How should the respective interests of the parties best be balanced?
As I have noted, already, there is a real concern that to order substantial security in this case will stop the claim altogether. That would be a denial of access to justice. On the other hand, it cannot be said that the plaintiff’s claim is a very strong one, and there is a real possibility that the defendants will have to defend a claim, will do so successfully, and will then be entirely unable to recover costs. Moreover, there is real doubt that the plaintiff’s financial embarrassment is due to the fire, and the associated alleged omissions of the defendants. In my view considering all these matters together, the best outcome in this case is to order a modest sum by way of security which should not prevent the case from proceeding, but which will give the defendants some assurance in the event of success at trial. Such an amount obviously will be less than that sought by the defendants in this case.
[34] In the circumstances I will direct that security of $7,500 be paid. Such payment must be made before the plaintiff takes further steps in the proceeding.
Disposition
[35] The application for review is allowed.
[36] There will be an order that the plaintiff pay security for costs of $7,500 before it takes any further steps in this proceeding.
[37] The defendants are entitled to costs on a category 2 band B basis.
Solicitors: Bruce Andrews, Palmerston North for Plaintiff
Tararua Law, Pahiatua for Defendants
Stephen Kós J
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