Shanghai Neuhof Trade Company Limited v Zespri International Limited
[2019] NZHC 617
•28 March 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2014-404-001316
[2019] NZHC 617
BETWEEN SHANGHAI NEUHOF TRADE COMPANY LIMITED
First Plaintiff/First RespondentSHANGHAI HUI ZHAN LOGISTIC LIMITED
Second Plaintiff/Second Respondent
AND
ZESPRI INTERNATIONAL LIMITED
Defendant/Applicant
Hearing: 18 March 2019 Appearances:
B Gray QC and K Muller for Plaintiffs/Respondents
M Corlett QC and B McKinnon for Defendant/Applicant
Judgment:
28 March 2019
JUDGMENT OF WYLIE J
This judgment was delivered by Justice Wylie On 28 March 2019 at 11.30am
Pursuant to r 11.5 of the High Court Rules Registrar/Deputy Registrar
Date:…………………………
Solicitors/counsel:
Winston Wang & Associates/B D Gray QC/K Muller, Auckland Buddle Findlay, Wellington/M Corlett QC, Auckland
SHANGHAI NEUHOF TRADE CO LTD v ZESPRI INTERNATIONAL LTD [2019] NZHC 617 [28 March 2019]
Introduction
[1] The defendant/applicant, Zespri International Limited (“Zespri”), has filed two interlocutory applications. It seeks:
(a)to vary an order reserving costs made by me on 26 March 2018; and
(b)further security for costs.
[2] Both applications are opposed by the plaintiffs/respondents, Shanghai Neuhof Trade Company Limited and Shanghai Hui Zhan Logistic Limited (“Shanghai Neuhof” and “Shanghai Hui Zhan” respectively – jointly “the respondents”).
[3]I deal with each application in turn.
(a) Application to vary order reserving costs
Background
[4] On 26 March 2018, I gave an oral judgment in relation to an application for unless orders made by Zespri.1 Zespri was alleging that the respondents had failed to comply with various discovery orders made by the Court. I dismissed some of Zespri’s assertions but accepted others, and I ordered the respondents to take certain additional steps in relation to discovery. I nevertheless declined Zespri’s application for unless orders. At the suggestion of Mr Gray QC, appearing for the respondents, and with the agreement of Mr Sizer, then acting for Zespri, I reserved costs. I held that costs could best be determined when the substantive proceedings come on for trial, and noted that only then would I be in a position to ascertain whether or not Zespri’s repeated requests for the discovery of various documents, including Shanghai Neuhof’s VAT returns, were unreasonable, or whether the respondents’ delays in attending fully to discovery were inappropriate.2
[5] Notwithstanding that it agreed to the order reserving costs at the time, on 29 June 2018, Zespri filed an interlocutory application, seeking to vary the order. It relied
1 Shanghai Neuhof Trade Co Ltd v Zespri International Ltd [2018] NZHC 559 at [41].
2 At [41].
on an affidavit that had been filed by a Shanghai based lawyer retained by the respondents, Haixuan Hong, sworn on 27 April 2018. It asserted that that affidavit vindicated its position, established that Shanghai Neuhof’s VAT returns had at all material times been controlled by Shanghai Neuhof, and that obtaining copies of the VAT returns had always been a straightforward exercise. It said that the “special reasons” which made it appropriate to reserve costs at the time no longer existed, and it sought costs of $58,537.50 (costs of $29,268.75 on a 2B basis with a 100 per cent uplift) plus disbursements of $148,789.36.
[6] The respondents filed a notice of opposition to the application. They argued that the order reserving costs was appropriate when it was made, that Zespri cannot now establish that the order should not have been made, and that there continue to be “special reasons” justifying an order deferring a decision on costs until the substantive proceeding is determined.
Relevant law
[7] It was common ground between counsel that I had jurisdiction to reverse the earlier order pursuant to r 14.8(2) High Court Rules 2016.3 It provides as follows:
14.8 Costs on interlocutory applications
[…]
(2)Despite subclause (1), the court may reverse, discharge, or vary an order for costs on an interlocutory application if satisfied subsequently that the original order should not have been made.
[8] It was also common ground that there is little guidance in the decided cases as to the application of this provision but that a degree of analogy with the provisions of r 7.49 – allowing the review of interlocutory orders – may be appropriate.
[9] Zespri argued the requirement under r 14.8(2) that the Court be “satisfied” is a low standard, and noted that it has been held in a number of contexts that the word “satisfied” requires simply that the Court “make up its mind”, and that “it is indicative of a state where the Court on the evidence comes to a judicial decision”.4
3 All references to rules are to the High Court Rules 2016 unless otherwise stated.
4 Blythe v Blythe [1996] AC 643 (HL).
[10] The plaintiffs did not agree that the use of the word “satisfied’ sets a low standard, and argued that the wording of the rule speaks for itself.
Analysis
[11] Unless there are “special reasons to the contrary”, costs on an opposed interlocutory application should be fixed when the application is determined – r 14.8(1). Both parties, in effect, accepted that there were special reasons not to fix costs on 26 March 2018 and I so ordered.
[12] Rule 14.8(2) does not expressly prohibit the Court from acting when the original order was made by consent – as in this case. This is in contrast to r 7.49. It provides that no application can be made to vary or rescind an interlocutory order made with the consent of the parties – r 7.49(2)(a). I nevertheless consider that the fact that the order reserving costs was made by consent is a relevant consideration, which I can properly take into account, and Mr Corlett QC, appearing for Zespri, properly accepted that it is for Zespri to satisfy the Court that the order reserving costs should be reversed or varied.
[13] Various consent orders had been made in relation to discovery – by Heath J on 24 March 2016, by me on 14 June 2016, and by Muir J on 11 October 2016. Those orders required the respondents to, inter alia, discover Shanghai Neuhof’s VAT returns. The respondents did not do so and Zespri filed an interlocutory application seeking to stay or strike out the proceedings in April 2017. In support of that application, Zespri filed an affidavit from Mr Bao, who explained the process for the retrieval of VAT returns from the taxation authorities in China. The application came before me. In an interim judgment issued on 5 July 2017, and by consent, I adjourned Zespri’s application for a stay or strike out, and required the respondents to take the various steps set out in a schedule attached to my judgment.
[14] Affidavit evidence later filed disclosed that, in September 2017, the respondents, through a Mr Chen, sought the VAT returns from the relevant Chinese taxation authorities, but had been unable to obtain them. Rather, they obtained only a summary of the amount of VAT paid.
[15] Zespri was not happy with the steps taken by the respondents, and sought that its adjourned April 2017 application for a stay or strike out should be brought on for hearing.
[16] This led to the hearing on 26 March 2018. At the hearing, Zespri complained that the respondents’ application to the Chinese authorities for the VAT returns had been incorrectly worded, and it argued that a number of the steps which I had directed should be taken in my interim judgment of 5 July 2017 were still outstanding. The respondents asserted in reply that they had made their request in the correct form, and they were adamant that they had taken all reasonable steps required by my interim judgment, but had nevertheless been unable to obtain the VAT returns.
[17] In my judgment of 26 March 2017, I rejected parts of Zespri’s affidavit evidence as being speculative, and other parts as not being of material assistance. I was not, on the materials then before me, prepared to require the respondents to re- take the various steps set out in the interim judgment, but instead using the terminology which Zespri asserted they should have used in the first place. I considered that to do so would be disproportionate, and that what Zespri was asserting should be done was not required by my interim judgment. I was not persuaded that the respondents had breached the obligations imposed on them by one clause in the schedule to the interim judgment – cl 17. I was however satisfied that the respondents had failed to comply with another clause – cl 18. Inter alia, that clause required the respondents to file a document known as a Request for Verification with a body in China called the Initial Tax Authority pursuant to a document headed “The Announcement of the State Administration of Taxation on Promulgating the Administrative Measures for Tax Related Information Inquiry”. I ordered the respondents to file a Request for Verification with the authorities in China and to apply for reconsideration of the initial disclosure application to the State Administration for Taxation (SAT) under the relevant Chinese legal provisions.
[18] Mr Hong, an independent solicitor in Shanghai, was engaged by the respondents to take the various steps necessary to comply with my orders. His affidavit sworn on 27 April 2018 disclosed that, on 16 April 2018, the tax authorities in China rejected the Request for Verification. Nevertheless, Mr Hong had a
discussion with the responsible tax administrator – Ms Wang – and she requested the respondents to resubmit their initial application. Mr Hong did so, and that eventually resulted in the provision of the VAT returns requested. They have since been discovered.
[19] Mr Corlett submitted that I should revisit the order reserving costs, arguing that I can now assess the merits of the parties’ respective positions.
[20]I am not sure that Mr Hong’s affidavit is as clear as Mr Corlett suggests.
[21] Mr Hong’s affidavit sets out his interactions with Ms Wang. She had previously dealt with the tax information request submitted by Mr Chen on Shanghai Neuhof’s behalf in September 2017. Mr Hong deposes that the request was drafted in accordance with relevant Chinese legal requirements. As directed by me, he submitted a Request for Verification. His evidence is that Ms Wang was initially uncooperative and that she refused either to accept the request or to provide any written notice of its rejection. Ms Wang gave what Mr Hong considered to be a confusing explanation of her dealings with Mr Chen in September 2017, claiming that she had disclosed the limited information given to Mr Chen under “internal Shanghai SAT rules”, and not the apparently applicable Information Inquiry Law, but providing no explanation for this. She also asserted that, as the SAT’s response was not issued under the Information Inquiry Law, she could not accept the Request for Verification.
[22] It is difficult to know from the materials filed what to make of the events in China. As noted, according to Mr Hong, the tax information request that Mr Chen submitted was in the relevant form required by the Information Inquiry Law in China. It appears it was to be in the same form as a request submitted by a Mr Yan on behalf of one of Zespri’s Chinese subsidiaries, which Ms Wang did act on. While Mr Corlett argued that two Chinese characters were missing, there is no expert evidence to support that submission.
[23] I do not consider that I am much better placed now than I was at the time of the hearing on 26 March 2018 to determine whether or not Zespri’s repeated requests
for discovery of the VAT returns were unreasonable and disproportionate, or whether the respondents’ delay in discovering the same, was inappropriate and improper.
[24] In short, I am not presently persuaded that the issue is as simple as Mr Corlett suggests – namely that the VAT returns were always within the respondents’ control, that they were readily available and the respondents needed only have filled out the form correctly.
[25] Further, I consider that I am not, at present, sufficiently informed to know whether or not the provision of the VAT returns was as essential as Zespri suggests, or whether Zespri’s oft repeated requests that the respondents should discover the same were harassment, as Mr Gray suggests.
[26] These matters will only become clear at the substantive trial. There were and there continue to be “special reasons” to reserve costs on Zespri’s application heard on 26 March 2018. Accordingly, I decline Zespri’s request to vary the order reserving costs made by me on that date.
(b) Application for further security for costs
Background
[27]On 27 June 2018, Zespri made application seeking additional security for costs.
[28] In 2014, the parties agreed that the respondents would pay $165,266 by way of security for costs. That agreement was based on a 3B calculation of the then estimated steps to trial, and assumed a three-week trial. Security was to be paid in stages:
(a)$40,000 immediately;
(b)$40,000 on completion of discovery;
(c)$40,000 when the proceeding was set down to be heard; and
(d)$45,266 one month before trial.
[29]The first three payments have been made.
[30] At the time of the original agreement, Zespri expressly reserved the ability to apply for further security if the sums agreed were considered to be inadequate at a later stage in the proceeding.
Submissions
[31] Zespri now considers that the sum ordered to be paid as security for costs is inadequate. It has recently estimated its costs on a mixed 3B/3C basis, plus disbursements and Court fees (assuming a 30 day trial) at $320,532. It estimates that it will incur additional disbursements in obtaining expert evidence in the amount of
$228,250 (inclusive of GST), and it initially sought that security for costs should be increased to $548,782. In the course of the argument before me, Mr Corlett accepted that Zespri would be entitled to claim the GST component in its likely experts’ fees back from the Inland Revenue Department. He accepted that it followed that its claim for disbursements should be reduced accordingly.
[32] Mr Corlett nevertheless argued that the previously agreed sum is now substantively inadequate to cover Zespri’s reasonable scale costs should the respondents be unsuccessful at trial. He acknowledged that two of Zespri’s affirmative defences have also been pleaded as counterclaims, but submitted that the counterclaims do not add any additional complexity or create additional evidential requirements beyond the matters pleaded by Zespri in its affirmative defences. He argued that the hearing time will not be increased because of the counterclaims, and that, therefore, there should be no deduction in the quantum of security on the basis that the counterclaims have been filed.
[33] Mr Gray, for the respondents, argued that no increase in the sum ordered in 2014 is warranted, let alone the uplift sought by Zespri. He submitted that the sums sought are unreasonable and disproportionate and that much of the additional costs likely to be incurred are due to the complexity, processes, and extra hearing time required as a result of Zespri’s introduction into the proceedings of the counterclaims alleging conspiracy by the respondents to defraud and deceit.
Analysis
[34] The application was brought pursuant to r 5.45 of the High Court Rules. Relevantly, that rule provides:
5.45 Order for security of costs
(1)Subclause (2) applies if a Judge is satisfied, on the application of a defendant,—
(a)that a plaintiff—
(i) […]
(ii)is a corporation incorporated outside New Zealand; or
(iii)[…]
[…]
(2)A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.
[…]
(6)References in this rule to a plaintiff and defendant are references to the person (however described on the record) who, because of a document filed in the proceeding (for example, a counterclaim), is in the position of plaintiff or defendant
[35] The respondents accepted the Court has jurisdiction to make an order under the rule and that the making of the consent order in 2014 does not preclude a subsequent review by the Court of the sum ordered. Nor was there any dispute that the Court’s jurisdiction to make an award for security for costs is triggered, because both respondents are companies domiciled in China.
[36] It was common ground that, where a plaintiff is resident overseas, the following principles are relevant:5
(a)there is no inflexible principle that such a plaintiff with no assets within the jurisdiction should normally be ordered to give security;
5 Aquaculture Corp v McFarlane Laboratories (1984) Ltd (1987) 1 PRNZ 467 (HC).
(b)the Court’s discretion is to be exercised by taking into account all the circumstances of the case and arriving at the conclusion which will do justice between the parties;
(c)the ease, convenience and cost of enforcing costs judgment in the plaintiff’s country of residence are primary considerations; and
(d)otherwise the principles applicable to applications for security by a plaintiff resident overseas are those applicable under r 5.45(1)(b).
[37] Counsel also agreed that the quantum of security does not necessarily permit of mathematical calculation, and that the amount should be fixed by reference to what the Court thinks fit in all the circumstances. Those circumstances can include the amount and nature of the relief claimed, the nature of the proceeding, including the complexity and novelty of the issues, the estimated duration of the trial, and the probable costs payable if the plaintiff is unsuccessful, and perhaps also the defendant’s estimated actual (solicitor and client) costs.
[38]I turn to consider the circumstances of this case.
[39] Here, neither of the respondents has assets in New Zealand. Moreover, the respondents through their solicitors have indicated they are being funded by family members, including trusts associated with those family members. It is likely that there could be a very real issue for Zespri in the event that it had to enforce any costs order. There is no certainty that a costs order issued by a New Zealand Court would be recognised in China, or enforced in that country. Mr Corlett was only able to refer me to two cases in which a Chinese court had recognised a judgment issued by a court in a foreign country, and in both cases a bilateral enforcement treaty was in place.6 Mr Corlett advised me that no bilateral treaty currently exists between China and New Zealand insofar as he was aware. Mr Gray did not take issue with this. At the very least, enforcement of a civil costs judgment in China is likely to be very costly.
6 Kolmar Group AG v Giang SU Textile Industry (Group) Import & Export Co Ltd (2016) (Manjing) and Liu v Taoli & Tong Wu (2015) (Wuhan).
[40] The respondents have pleaded two claims – both in contract. First, the respondents sue on the primary contract they say was in place between them and Zespri between 2000 and 2011. They allege that Zespri has breached that contract by failing to reimburse them for duty paid by them to the customs authorities in China. Secondly, they sue on a second contract they allege existed. They say that Zespri asked Shanghai Neuhof to build a cool store for it, and agreed that it would purchase from them cool storage and services in respect of a specified number of trays of kiwifruit each year. They say that when Zespri terminated the primary contract with them, it thereby breached the cool store contract. The total amount claimed in respect of the main contract is approximately NZD 8,200,000, together with interest and costs. A further NZD 17,600,000, together with interest and costs, is claimed in regard to the cool store contract.
[41] As I have already commented earlier in these proceedings, the claims pleaded by the plaintiffs are relatively straightforward.7 I suspect that the devil will be in the detail.
[42] Zespri, for its part, denies the terms of the main contract between it and the respondents, and it says it has no liability to pay the amount of duty claimed by the respondents. It also says that even if the respondents were entitled to deduct the amount claimed from future consignments of kiwifruit (which is denied), then, from at least January 2012, Shanghai Neuhof was liable to pay it for goods received, against which it would have deducted or set-off the amount claimed. It denies the cool store contract as alleged. Zespri also raises four affirmative defences, namely that:
(a)the respondents’ claims are founded on unlawful acts;
(b)there was no shortfall of duty;
(c)it is entitled to an equitable set-off because there was a conspiracy to injure by the respondents; and
7 Shanghai Neuhof Trade Company Ltd v Zespri International Ltd, HC, Auckland CIV-2014-404- 001316, minute dated 8 February 2019 at [5(a)].
(d)it is entitled to an equitable set-off, consequent on an alleged deceit by the respondents.
The third and fourth affirmative defences result in counterclaims against the plaintiffs. The first counterclaim seeks damages of some $37 million (NZ) plus interest and costs and in the second counterclaim damages are claimed of some $20 million (NZ) plus interest and costs.
[43] I have already observed that the third and fourth affirmative defences, and the counterclaims that arise from them, do not, in my view, flow on from the matters raised by the respondents.8 Rather, they are discreet and separate allegations. Both are founded on an assertion that the respondents tried to recover both duty and the VAT payable from Zespri, and that Zespri was liable to reimburse the respondents only for duty and not VAT. It is asserted that spreadsheets sent by the respondents to Zespri claimed the total amount, and sought to induce Zespri to reimburse them for that total sum.
[44] The respondents for their part deny the factual allegations relied on by Zespri, and also argue that the counterclaims are statute barred.
[45] Conspiracy and deceit are of course serious allegations, and because they are counterclaims, they are, at law, separate proceedings in their own right. They will stand or fall regardless of the fate of the respondents’ claims.
[46] The hearing of proceedings is likely to take longer than was originally estimated. Security for costs was originally fixed on the basis of a three week trial. The matter has now been allocated a six week trial, currently due to commence on 1 July 2019. Mr Gray tells me that the respondents will be calling four or five witnesses. He also accepts that the hearing is likely to progress slowly, given that some of the witnesses will need interpreters to give their evidence.
[47] I accept Zespri’s calculation of its costs on a 3B/3C basis, and I also accept Mr Corlett’s submission that Zespri’s actual costs are likely to be substantially in
8 At [5(c)].
excess of that sum. Indeed, the affidavit evidence suggests that Zespri’s actual costs are likely to exceed $1 million.
[48] I note however that no attempt has been made by Zespri to break down the costs it will incur in defending the respondents’ claims against it, and the costs it will incur in prosecuting its counterclaims against the respondents. The respondents are in the position of defendants in terms of r 5.45(6) in relation to Zespri’s counterclaims. Requiring a defendant to provide security for costs to a plaintiff is not something contemplated by the rules. I do not consider that the respondents should be required to provide security for costs for steps taken or to be taken by Zespri to pursue its counterclaims. Nor do I consider that the counterclaims are inextricably mixed with the subject matter of the respondents’ claims and the other affirmative defences. The VAT claims and the allegations of conspiracy and deceit are separate and distinct.
[49] Nevertheless, I consider that it is appropriate to increase the quantum of the security for costs ordered to recognise the reality of the situation. Zespri will have difficulty in enforcing any costs award it may receive. It will face significant costs in resisting the respondents’ claims. Zespri seeks a substantial uplift. It is impossible to apply a mathematical approach, because it is not known how much time will be taken in considering Zespri’s counterclaims, or what disbursements will be incurred as a result of the counterclaims.
[50] Looking at the matter holistically, and taking into account that interest earned on the monies paid into Court will be available, in my view, security overall in the sum of $300,000 is appropriate. From that the amount, the sum already agreed and in part paid, must be deducted – leaving a balance of $134,734. I make an order increasing the quantum of the security for costs ordered by that amount.
[51] Zespri was not opposed to the staged payment of any additional security ordered.
[52] I direct that the sum of $134,734 (together with the amount of $45,266 outstanding under the initial order) is to be paid or otherwise secured as provided for in r 5.45(34)(a) as follows:
(a) $44,911.33 by 12 April 2019;
(b)$44,911.33 two months before trial; and
(c)$90,177.34 ($44,911.34 plus $45,266 payable under the initial order) one month before trial.
[53] I do not at this stage propose to order a stay if the payments are not made as directed. All payments to date have been made on time and there is no reason to assume that that pattern will not continue. I do however reserve leave to either party to apply to the Court for further orders if that proves necessary.
Costs
[54] Zespri has failed in its application to set aside the order reserving costs. It has succeeded in part its application for increased security. It is my preliminary view that costs and disbursements should lie where they fall.
[55] If the either party disagrees with that new assessment, then I make the following directions:
(a)within 10 working days of the date of this judgment:
(i)the respondents are to file a memorandum seeking costs and disbursements in regard to the application to set aside the order reserving costs; and
(ii)Zespri are to file a memorandum for costs and disbursements in regard to the application seeking increased security;
(b)within a further 10 working days, both parties are to file memoranda in reply to the other party’s memoranda;
(c)all memoranda are not to exceed five pages.
I will then deal with the issue of costs and disbursements on the papers, unless I require the assistance of counsel.
Wylie J
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