Shanghai Neuhof Trade Company Limited v Zespri International Limited
[2014] NZHC 2353
•26 September 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-001316 [2014] NZHC 2353
BETWEEN SHANGHAI NEUHOF TRADE
COMPANY LIMITED First Plaintiff
SHANGHAI HUI ZHANG LOGISTIC LIMITED
Second Plaintiff
AND
ZESPRI INTERNATIONAL LIMITED Defendant
Hearing: 22 August 2014 Appearances:
B D Gray QC and D T C Wu for Plaintiffs
S A Barker and K J Hamill for DefendantJudgment:
26 September 2014
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 26 September 2014 at 11.00 am
pursuant to R 11.5 of the High Court Rules
Registrar / Deputy Registrar
Date……………………
SHANGHAI NEUHOF TRADE COMPANY LTD v ZESPRI INTERNATIONAL LTD [2014] NZHC 2353 [26
September 2014]
Introduction
[1] The plaintiffs, Shanghai Neuhof Trade Company Limited and Shanghai Hui Zhang Logistics Ltd, are Chinese companies which import and distribute fruit in China. Zespri International Ltd is the exporter of New Zealand kiwifruit to China. Between 2007 and 2011 there was a contractual relationship between Zespri and Shanghai Neuhof (and, on the plaintiffs’ case, Shanghai Hui Zhang1) for the importation and distribution of New Zealand kiwifruit in China. That relationship was terminated in 2011.
[2] The plaintiffs sue Zespri, claiming approximately NZ$33m, for breaches of contract in failing to reimburse Shanghai Neuhof for duty paid in respect of the kiwifruit, for indemnity in respect of a fine imposed for underpayment of duty and for losses resulting from termination of the contract without adequate notice.
[3] In China the underpayment of duty constitutes the crime of smuggling. Shanghai Neuhof ’s underpayment of duty resulting in it and its managing director, Mr Liu, being convicted of that offence. Zespri asserts that the plaintiffs’ claims are therefore based on their own wrongful acts and are precluded by the principle of ex turpi causa non oritur actio (no court will lend its aid to a man who founds his cause of action on an immoral or illegal act). Further, the plaintiffs are severely hampered by a lack of documents (their documents and computers having been seized by Chinese authorities) and their case depends substantially on the evidence of Mr Liu, who is in prison in China.
[4] In these circumstances Zespri says that the proceeding is likely to cause prejudice to Zespri and is an abuse of the Court.2 It has applied for orders striking out or staying the proceeding or, alternatively, removing the proceeding from the Commercial List and granting leave to apply for summary judgment against the
plaintiffs.
1 Shanghai Hui Zhang’s status depends on proof of an oral novation of the contract, which Zespri
does not accept.
2 High Court Rules, r 15.1.
A brief background
Chinese authorities investigate the plaintiffs and Zespri terminates the relationship
[5] In June 2011 the Shanghai Customs anti-smuggling bureau (ASB) raided Shanghai Neuhof ’s offices. It was investigating the under-payment of duty on imported kiwifruit.
[6] The criminal investigation caused significant disruption to Zespri’s exports of kiwifruit to China; other importers with whom Zespri had a relationship refused to clear kiwifruit shipments through Customs out of concern that they, too, might be exposed to investigation. Zespri was forced to re-direct all fruit to the Shanghai port, where Shanghai Neuhof was still managing to clear kiwifruit shipments but disputes between Customs and Shanghai Neuhof as to the bond payable on the kiwifruit prevented the fruit being cleared there and the kiwifruit remained on the wharf for another week. In the end Zespri ceased further shipments until the issues were resolved. It also terminated its relationship with Shanghai and appointed a new importer.
Shanghai Neuhof and Mr Liu are convicted
[7] In May 2012 Shanghai Neuhof and Mr Liu were both charged with the crime of smuggling. The Shanghai No 1 Intermediate People’s Court heard evidence from Zespri personnel and received documentary evidence, together with admissions made by Mr Liu regarding the value of the kiwifruit and payment of duty. Shanghai Neuhof and Mr Liu advanced their defence, in part, on the basis that Shanghai Neuhof sold the fruit on consignment and should therefore be liable only as an accessory to Zespri’s conduct. However, the Court concluded that the arrangement between Zespri and Shanghai was “buy/sell” rather than on consignment.
[8] Shanghai Neuhof and Mr Liu were convicted. Shanghai Neuhof was required to pay the shortfall in duty of approximately NZ$7.5m together with a fine of approximately NZ$8m. Mr Liu was sentenced to 13 years’ imprisonment. Shanghai Hui Zhang was not convicted of any offence. The convictions and sentences were upheld by the Shanghai Higher People’s Court.
The plaintiffs’ claims
[9] The plaintiffs allege that Zespri is contractually bound to reimburse Shanghai Neuhof for the duty payable and to indemnify it in respect of the fine. They say, further, that reasonable notice of termination was required and that in the circumstances of the case four seasons was reasonable. They claim losses of
$NZ18m resulting from Zespri’s failure to give adequate notice.
The contract asserted by the plaintiffs
[10] The plaintiffs plead a partly written partly oral contract between Shanghai Neuhof and Zespri created by the exchange of emails and conversations with the respective representatives. Shanghai Neuhof ’s representative was Mr Liu, described as the managing director. Zespri’s representatives were Mr Chen, then Sales and Marketing Manager of Asia, and Mr Kevin Bezuidenhart, its Asian Sales Manager. Mr Chen no longer works for Zespri.
[11] It is alleged that the contract was novated orally. The date of the alleged novation is not pleaded. It is said to have been negotiated by Mr Liu and Mr Chen. The pleading inconsistently describes the novated agreement as a ‘tri-partite agreement’ under which Shanghai Hui Zhang “took over the role of [Shanghai Neuhof]”.
[12] It is alleged that the terms of the contract included extensive arrangements for determining the price ultimately paid to Zespri and ascertaining the duty payable. Mr Gray QC, for the plaintiffs, explained that ascertaining the dutiable price of the kiwifruit is not straightforward because, although the final price is not known until the kiwifruit is actually sold in the Chinese market, there has to be some way of assessing the duty payable upon importation.
[13] The pleaded contract alleges the following agreed process for determining the dutiable price upon importation:
(a) Zespri would advise Shanghai Neuhof of the assessable value for each tray equivalent of kiwifruit for the purposes of assessing duty (Agreed Assessable Value);
(b)There would be a specific procedure (the Annual Adjustment Mechanism) for adjusting actual sales and expenses on an annual basis;
(c) Shanghai Neuhof would bear the costs of warehousing, sorting and other expenses;
(d) At the conclusion of each trading year Shanghai Neuhof would charge
Zespri commission at an agreed rate per tray of kiwifruit;
(e) At the conclusion of each trading year kiwifruit sales, Customs tariffs and clearing fees and other expenses would be reconciled, the commission payable for the year agreed on;
(f) The agreed commission and the Customs duty that had been paid by Shanghai Neuhof would then be deducted from the total kiwifruit sales and the balance transferred to Shanghai Neuhof.
[14] It is alleged that before the shipment of kiwifruit each year Shanghai Neuhof, Zespri, other kiwifruit distributors in China and officers of the Chinese Customs authority would meet and agree on the Agreed Assessable Value of the kiwifruit and the minimum amount of duty payable per tray equivalent for the forthcoming trading year. Once the Agreed Assessable Value was determined Zespri would give directions to its distributors, including Shanghai Neuhof, requiring them to declare imports of kiwifruit at that Agreed Assessable Value.
[15] The Annual Adjustment Mechanism, alleged to be ascertainable from the conduct of the parties, was:
(a) As Zespri’s distributor, Shanghai Neuhof would obtain orders for kiwifruit from Shanghai buyers and pre-pay Customs duty incurred on each consignment of kiwifruit;
(b)Shanghai Neuhof and Zespri would agree on the anticipated gross revenue (anticipated GR) to be derived from the orders obtained by Shanghai Neuhof and that Zespri itself would, in consultation with Shanghai Neuhof, estimate the amount of duty, tax, VAT, transportation and handling costs likely to be incurred in meeting those orders (projected China in market expenses);
(c) Using that estimate Zespri would set a price (the notional price) at which each consignment of kiwifruit was delivered, this being the anticipated GR less the projected China in market expenses. However, Zespri would actually invoice Shanghai Neuhof for each consignment, not at the notional price, but at a price equal to the Agreed Assessable Value (the pro forma invoice price);
(d)Shanghai Neuhof was required to pay or pre-pay Customs duty calculated on the Agreed Assessable Value of the consignment;
(e) At the end of each trading year, the parties would calculate the actual gross revenue (actual GR), actual duty taxes, VAT and expenses paid (actual China in market expenses), actual net revenue and the difference between the actual net revenue and the notional price.
[16] It is alleged that as a result of this mechanism expenses (including duty) that Shanghai Neuhof had paid or pre-paid were reimbursed to it at the end of each trading year.
[17] It is also alleged that there was an express term of the contract that Shanghai Neuhof would, if called upon, construct a coolstore facility to handle the anticipated volumes of kiwifruit.
[18] There is no express term alleged regarding termination alleged; Shanghai Neuhof pleads an implied term that reasonable notice would be given, which it asserts was for trading seasons
[19] Zespri does not accept that a contract of this kind existed. It says that its entire contract for each year was contained in written importer agreements which the plaintiffs say were merely adjuncts to the primary contract pleaded.
The causes of action
[20] Against that background the plaintiffs plead three causes of action. The first is a breach of the pleaded contract by Zespri’s failure or refusal to reimburse Shanghai Neuhof for the duty shortfall (NZ$7.5m) and fine (NZ$8m) in accordance with the Annual Price Adjustment Mechanism. These claims total $15.5m.
[21] The second cause of action alleges wrongful termination of the contract, in particular the failure to give reasonable notice, which is said to be four kiwifruit trading seasons. The loss is described as equal to the net present value of the contribution the plaintiffs were entitled to receive under the trade relationship until the expiry of a reasonable notice period which is calculated at not less than NZ$18m, though there is no indication as to how that figure is reached.
[22] The third cause of action is also a breach of the trade relationship on the basis that the true nature of the relationship was an agency relationship and that Zespri was obliged to but has failed or refused to indemnify the plaintiffs for the losses sustained as a result of not receiving a notice period of four seasons and indemnification of the shortfall and fine.
Striking out on the ground that the claim is precluded by the principle ex turpi causa non oritur actio
The nature of the application
[23] Zespri contends that Shanghai Neuhof ’s criminal conduct in underpaying the duty payable in China precludes them from asserting their claims, relying on the principle ex turpi causa non oritur actio. It seeks to have the court exercise its
inherent jurisdiction or its jurisdiction under rule 15.1 of the High Court Rules to strike out or stay the proceeding for this reason.
[24] Under r 15.1(a) the court may strike out or stay all or part of a proceeding if it discloses no reasonable cause of action. The principles to be applied in determining a strike out application brought on the ground that the cause of action pleaded cannot succeed are well established and summarised in Attorney-General v Prince:3
A striking out application proceeds on the assumption that the facts pleaded in the statement of claim are true. That is so even though they are not or may not be admitted. It is well settled that before the Court can strike out proceedings the causes of action must be so clearly untenable that they cannot possibly succeed … The jurisdiction is one to be exercised sparingly and only in a clear case where the Court is satisfied it has the requisite material … The fact that applications to strike out raise difficult questions of law and require extensive argument does not exclude the jurisdiction.
[25] In Couch v Attorney-General the Supreme Court commented that:4
[33] It is inappropriate to strike out a claim summarily unless the Court can be certain that it cannot succeed. The case must be “so certainly or clearly bad” that it should be precluded from going forward. Particular care is required in areas where the law is confused or developing.
The principle ex turpi causa non oritur actio
[26] The principle, ex turpi causa non oritur actio, sometimes referred to as policy and sometimes as a maxim, was stated by Lord Mansfield CJ in Holman v Johnson:5
The principle of public policy is this … No court will lend its aid to a man who founds his cause of action upon an immoral or illegal act. If, from the plaintiff’s own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted. It is upon that ground that the court goes; not for the sake of the defendant but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change side and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally in fault, potior est conditios defendentis.
[27] Although deterrence has been cited as the rationale for this policy,6
inconsistency is more often identified. In Hall v Hebert, McLachlin J described the
3 Attorney-General v Prince [1998] 1 NZLR 262 (CA).
4 Couch v Attorney-General [2008] NZSC 45.
5 Holman v Johnson (1775) 1 CAWP 341, 343.
maintenance of the internal integrity of the law by avoiding the situation where recovery “would amount to the law’s giving with the one hand what it takes away with the other”.7 The risk of inconsistency between the criminal and civil law as the underlying rationale for the ex turpi causa rule was affirmed in Gray v Thames Trains Ltd, with Lord Browne, after referring to cases in which compensation for the consequences of a deliberate criminal act had been refused, said:8
Common to all is the principle that the integrity of the justice system depends upon its consistency. The law cannot at one and the same time incarcerate someone for his criminality and compensate him civilly for the financial consequences. I shall refer to this henceforth as the consistency principle. It is the underlying rationale for the application of the ex turpi causa non oritur actio doctrine in the present context.
[28] The illegality in question in this case is, of course, illegality under Chinese law. However, Zespri properly did not take any point regarding this fact; the deliberate under-payment of duty on imports should be regarded as illegal conduct for the purpose of the ex turpi causa principle even if the law broken is Chinese rather than New Zealand law.9
[29] The application of the ex turpi causa principle has proved somewhat troublesome. In Leason v Attorney-General the Court of Appeal observed that no single formulation has emerged and, declining to offer one, simply identified the different expressions of it evident from the case law.10 These were primarily the
‘reliance test’ and the ‘causation approach’ (a third, the ‘conscience approach’ was rejected by the House of Lords in Tinsley v Milligan and does not require consideration11).
[30] I respectfully venture to suggest that the answer to the confusion lies in Lord
Hoffman’s observation in Gray that:12
6 Tinsley v Milligan [1994] 1 AC 340 at 363.
7 Hall v Hebert [1993] 2 SCR 159.
8 At [107].
9 Marlwood Commercial Inc v Kozeny [2006] EWHC 872 at [168].
10 Leason v Attorney-General [2013] NZCA 509.
11 Tinsley v Milligan, above n 6. Lord Goff pointed out that this approach would confer a
discretion, contrary to Lord Mansfield’s statement in Holman v Johnson.
12 Gray v Thames Trains [2009] UKHL 33 at [91].
The maxim ex turpi causa expresses not so much a principle as a policy. Furthermore, that policy is not based upon a single justification but on a group of reasons which vary in different situations.
For example, as Beldam LJ pointed out in Cross v Kirkby (2000) Times, 5
April (para 74) in cases in which the Court is concerned with the application of the maxim to property or contractual rights between two parties who were both parties to an unlawful transaction “it faces the dilemma that by denying relief on the ground of illegality to one party, it appears to confer an unjustified benefit illegally obtained on the other”.
… In cases of that kind, the courts have evolved varying rules to deal with the dilemma: compare the approach of the House of Lords in Tinsley v Milligan [1993] 3 All ER 65, [1994] 1 AC 340 with that of the High Court of Australia in Nelson v Nelson (1995) 184 CLR 538. But the problems to which Beldam drew attention does not arise in this case. The questions of fairness and policy are different and the content of the rule is different. One cannot simply extrapolate rules applicable to a different kind of situation.
(emphasis added)
[31] All the cases in which the ex turpi causa principle has been applied involve claims that are, in some sense, “founded on” the plaintiff’s wrongful act. But what is required to found a claim in equity, for example, is different from what is required to found a claim in tort and the apparent different approaches reflect that. What appears to be a difference in approach is no more than application of the same principle in the particular context, as a survey of the notable cases shows.
[32] In Singh v Ali the Privy Council considered a case in which the plaintiff who had acquired a lorry in an illegal transaction sued in detinue when it was taken from him.13 He succeeded because property in the lorry had passed to him and he had rightful possession of it when the defendant seized it. To succeed in detinue he needed only to prove the right to immediate possession. He did not need to rely on the illegality of the transaction to support his claim and, as a result, the case fell outside the scope of ex turpi causa. Lord Denning described the application of the principle in cases involving the transfer of property:14
There are many cases which show that when two persons agree together in a conspiracy to effect a fraudulent or illegal purpose – and one of them transfers property to the other in pursuance of the conspiracy – then, so soon as the contract is executed and the fraudulent or illegal purpose is achieved, the property (be it absolute or special) which has been transferred by the one
to the other remains vested in the transferee, notwithstanding its illegal origin: see Scarfe v Morgan per Parke B. The reason is because the transferor, having fully achieved his unworthy end, cannot be allowed to turn around and repudiate the means by which he did it – he cannot throw over the transfer. And the transferee, having obtained the property, can assert his title to it against all the world, not because he has any merit of his own but because there is no-one who can assert a better title to it. The Court does not confiscate the property because of the illegality – it has no power to do so. – So it says, in the words of Lord Eldon: “ Let the estate lie where it falls”; see Muckleston v Brown (1801) 6 VES. 52, 69.
[33] In comparison, in Palaniappa Chettiar v Arunasalam Chettiar the Privy Council considered the claim by a man who transferred land to his son for the fraudulent purpose of avoiding regulations in place to control the production of rubber, for which the land was to be used.15 The man’s son had subsequently refused to execute a transfer of the property. In response to the father’s assertion that the son was a trustee of the land for him the Privy Council considered that:16
… Where the fraudulent purpose has actually been effected by the means of the colourable transfer, there was no room for repentance. The father has used the transfer to achieve his deceitful end and cannot go back on it. He cannot use the process of the courts to get the best of both worlds – to achieve his fraudulent purpose and also to get his property back …
In the present case the father has of necessity to put forward and indeed assert his own fraudulent purpose which he has fully achieved. He is met therefore by the principle stated long ago by Lord Mansfield “No court will lend its aid to a man who founds his cause of action upon an immoral or illegal act” …
(emphasis added)
[34] In Tinsley v Milligan Lord Browne-Wilkinson reconciled Singh v Ali and
Palaniappa:17
In my judgment these two cases show that the Privy Council was applying exactly the same principle to both cases although in one case the plaintiff’s claim rested on a legal title and the other on an equitable title.
The claim based on the equitable title did not fail simply because the plaintiff was a party to the illegal transaction; it only failed because the plaintiff was bound to disclose and rely upon his own illegal purpose in order to rebut the presumption of advancement. The Privy Council was plainly treating the principle applicable both at law and in equity as being
15 Palaniappa Chettiar v Arunasalam Chettiar [1962] AC 294.
16 At 302 – 303.
17 Tinsley v Milligan, above n 6, at 376.
that a man can recover property provided that he is not forced to rely on his own illegality.
[35] Tinsley v Milligan concerned a claim to a resulting trust where the property was transferred as part of a plan to defraud the Department of Social Services. The majority of Lords Jauncey, Lowry and Browne-Wilkinson considered that a resulting trust had been created when the property was conveyed into the name of Ms Tinsley alone and Ms Milligan was able to prove her interest without reference to the illegal plan by which the house had originally been acquired. The illegality only emerged because it was raised by Ms Tinsley by way of defence.
[36] Lord Browne-Wilkinson considered that:18
In my judgment the time has come to decide clearly that the rule is the same whether a plaintiff founds himself on a legal or equitable title; he is entitled to recover if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction.
As applied in the present case that principle would operate as follows. Ms Milligan established a resulting trust by showing that she had contributed to the purchase price of the house and that there was common understanding between her and Ms Tinsley that they owned the house equally. She had no need to allege or prove why the house was conveyed into the name of Ms Tinsley alone, since that fact was irrelevant to her claim: it was enough to show that the house was in fact vested in Ms Tinsley alone. The illegality only emerged at all because Ms Tinsley sought to raise it. Having proved these facts Ms Milligan had raised a presumption of a resulting trust. There was no evidence to rebut that presumption. Therefore Ms Milligan should succeed.
[37] Lord Browne-Wilkinson rejected a submission that once the illegality of a transaction emerges, the Court must refuse to enforce the transaction and all claims under it whether pleaded or not:19
In my judgment the Court is only entitled and bound to dismiss a claim on the basis that it is founded on an illegality in those cases where the illegality is of a kind which would have provided a good defence if raised by the defendant. In a case where the plaintiff is not seeking to enforce an unlawful contract but founds his case on collateral rights acquired under the contract (such as a right of property) the Court is neither bound nor entitled to reject the claim unless the illegality of necessity forms part of the plaintiff’s case.
[38] Tort claims raise entirely different issues. It is in this context that the potential for inconsistency between civil and criminal law has emerged most sharply. Hall v Hebert concerned a personal injury claim by the drunk driver of a vehicle against the vehicle’s owner who allowed him to drive. Following a lengthy discussion about the nature of the ex turpi causa principle McLachlin J, speaking for
the majority, explained that:20
The doctrine of ex turpi causa non oritur actio properly applies in tort where it will be necessary to invoke the doctrine in order to maintain the internal consistency of the law. Most commonly, this concern will arise where a given plaintiff genuinely seeks to profit from his or her illegal conduct or where the claimed compensation would amount to an evasion of a criminal sanction.
[39] In Hall v Hebert the ex turpi causa principle was held not to preclude the plaintiff’s claim because the compensation being sought was for the injuries that had been sustained. The compensation could be adjusted to reflect the plaintiff’s contributory negligence. He was not, however, to be denied compensation by reason of his conduct.
[40] In comparison, the plaintiff in Gray v Thames Trains Ltd failed in his claim for compensation for loss of earnings arising from personal injury by reason of the ex turpi causa principle.21 The circumstances of Gray were these; Mr Gray was involved in a train accident caused by the defendant’s negligence. As a result, he developed post traumatic stress disorder and depression. While suffering from these illnesses he stabbed a man to death. He was convicted of manslaughter and imprisoned. He sued the defendant for loss of future earnings as a result of not being able to work. In order to succeed he had to prove that his claimed loss was caused
by the defendant’s negligence.
[41] It is in this tortious context that Lord Hoffman raised the issue of causation, concluding that, although the plaintiff’s inability to work was originally caused by the defendant’s negligence, that cause was overtaken by the plaintiff ’s imprisonment
as a consequence of his own crime:22
20 Hall v Hebert, above n 7, at [40].
21 Gray v Thames Trains Ltd, above n 12.
So Mr Scrivener QC, who appeared for Mr Gray, said that his client’s action was founded upon the defendants’ act of negligence and not upon the unlawful killing. That of course is true; if the defendants had not been negligent or the damage had no connection with the train crash which could be described as causal, the claim would not have got past the starting point. But that is not the point; in this kind of case, the question is whether recovery is excluded because the immediate cause of the damage was the act of manslaughter which resulted in the sentence of the Court.
[42] A further aspect of the ex turpi causa defence, relevant in this case, was considered Stone & Rolls Ltd (in liquidation) v Moore Stephens in the context of a claim against auditors for breach of their contractual duty to exercise reasonable skill and care.23 Stone & Rolls was what is commonly referred to as a ‘one man company’ and was controlled by Mr Stojevic. He used the company as a vehicle to defraud banks. Both he and Stone & Rolls had been sued to judgment, which they could not meet. Stone & Rolls commenced proceedings against its auditors on the ground that, had they exercised reasonable skill and care, they would have identified
the frauds earlier.
[43] The nature of the ex turpi causa principle was not in issue. Lord Walker, having cited from Lord Mansfield’s speech in Holman v Johnson and referred to Hall v Hebert, summarised it:24
No-one can found a cause of action on his own criminal conduct. This is not
a technical rule but a fundamental principle of public policy …
The same principle has been described by McLachlin J in the Supreme Court of Canada, writing for the majority, as based on the need to preserve the integrity of the legal system: Hall v Hebert …
The leading modern English authority on the scope of the principle is the decision of this House in Tinsley v Milligan … In that case the House was unanimous in disapproving the ‘public conscience’ test applied by the Court of Appeal …
But the House was divided over the correct test. The majority identified the test as whether the claimant had to plead or rely on his own illegality (see Lord Browne-Wilkinson [1993] 3 All ER 65 at 91, [1994] 1 AC 340 at 376). The minority favour the broader test of whether the claim is tainted by illegality (see Lord Goff of Chieveley [1993] 3 All ER 65 at 79-80, [1994] 1
AC 340 at 363) …
The present stated law is as laid down by the majority of the House in
Tinsley v Milligan.
[44] The central issue in Stone & Rolls was whether Mr Stojevic’s criminal conduct should be imputed to Stone & Rolls for the purposes of the ex turpi causa principle. The majority in Stone & Rolls held that where the illegal conduct was committed by a person who was the directing mind and will of the plaintiff company, his conduct could be treated as the conduct of the company. Lord Walker analysed
the position as follows:25
Had Mr Stojevic acted alone in his fraud (for instance had S&R been a completely fictitious company, never properly incorporated) it is perfectly clear that he would have had no cause of action against Moore Stephens because of (among other reasons) the ex turpi causa rule …
The same results would follow if Mr Stojevic had an individual partner in crime … Two highwaymen may be partners in crime but neither can sue the other for an account …
Why then does it make a difference that S&R, Mr Stojevic’s partner in crime, was not an individual but a corporation? … I can see no reason why the corporate status of S&R should alter the analysis. Once it is accepted (first, that a company can have a guilty mind (Tesco Supermarkets Ltd v Mattrass [1971] 2 All ER 127, [1972] AC 153; Royal Bruei Airlines SDN B8D v Tan [1995] 3 All ER 97, [1995] 2 AC 378) and second, that S&R was directly (and not merely vicariously) liable for the frauds, then it seems to me to be in just the same position as one of the highwaymen.
[45] The corollary, however, is that if the conduct in issue is that of a person who is not the directing mind and will of the company, the company is merely vicariously liable for the person’s conduct and its claim is not affected by the conduct:26
… The issue is the attribution to S&R of a dishonest state of mind. Where that is the issue the notion of a one man company does become meaningful, as Royal Brunei Airlines Sbn Bhd v Tan demonstrates. In this context I would treat the expression as covering cases where there is one single dominant director and shareholder … Even if there are other directors or shareholders who are subservient to the dominant personality.
…
… In the case of a one man company … which has deliberately engaged in serious fraud, I would follow Royal Brunei Airlnes Sbn Bhd v Tan … in imputing awareness of the fraud to the company, applying what is referred to in the United States as the “sole actor” exception to the “adverse interest” principle.
[46] Lord Walker recognised that there might be difficulty identifying whether a company in any particular case should be fixed with the dishonest knowledge and intent of its controlling director, considering that where there was doubt it would not be right to strike out the case on the basis of an assumed application of the ex turpi causa principle:27
… What if there are innocent minority shareholders who have no say in the management of the company? What if majority shareholders, even, have been “hijacked” by a fraudulent but dominant managing director? These are difficult questions but what can be said with confidence is that cases of that sort would plainly not be suitable for a strike out (compare the unreported case of Marlwood Commercial Inc v Kozeny [2006] EWHC 872 (Comm), [2006] All ER (D) 265 (APR) mentioned in paras [48] – [51] of the judgment of Langley J. In a case of that sort the Court would have to enquire closely into the facts in order to see (as Saville LJ put it in Group Josi Re (formerly known as Group Jose Reassurance SA) v Wellbrook Insurance Co Ltd [1996] 1 All ER 791, [1996] 1 WLR 1152 whether it would be contrary to justice and commonsense to treat the company as complicit.
Application of the ex turpi causa principle to this case
[47] Shanghai Neuhof’s claim for indemnity in respect of the fine plainly falls foul of the ex turpi causa principle. It is a substantial fine imposed in criminal proceedings and affirmed on appeal. Shanghai Neuhof could not advance its claim without putting in evidence the fact of its conviction and the decision of the Chinese courts as evidence of it. I do not need to deal further with that aspect of the claim.
[48] The claim for reimbursement of duty, however, is based on an alleged contractual term under which Zespri was obliged to meet the duty payable. The central issue on this cause of action is whether the terms of the contract did have that effect. There is no suggestion of illegality in relation to the contract itself. The fact that Shanghai Neuhof committed an offence in China by underpaying the duty does not necessarily affect Zespri’s own contractual obligations. It is certainly arguable that if those contractual obligations exist then the essential ingredients of the cause of action will be made out without the need to refer to Shanghai Neuhof ’s criminal
conduct in under paying the duty.
27 At [191].
[49] The position is arguably the same in relation to the second cause of action; the plaintiffs need only plead and prove the existence of the contractual term under which they assert that Zespri was required to give notice of the kind claimed and breach by Zespri in the failing to give reasonable notice. Of course, determining what notice was reasonable would depend on the circumstances that existed at the time of termination in order to determine what was required to bring the relationship
to an end in an orderly way.28 Given the confusion arising from the criminal
investigation that Ms Gardiner described, it is impossible to think that an assessment of what notice was reasonable could be made without reference to Shanghai Neuhof’s criminal conduct or that this conduct would not affect the result.
[50] In any event, I am unable to reach a conclusion as to the application of the ex turpi causa principle because the problem of attribution that arose in the Stone & Rolls case also arises here. If the plaintiffs were not directly implicated in the crime then there would be no criminal conduct that would trigger the ex turpi causa principle. Suppose, for example, that the underpayment of the duty was carried out by an employee who did not control the company: that person’s conduct would not be attributable to the companies; their liability would be vicarious only. On the approach taken in Stone & Rolls the company would not be fixed with the employee’s knowledge for the purposes of the ex turpi causa principle.
[51] Neither counsel touched on the issue of attribution in their written submissions. There was no evidence on the point. The judgments of the Chinese court refer to Mr Liu as the general manager of Shanghai Neuhof and the ‘person in charge of this company’ but there is no reference to his status in relation to Shanghai Hui Zhang. Nor is there any indication as to whether there were others who also controlled the company. Further, as I have noted, the second plaintiff was not actually convicted of any offence.
Application to strike out or stay on other grounds
[52] Zespri argues that the plaintiffs’ claims should be struck out because they are
an abuse of process and likely to cause prejudice to it.
28 Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC26; Crawford Fitting Co v Sydney
Valve & Fitting Ltd (1988) 14 NSWLR 438 at 453.
Relevant principles
[53] Rule 15.1(b) and (d) of the High Court Rules provides that:
(1) The Court may strike out all or part of a proceeding if it –
….
(b) Is likely to cause prejudice or delay; or
…
(d) Is otherwise an abuse of the process of the Court.
[54] The abuse of process ground is a general ground which encompasses all types of misuse of the Court’s process, including proceedings brought with an improper motive or ones which seek a collateral advantage beyond what is legitimately gained from a court proceeding.29 However, there is a heavy onus on a party seeking a strike out or stay on the ground of abuse of process. In Williams v Spautz the High Court of Australia commented that:30
It is of course well established that the onus of satisfying the Court that there is an abuse of process lies upon the party alleging it. The onus is “a heavy one” to use the words of Scarman LJ in Goldsmith v Sperrings Ltd 31and the power to grant a permanent stay is one to be exercised only in the most exceptional circumstances.
Are the proceedings an abuse or likely to cause prejudice?
[55] Zespri advances two grounds. First, the claim effectively seeks a re- determination of the consignment/sale and agency arguments that have already been rejected by the Chinese courts. I do not see this as significant. The nature of the contract was determined in the Chinese criminal court for the purposes of the criminal charges under Chinese law. That finding cannot preclude a proper enquiry under New Zealand law in the civil context. Indeed, the importer agreements that Zespri maintains represent the whole contract between the parties expressly record that the contract will be governed by and construed in accordance with New Zealand
law.
29 In Re Majory [1955] Ch 600 at 623 – 624.
30 Williams v Spautz [1992] HCA 32, (1992) 174 CLR 509 at 536.
31 Goldsmith v Sperrings Ltd [1977] 1 WLR 478 at 496.
[56] The second ground is that the evidential impediments to proving the plaintiffs’ case are so significant that the claim is destined to fail for lack of evidence. It is an abuse of the process and prejudicial to Zespri to force Zespri into the time and expense of defending such a claim.
[57] Although the plaintiffs allege a partly written partly oral contract comprising emails and discussions in which they were represented by Mr Liu, they currently have almost no documents to support this assertion; Zespri’s letter to the plaintiffs’ solicitors highlighting inadequacies in the plaintiffs’ initial disclosure was met with a solicitor’s certificate dated 16 July 2014 stating that it is not possible for the plaintiffs to comply with initial disclosure requirements because “the whereabouts of the documents is currently unknown but believed to possibly be with ASB”.
[58] This position is, in itself puzzling; the statement of claim is extremely detailed and it is difficult to see how it was produced without the necessary documents. Further, given that the criminal trial was completed in 2012 one would expect that efforts to retrieve the documents from the authorities would have been made before the proceedings were commenced in July 2014.
[59] In a memorandum filed with the court at the same time as the solicitor’s
certificate the plaintiffs’ counsel advised that:
The plaintiffs require 4 weeks to make more detailed searches in China for any additional documents that are relevant to this proceeding.
This will include making an application to the Chinese Court for the release or copies of documents that were seized by the Chinese Prosecutions, if appropriate.
[60] By the time the present application was heard on 22 August 2014 no further information had been provided regarding the searches that were to be undertaken or the application for release of the documents. No affidavit has been filed outlining what steps have been taken, what the procedure is for obtaining the release of documents, how long such a procedure might take or what the prospects are for securing the release of the documents.
[61] The plaintiffs have, in fact, written to Zespri requesting its documents on the apparent assumption that Zespri must have key documents that could be used to prove the plaintiffs’ claim. However, such an assumption would seem to be unfounded; Zespri has provided an affidavit deposing to searches of its servers for emails between Mr Chen and Mr Liu but, although Mr Liu was referred to often in Mr Chen’s emails no emails passing between them have been found. Zespri is also concerned at the plaintiffs’ request for permission to inspect documents provided by Zespri to the SFO in connection with an SFO investigation, the details of which even Zespri does not know.
[62] Further, the plaintiffs maintain that fruit trading in China is essentially paperless. As a result, one can reasonably expect that the plaintiffs will be heavily reliant on witnesses. However, the only witnesses of any significance referred to in either the pleadings or in submissions are Mr Liu and Mr Chen, neither of whom are available. Mr Chen, who it is suggested was implicated in the underpayment of duty, has left Zespri and his whereabouts are unknown. That, of course, is not the plaintiffs’ concern. Mr Liu is serving a lengthy prison sentence in China.
[63] The plaintiffs propose simply that Mr Liu’s evidence be taken in China. There is no evidence to confirm that Mr Liu will be permitted by the authorities to participate in the taking of evidence. No information has been provided as the procedure available in China for the taking of evidence. Even if there is a satisfactory procedure in which Mr Liu will be permitted to participate Zespri is understandably concerned that it will be prejudiced by being forced to cross-examine a witness who is in custody for dishonesty connected with the subject matter of the evidence and is not be liable to any sanction for perjury.
[64] In summary, Zespri says that the evidential challenges are so great there is no realistic prospect of the plaintiffs succeeding at trial and forcing Zespri to into the cost and inconvenience of defending such substantial claims is an abuse. I have sympathy with this submission. The plaintiffs do not have the documents said to evidence the alleged contract and no certainty as when, or even if, such documents will become available. Faced with a pleading of a partly oral partly written
agreement where there are few documents available a defendant would ordinarily
consider interrogatories. But Mr Liu’s position makes this unlikely to be possible.
[65] However, these are matters for case management. Whilst acknowledging that Zespri is being put to expense and inconvenience in defending a case that may ultimately founder on the deficiencies complained of a Judge must nevertheless be slow to strike out or stay proceedings merely because one party faces serious evidential hurdles. If the plaintiffs fail to comply with the inevitable interlocutory requirements, particularly discovery, it will be open to Zespri to apply to strike out the claim on that ground.
Removal from Commercial List/leave to apply for summary judgment
Removal from the commercial list
[66] Rule 29.13 of the High Court Rules confers a discretion on a Commercial
List Judge to remove proceedings from the commercial list.
[67] Zespri seeks to have the proceeding removed from the Commercial List on the grounds that the proceeding does not require any greater urgency than would be afforded by a standard case management regime, discovery is likely to be onerous and complex and a number of complex interlocutory applications are anticipated. The plaintiffs resist removal from the Commercial List on the ground that the dispute has the requisite commercial flavour and that the nature of the claim is such that it would benefit from the greater consistency available from case management by the limited number of Commercial List judges.
[68] The approach to be taken in considering an application for removal from the list was considered by Rodney Hansen J in Cadbury Ltd v Effem Foods Ltd, with the benefit of having reflected on the differing approaches taken prior to that case.32 The Judge concluded that in exercising the unfettered discretion conferred by r 29.13 the exercise was a straightforward balancing exercise, considering whether it is appropriate in all the circumstances for the proceeding to remain on the list. There is
no particular onus on the applicant.
32 Cadbury Ltd v Effem Foods Ltd (2003) 16 PRNZ 991.
[69] This claim has the requisite commercial flavour and in different circumstances it would be appropriate for it to remain on the list. However, I am satisfied that it is properly removed from the list. First, there is no urgency associated with the proceedings; it relates to the 2011 termination of the alleged contract and there are no ongoing issues between the parties. That factor alone would not justify removal from the list; although expeditious disposition of cases is an important objective of the Commerical List, I acknowledge Barker J’s observation in Taspac Oysters Ltd v James Hardie Pty Ltd that speed is relative and the speed with which a complex case should be processed is different from that appropriate to a less
complex case.33
[70] However, it is also a case in which there will, inevitably, be complex interlocutory applications that are better managed in the usual way. The significance of these pre-trial processes to the outcome and the overall size and complexity of the claim make it more likely that there will be appeals from interlocutory decisions. For these reasons I do not consider that the Commercial List is the appropriate place for this proceeding and make an order removing it.
Leave to apply for summary judgment
[71] [This paragraph is redacted and will be omitted from all copies of this decision, other than the original on the Court file and the copy delivered to counsel]..
33 Taspac Oysters Ltd v James Hardie Pty Ltd [199-0] 1 NZLR 442 at 444 – 445.
34 Pemberton v Chappell [1987] 1 NZLR 1, (1986) 1 PRNZ 183.
35 Attorney-General v Rakiura Holdings Ltd (1986) 1 PRNZ 12; Bilbie Dymock Corp Ltd v Patel
(1987) 1 PRNZ 84 (CA).
Result
[72] In relation to the application for orders striking out or staying the proceeding:
(a) The claim for indemnity in respect of the fine imposed by the Chinese court is struck out on the ground that it is precluded by the ex turpi causa principle;
(b) The application is otherwise dismissed.
[73] [This paragraph is redacted and will be omitted from all copies of this decision, other than the original on the Court file and the copy delivered to counsel].
[74] The application for an order that the proceeding be removed from the
Commercial List is granted. A case management conference is to be allocated before an Associate Judge.
P Courtney J
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