Smith v Noble Investments Limited

[2015] NZHC 3006

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2014-409-000549 [2015] NZHC 3006

BETWEEN

GREGORY ROBERT SMITH AND

COLIN PETER STOKES Plaintiffs and First Counterclaim Defendants

AND

NOBLE INVESTMENTS LIMITED
First Defendant and Counterclaim Plaintiff

APPLE FIELDS LIMITED
Second Defendant and Counterclaim
Plaintiff

JUSTIN WILLIAM PRAIN Third Defendant

CARDNO (NZ) LIMITED Fourth Defendant

SHAYNE PHILPOTT, NEW ZEALAND TRUSTEE SERVICES LIMITED,

FAY EUNICE RICHARDSON, AND BURNSIDE TRUSTEES LIMITED Second Counterclaim Defendants

STUART ELLESMERE LINDSAY AND JULIE IVONNE LINDSAY

Third Counterclaim Defendants

Hearing:	21 August 2015
Appearances:	S Caradus for Plaintiffs Smith and Stokes P B McMenamin for First, Second and Third Defendants G J Ryan for Second Counterclaim Defendants A C Hughes-Johnson QC for Third Counterclaim Defendants
Judgment:	30 November 2015

JUDGMENT OF GENDALL J

SMITH v NOBLE INVESTMENTS LIMITED [2015] NZHC 3006 [30 November 2015]

Introduction

[1]      The  plaintiffs  in  this  litigation,  Gregory  Robert  Smith  (Mr  Smith)  and Colin Peter Stokes (Mr Stokes) claim against the first defendant, Noble Investments Limited (Noble) for breach of a contract dated 17 May 2002 relating to the purchase by Mr Smith and Mr Stokes of land in a subdivision to be completed by Noble.  The present  substantive  claim  is  against  both  Noble  and   the  second   defendant Apple Fields Limited (Apple Fields), the company used by Noble to manage the development of this particular subdivision.   Essentially it is a claim for breach of contract and misrepresentation.  Further, Mr Smith and Mr Stokes claim that they are the victims of deceit perpetrated by the director of Apple Fields, the third defendant Justin William Prain (Mr Prain), and the fourth defendant, Cardno (NZ) Limited (a company engaged by Noble to acquire the requisite consents and assist in planning the subdivision in question).

[2]      Noble and Apple Fields in turn have counterclaimed against Mr Smith and Mr Stokes alleging breach of the 17 May 2002 sale and purchase contract (the ASP). Specifically, Noble and Apple Fields contend that Mr Smith and Mr Stokes have contravened their obligations under the ASP by refusing to surrender certain caveats lodged against the land contained in the subdivision.

[3]      Noble and Apple Fields as counterclaimants further contend that this refusal by Mr Smith and Mr Stokes to surrender their caveats has delayed the entire development of the land and has ultimately caused this commercial undertaking to stagnate.  They therefore claim damages and seek an order for specific performance requiring Mr Smith and Mr Stokes as counterclaim defendants to surrender their caveats.

[4]      Noble and Apple Fields have also named third parties against whom they wish to pursue their counterclaim.  These are the second counterclaim defendants, Shayne Philpott, New Zealand Trustee Services Limited, Fay Eunice Richardson and Burnside Trustees Limited (the Philpott Interests) and the third counterclaim defendants, Stuart Ellesmere Lindsay and Julie Ivonne Lindsay (the Lindsays).

The security for costs application

[5]      The  matter  of  immediate  concern  before  me  is  an  application  by  all counterclaim defendants for security for costs against Noble and Apple Fields with respect to their counterclaim.  The legal position on this application for security for costs is clear.  The power to make such an order is contained in r 5.45 of the High Court Rules. Relevantly this provides in part:

5.45     Order for security of costs

(1)       Subclause (2) applies [ordering the giving of security for costs] if a

Judge is satisfied, on the application of a defendant,—

...

(b)       that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff’s proceeding.

...

[6]      The Court of Appeal provided a useful summary of the general approach to be applied in such applications in A S McLachlan Ltd v MEL Networks Ltd:1

[13]     Rule 60(1)(b) High Court Rules [now r 5.45(1)(b)] provides that where the Court is satisfied, on the application of a defendant, that there is reason to believe that the plaintiff will be unable to pay costs if unsuccessful, “the Court may, if it thinks fit in all the circumstances, order the giving of security for costs”. Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing “principles” from the facts of previous cases.

[14]      While  collections  of  authorities  such  as  that  in  the  judgment  of

Master Williams in Nikau Holdings Ltd v Bank of New Zealand (1992)

5 PRNZ  430,  can  be  of  assistance,  they  cannot  substitute  for  a  careful assessment of the circumstances of the particular case. It is not a matter of going through a check list of so-called principles. That creates a risk that a factor accorded weight in a particular case will be given disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.

[15]      The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating  also  that  an  order  for  substantial  security  may,  in  effect,

1      A S McLachlan Ltd v MEL Networks Ltd (2002) 16 PRNZ 747.

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.

[16]     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.

[7]      The counterclaim defendants here allege that if Noble and Apple Fields are unsuccessful in their counterclaim they will be unable to pay costs.   In response, Noble and Apple Fields appear to accept, to some extent, that at present they are financially unable to provide security, but this difficulty, it is said, derives from their inability to access their equity in the land subject to the development which inability is caused by the subsistence of the caveats of the counterclaim defendants.

[8]      First,  therefore,  I  need  to  address  the  submissions  as  to  Noble  and Apple Fields alleged current and future impecuniosity and, secondly, whether that impecuniosity is caused by the actions of the counterclaim defendants.   Thirdly, I will consider briefly whether there is merit in the counterclaim and also whether the counterclaim is substantively no more than an affirmative defence to the main claim in this proceeding.   Lastly, in considering whether the Court should exercise its discretion to grant security here, I will, as I am required to do, endeavour to balance the proper interests of the counterclaim plaintiffs and the counterclaim defendants.

Impecuniosity

[9]      As noted above, r 5.45 provides for a threshold requirement on applications of this type. This is to the effect that for the application to succeed, the counter claim plaintiffs here, Noble and Apple Fields, generally must be shown to be impecunious. In the absence of a concession as to impecuniosity, the counterclaim defendants are required to identify credible evidence of surrounding circumstances from which may be reasonably inferred that the counterclaim plaintiffs, if unsuccessful, will not be able to pay their costs.  On these aspects, first, the development manager for Noble and a director of Apple Fields, Mr Prain, alleges in his affidavit dated 18 July 2015 the following:

A principal object of the counterclaim is to obtain specific performance of the obligations of the counterclaim defendants under clause 21.5.2 of the contract,  which  failure  is  the  sole  and  complete  cause  of  Noble  and Apple Fields being able to provide security for costs.

[10]     The corollary of this allegation is that Noble and Apple Fields will be unable to  pay  costs  if  they lose  their  counterclaim.    That  is,  loss  in  the  counterclaim proceeding  entails  the  subsistence  of  the  caveats  which  preclude  Noble  and Apple Fields from accessing equity they may have in the land burdened by those caveats.  Somewhat ironically, in their efforts to prove Noble and Apple Fields are impecunious for the purposes of their security for costs application, the counterclaim defendants fortify Mr Prain’s conclusion as to the financial position.  They adduce evidence, amongst other things, of Noble’s inability to satisfy a demand for payment issued on 30 May 2014 under s 119 of the Property Law Act 2007.   Further, in correspondence between Mr Prain and Mr Stokes, Mr Prain notes that Noble’s lack of funds has rendered it unable to continue playing a leading role in negotiations regarding the subdivision.

[11]     It is clear from the authorities that it may be unjust for a defendant to receive an order for security for costs if it is the defendant’s own actions, being the subject of the litigation, that have caused the plaintiff’s impecuniosity.  In Du Claire v Palmer2,

29 October 2010 it was held the possibility of a connection between the plaintiff’s impecuniosity and the subject matter of the proceeding was sufficiently strong to weigh against an order for security.   However, these factors clearly involve consideration of the linkage between the two rather than any major examination of the merits of a claim – Highgate on Broadway Ltd v Devine.3   It is common ground here that Noble and Apple Fields are presently encountering significant financial difficulty.  Moreover, it seems clear that their inability to access sufficient equity in the land to give security for costs is, at least in part, because of the counterclaim defendants’ caveats.  In response to that proposition, the counterclaim defendants do

not dispute that the burden imposed on the land by their caveats at present renders its value unrealisable.  Rather, they contend that the registration and subsistence of the caveats is entirely justified.  As such, they refer to an interim finding in a Court of

Appeal judgment which acknowledged that there was a reasonable case to be made

2      Du Claire v Palmer HC Wellington CIV-2009-485-2638, 29 October 2010.

3      Highgate on Broadway Ltd v Devine 2012 NZHC 2288.

that their refusal to surrender the caveats was justified and was not in breach of any contractual obligations.4   At this point, I do not need to enter into a debate over the detail of this Court of Appeal decision.  That is because, regardless of whether the subsistence of the caveats is legitimate or otherwise, the fact of the matter is that they do subsist and, on one interpretation of matters, they are therefore largely responsible for Noble’s present inability to give security.   The counterclaim will

determine, amongst other things, whether the caveats should continue to subsist, but at least it is arguable that they are the principal reason why Noble and Apple Fields at this point cannot access their equity (if indeed any equity does exist).

[12]   The only relevant feature of the caveats in the present enquiry as to impecuniosity is that they in fact exist and preclude Noble and Apple Fields from using the land as security to acquire funds to grant the security for costs requested.

[13]     In the present case, what I must decide is whether there is merit in ordering Noble and Apple Fields to pay security for costs in circumstances where they may be unable to pay costs and whether the legitimacy of their reason for that inability to pay (the existence of the caveats) might only be determined by allowing the counterclaim to be brought.

Merit of the counterclaim

[14]     On this aspect, counsel for all counterclaim defendants here cite the Court of Appeal judgment relating to the caveats in this proceeding and refer to the following passage:5

…Requiring  the  appellants  to  surrender  easements  to  which  they are contractually entitled to is not a reasonable requirement, at least not at this point in time when it is possible that the caveators’ legitimate interest will be prejudiced by removal.

[15]     But on this, as Mr McMenamin, counsel for Noble and Apple Fields noted before me,  the Court  of Appeal  decision  was  concerned  only with  whether the

Philpott Interests and others arguably held caveatable interests.6 This was an interim

4      Philpott & Ors v Noble Investments Limited [2015] NZCA 342.

5 Above n 2, at [55].

6 Above n 2, at [69].

finding and it cannot determine the ultimate outcome of the counterclaim before me now.  I am therefore not prepared at this point to advance further arguments on the merits or otherwise of this particular case.  These merits will be properly determined in the ensuing substantive litigation.

Nature of the counterclaim

[16]     Security for costs will generally not be ordered where a counterclaim, though formerly distinct, is substantively an affirmative defence to a principal claim in a proceeding.7  As McGechan on Procedure at para HR5.45.13 notes:

(c)       Security is inappropriate if the counterclaim is in effect a defence to the plaintiff’s claim: Onop Properties Ltd v Fallon Properties Ltd [1988] 1 PRNZ 261 (HC).  In that case, security for costs will not be awarded against a defendant in favour of a plaintiff:   Oceania Furniture Limited v Debonaire Products Ltd HC Wellington CIV-

2008-485-1701, 24 April 2009.

[17]      Here, the various breaches of contract that the plaintiff claimants Mr Smith and Mr Stokes allege Noble and Apple Fields committed relate to delay and the ultimate stagnation of the development.  In reply, Noble and Applefields suggest that a reason for this delay was the refusal by all the caveators in question to surrender their caveats.  While counsel for Mr Smith and Mr Stokes submitted that Noble and Apple Fields would have to lead evidence to substantiate their counterclaim which might be irrelevant to the defence to the main claim, this does not render the counterclaim wholly different to the main claim.  Of course there will be additional matters raised in evidence of Noble’s contentions in the counterclaim which do not form part of the main claim.   However, this does not mean that one can readily demarcate the two causes of action.  Considering there is a real possibility that an order for security for costs will result in Noble’s needing to withdraw the counterclaim, and considering that the counterclaim is relevant to the main claim, I need to be cautious here before ordering security.   Otherwise,  any counterclaim might  well  be  neutered,  despite  much  of  its  substance  relating  to  matters  also

relevant in the main action.

7      Nikau Holdings Ltd v Bank of New Zealand [1992] 5 PRNZ 430 (CA).

[18]     I therefore reject the submission that the nature of the counterclaim is so different as to warrant security for costs being ordered against the principal claimants here, Mr Smith and Mr Stokes.

Potential for denial of justice

[19]     In Highgate on Broadway Ltd v Devine8 Kós J with some force supported the principle noted in A S McLachlan Limited v MEL Network Ltd9 I have outlined at [6] above as follows:

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.

[20]     The position of the third party counterclaim defendants here (the Philpott Interests and the Lindsays) whose presence in this litigation is only due to their defence  of  the  counterclaim,  as  I  see  it,  is  different  to  that  of  Mr  Smith  and Mr Stokes.  The Philpott Interests and the Lindsays are not claimants in the principal claim.  Noble and Apple Fields’ counterclaim cannot be construed as a response to any proceedings they have brought.   But for the counterclaim they would not be involved in the main proceeding here.  Thus they cannot have their application for security refused on the basis that the counterclaim is substantively linked to a claim that they have brought.  It is important however to bear in mind that, if Noble and Apple Fields are ordered to give security to the third parties, it is likely that they will be unable to bring the counterclaim at all and they will thereby lose their opportunity to raise the counterclaim in response to the main claim brought by Mr Smith and Mr Stokes.  This may possibly lead to a consequence for the Philpott Interests and the Lindsays that their ability to obtain security for costs is diminished by the need to allow Noble and Apple Fields to effectively respond to the main claim brought by Mr Smith and Mr Stokes.  Although this may be seen as somewhat unfortunate, the Court must proceed cautiously before granting security for costs, such that it would

effectively prevent a claim (or here a counterclaim) from being brought, as access to

8      Above n 3, at [23](b).

9      Above n 1.

justice is an important right and considerations relating to this loom large in this case.

[21]     Here, there is a real likelihood that if Noble and Apple Fields are required to provide security for costs for any party, the counterclaim will be withdrawn and they will therefore be unable to seek a court’s decision as to the legitimacy of the caveats lodged  by  the  counterclaim  defendants  and  their  entitlement  to  an  appropriate remedy.  As I see it, this is a weighty reason for refusing to order security for costs here.   There is also a real argument open that  the impecuniosity of Noble and Apple Fields has, in some way at least, been caused by the Philpott Interests and the Lindsays in lodging and maintaining their caveats.

Balancing interests of the parties

[22]     Finally, in considering applications such as the present one, the Court in exercising its  discretion  is  required  to  balance  the interests  of the counterclaim plaintiffs and the counterclaim defendants – A S McLachlan Ltd v MEL Network Limited.  This proceeding, and the various claims before the Court involving these parties, has a long and complex history relating to the problems with this particular land development.  It has been hinted that the motives of the various counterclaim defendants in bringing the present application, which it is said is simply to halt genuine proceedings involving them, should well be questioned.  But I say nothing further on this.

[23]     As the authorities clearly note, the interests of Noble and Apple Fields as counterclaim plaintiffs in pursuing their claims, claims which are inextricably linked to the claim against them by Mr Smith and Mr Stokes, must be balanced here against the interests of all the counter claim defendants.   Those counterclaim defendants need to be protected against being drawn into unjustified litigation which might involve considerable expense, particularly if the situation arises where there is little likelihood  of recovering  those  costs  in the event  the counterclaim  plaintiffs are unsuccessful.

[24]     But, finally, in weighing up all matters which have been advanced to me, I conclude that the proper balancing of the interests of the parties in this case must fall on the side of the counterclaim plaintiffs, Noble and Apple Fields.

Conclusion

[25]     The present applications for security for costs brought by all the counterclaim defendants, Mr Smith and Mr Stokes, the Philpott Interests and the Lindsays must fail. They are dismissed.

[26]     As to costs, the counterclaim plaintiffs, Noble Investments and Applefields, have been successful in opposing the present applications and I see no reason why costs should not follow the event in the usual way.

[27]     An order is now made that the counterclaim plaintiffs, Noble and Applefields Limited, are entitled to one award of costs in their successful opposition to the present applications (to be met on a joint and several basis by the counterclaim defendants) calculated on a category 2B basis together with disbursements as fixed by the Registrar.

...................................................

Gendall J

Solicitors:

Duncan Cotterill, Christchurch

K J McMenamin & Sons, Christchurch

White Fox & Jones, Christchurch

Anthony Hughes-Johnson QC, Christchurch

Post script

[28]     As I understand the position, the claims here relating to this subdivision and the land in question have quite some history and the present position would only seem to be one of continuing stalemate.  Matters must be resolved in the interests of all parties before legal and other costs turn this matter into an even more intense quagmire than presently exists.  The disputes evidenced in the principal claim and

the counterclaims here would appear to be rather acrimonious and long-running.  I am not aware whether they may have been the subject of any detailed negotiation or mediation efforts in the past.   In my view the costs and substantial internecine fighting between all these parties cannot simply continue and must be brought to a head at some point.   That said, I urge the parties now to consider carefully the desirability of this matter proceeding to some form of mediation or the like in an endeavour to resolve all issues.

...................................................

Gendall J