Sun v Peninsula Road Limited
[2014] NZHC 478
•14 March 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-7991 [2014] NZHC 478
BETWEEN HO KOK SUN & ORS
Plaintiffs
AND
PENINSULA ROAD LIMITED First Defendant
AND
KAWARAU VILLAGE HOLDINGS LIMTED
Second Defendant
AND
RUSSELL McVEAGH Third Defendant
AND
MELVIEW (KAWARAU FALLS STATION) INVESTMENTS LIMITED Fourth Defendant
Hearing: 10 December 2013 Appearances:
R A Edwards for plaintiff
M G Colson & T B Fitzgerald for second and fourth defendantsJudgment:
14 March 2014
JUDGMENT OF WINKELMANN J
This judgment was delivered by me on 14 March 2014 at 4.00 pm pursuant to
Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar
HO KOK SUN & ORS v PENINSULA ROAD LIMITED [2014] NZHC 478 [14 March 2014]
[1] This judgment determines various applications for security for costs and discovery. The proceeding is brought by 105 plaintiffs, each of whom contracted to purchase one or more apartments in a development at Kawarau Falls Station near Queenstown.
[2] The development was to be an integrated resort comprising spa and resort hotels, town houses, conference and retail facilities. It was to be developed in three stages. Because of the insolvency of one of the developers, only the first stage was ever completed.
[3] The combined purchase price for the units was approximately $85,000,000. The plaintiffs each paid a deposit in respect of their purchase but refused to settle the purchase when called upon to do so. The second defendant, Kawarau Village Holdings (Kawarau), cancelled the agreements, relying upon the refusal to settle as a repudiation of the contract. The plaintiffs allege that they were not obliged to settle, and indeed are entitled to cancel the agreements. They each seek the return of their respective deposits and an order for general damages including an amount for wasted expenditure to be established at trial.
[4] The first and fourth defendants in the proceeding, Peninsula Road Ltd and Melview (Kawarau Falls Station) Investments Ltd respectively, were each original counterparties with the plaintiffs sale and purchase agreement. Peninsula Road is insolvent and is not playing an active part in the proceeding.
[5] Kawarau is the owner of the development and became the vendor under the agreements pursuant to a series of assignments. The third defendant, Russell McVeagh, holds the deposits paid by the plaintiffs as stakeholder, and again is not actively involved in the proceeding.
[6] The plaintiffs plead four causes of action:
(a) Repudiation by wrongful cancellation. The plaintiffs say that Kawarau’s cancellation was wrongful because it was not entitled to call upon the plaintiffs to settle; it was not itself ready, willing and
able to settle, it had not established the settlement date in accordance with the terms of the agreement, and it had failed to serve effective settlement notices.
(b)Anticipatory breach. The essential allegation is that because of various defects in the contractual agreements and fundamental changes to various aspects of the development, the defendants were unable to convey to the plaintiffs what they had contracted for.
(c) Breach of contract. It is alleged that the vendors were contractually obliged to develop the entire Kawarau Falls Development. It is alleged that because of the failure to construct the entire Kawarau Falls Development the defendants breached the agreements.
(d)Breach of s 37(1) of the Securities Act 1978. It is alleged that the sale and purchase agreements required that purchasers become and maintain membership of an incorporated body – the Precinct Society. It is alleged that membership of the Society would have constituted a security and that by marketing these to the prospective purchasers as part of the marketing of the development, these securities were offered to the public. In the absence of a registered prospectus, this was a breach of the Securities Act. It is alleged that as a consequence the agreements for sale and purchase were invalid.
Discovery application
[7] The plaintiffs have applied for orders for specific discovery1 relating to three categories of documents, and also for a final date for provision of all further discovery (whether provided voluntarily or pursuant to Court order) with sanctions if it was not provided. Tailored discovery orders have previously been made on a
consent basis.
1 Pursuant to the High Court Rules, r 8.19.
[8] The first category of documents sought is any documents and correspondence that bear upon any work excluded from the practical completion certificates.2 The plaintiffs contend these documents are relevant to whether Kawarau was ready, willing and able to settle at the time it called upon the plaintiff to settle – relevant because the documents bear upon the validity of the practical completion certificates. If the certificates did not cover all work within the appropriate scope of work, they
would not be valid certificates for the purposes of the agreement.
[9] The defendants say that the allegations in the statement of claim as to the validity of the certificates3 are limited to allegations that the certificates are defective because:
(a) of who issued the certificates;
(b) of what the certificates state they are based on;
(c) they were based on a sample agreement for Lakeside West and Kingston West rather than on the agreements relevant to the specific units subject to the agreement.
[10] The defendants say that these allegations focus on the technicalities associated with the certificates and do not concern what happened after the certificates were issued. Nor do they concern the substantive completeness of the development.
[11] Paragraph 78 of the amended statement of claim (and now the second amended statement of claim filed in February) contain the allegations that the certificates of practical completion for the units were invalid because they did not state that they had been issued in accordance with the plans and specifications contained in the agreement. Just what the certificates did cover is therefore very
much at issue in the proceeding. This will inevitably be evidence that either
2 This differs from the category sought in the application for further and better discovery, but during the course of argument, the plaintiffs were able to refine the request.
3 Set out at [78] of the amended statement of claim.
adversely affects the plaintiffs’ case or supports it, or adversely affects the defendants’ case or supports it.4
[12] I am satisfied that these documents are relevant and should be discovered.
Second disputed category
[13] The plaintiffs had sought documents showing the basis for the calculation of certain fees payable in respect of the Precinct Society. At the hearing the defendants accepted an obligation to provide this discovery so that no order is necessary.
Third disputed category: Hilton comments on changes to the Kingston West second or third lease, and/or body corporate rules, or other changes to either Lakeside West or Kingston West
[14] The plaintiffs say that it appears from documents already discovered that changes which were made to both the Kingston West and Lakeside West buildings were made at Hilton’s specific request. They cite as an example a document which refers to Hilton’s right to comment on the second and third lease of the Kingston West units in the body corporate rules. The plaintiffs argue that the effect of these changes is directly in issue in the proceeding, understanding the context and catalyst for each change is relevant in assessing its scope and effect.
[15] The plaintiffs do not anchor their application for discovery to any of the existing pleadings. Even on their own submissions, this is an attempt to obtain documents which may give further grounds for them to challenge the enforceability of the agreements on the basis that the plaintiffs were not to receive what they had contracted to purchase. This is a “fishing exercise” and in those circumstances no order is appropriate.
[16] Finally, in relation to discovery issues the plaintiffs seek an order that all further discovery be provided by a certain date. They seek an order that unless it is, a monetary penalty will be imposed on the defendants. I consider it is sufficient if
the date ordered is a firm date, with costs implications to follow if there is a default.
4 High Court Rules, rr 8.7 and 8.18.
Plaintiffs’ application for security for costs on counterclaim
[17] Kawarau and Melview have counterclaimed against each of the plaintiffs, relying upon the plaintiffs’ failure to settle as a breach of the agreements for sale and purchase. They claim damages in respect of the loss suffered by them by reason of that breach. The plaintiffs seek security for costs in respect of that counterclaim. There is no dispute that Kawarau is impecunious. The issue between the parties is whether security is appropriate in the circumstances, and the level at which security should be set. The plaintiffs say security paid should be commensurate with that ordered against the plaintiffs on their claim ($367,500), or alternatively should be determined according to 2B costs for the entire proceeding with 2C for discovery and inspection, and an allowance made of $200,000 for experts valuer’s fee. That produces a security for costs figure of $325,814. The defendants say that if any security is payable, it should be set at a figure of no more than $30,000.
[18] The relevant principles are as stated in McGechan on Procedure:5
1.Security may be ordered on a counterclaim which is an independent cross-claim. Relevant factors are whether the counterclaim arises out of the same transaction, whether the amount counterclaimed exceeds that on the principal claim, and whether the counterclaim plaintiff would have issued proceedings had the plaintiff not done so.6
2. Security is inappropriate if a counterclaim is in effect a defence to
the plaintiff’s claim.7
[19] Here the defendants say that this is a classic case of a counterclaim that does nothing more than seek remedies that flow from a successful defence, and at most it will add one and a half days to the length of the hearing. They submit it is not in any sense an independent cross claim because:
(a) It arises from the same transaction as the primary claim. The issues in the claim and counterclaim are not only inextricably linked; they are in almost every respect the same issue.
5 McGechan on Procedure (looseleaf ed, Brookers) at [5.45.13].
6 Oceania Furniture Ltd v Debonaire Products Ltd HC Wellington CIV 2008-485-1701, 24 April
2009 at [11].
7 Onop Properties Ltd v Fallon Properties Ltd (1988) 1 PRNZ 261 (HC).
(b)It is interconnected with the plaintiffs’ claim. If the defendants make out their defence they will necessarily establish the allegations in the counterclaim (other than in relation to quantum).
[20] The plaintiffs’ case is that the counterclaim is more than just a defence to the plaintiffs’ claim. The plaintiffs seek a liquidated sum of approximately $8,000,000 plus interest and costs held in a solicitor’s trust account, whereas the defendants seek an unliquidated sum of approximately $31,000,000 by way of damages assessed on the market value of each unit. Although the plaintiffs’ claim involves allegations that are common to each plaintiff and affects all units in a uniform way, the defendants’ counterclaim involves considering the market value of each individual unit including features that are peculiar to each unit. It has therefore dramatically broadened the scope of the valuers evidence to be called. It also raises the issue as to the defendants’ duty to mitigate and in particular the steps taken to sell the units and underwrite agreements with a third party. Significant further discovery on these issues has been provided and is still ongoing. The plaintiffs say that such is the scope of the new issues raised by the counterclaim that it will add an additional 15 days to the hearing.
Analysis
[21] Much of what the defendants need to prove to succeed with their counterclaim will be proved in the course of defending the plaintiffs’ claim against them. To defend the plaintiffs’ claim they will need to prove that the plaintiffs were obliged to settle when called upon to settle, and that the defendants cancellation of the agreements was not a wrongful repudiation. The overlap between the claims will be substantial.
[22] On the other hand it is also true that the two defendants do more than simply defend themselves so that the claim and counterclaim are not entirely conterminous. The defendants seek damages in respect of the plaintiffs’ failure to settle, which exceed by a very considerable margin the amount claimed by the plaintiffs. The claim is for damages and not a liquidated sum. The evidence produced to defend the
plaintiffs’ claim will not prove this amount,8 so that additional expert evidence will be required. I agree that the issue of the defendants’ duty to mitigate will also be ventilated during the hearing of that counterclaim.
[23] Taking these various matters into consideration I am satisfied that it is appropriate to order security against the defendants, but for a substantially lesser sum than the order sought. Security should be calculated on the basis that the additional issues added in by the counterclaim will take four days to hear, which is my estimate of the additional time likely to be added to the hearing by the addition of those issues. On that basis the calculation for security for costs would be as follows:
Statement of defence – 6 days (on the basis that the defences for each plaintiff are likely to be very similar).
Inspection of documents – 6 days.
Defendants’ preparation of briefs of evidence – 5 days.
Defendants’ preparation of list of issues, authorities and common bundle – 2 days (reduced from full allocation of 4 days due to commonality of issues between claim and counterclaim).
Preparation for hearing – 5 days. Attendance at hearing – 4 days.
Attendance at hearing by second counsel – 2 days.
Experts fees – $50,000. (The $50,000 is lower than the estimate by the plaintiffs as the issues to be traversed in respect of quantum should be
consistent across most if not all of the plaintiffs).
8 Contrast this with Oceania where the Judge was satisfied that the prosecution of the counterclaim would resolve the question of the balance of the account between the plaintiff and the defendant, which was a critical element in determining how much of the judgment the plaintiff had already obtained was enforceable against the defendant.
[24] This produces a likely cost figure of (30 x $1990) + $50,000 = $109,700. This is the amount which should be paid as security for costs by the defendants Kawarau and Melview.
Application by defendants for additional security for costs
[25] In a judgment dated 31 May 2012, Gilbert J awarded security for costs against those plaintiffs with no substantial assets in New Zealand. He awarded security calculated on the basis that it should cover all steps up to setting down. The Judge proceeded on the basis of counsel for the defendants’ calculation that scale costs up to the setting down stage would be $61,476 on a 2B basis or $81,404 on a
2C basis, assuming two interlocutory hearings and amended pleadings. That equates to $746 per plaintiff, but as he noted made no allowance for the fact that there were multiple plaintiffs. Because of the number of plaintiffs, he uplifted that amount to order that each plaintiff should pay the sum of $3,500 to cover security for costs until setting down.
[26] The defendants now seek an order that each of the plaintiffs other than those excluded from the earlier order each provide substantial additional further security for costs and that the proceedings be stayed until such security is provided.
[27] In making this application they acknowledge that in one material respect the circumstances of the claim have changed since Gilbert J’s award. At the time of the award the plaintiffs alleged a cause of action based on misrepresentation. That would have required a separate statement of defence in respect of each of the plaintiffs’ allegations and Gilbert J accordingly made an unquantified allowance for separate defences. They say that the judgment does not disclose how much value Gilbert J attributed to the need to file separate statements of defence in respect of each claim. In the event the plaintiffs amended their claim such that Kawarau and Melview were able to file one statement of defence each. Nevertheless the second to fourth defendants’ scale costs in the proceedings they say will significantly exceed the security already provided.
[28] The defendants set out the calculation as follows:
Step KVH
L
daysMKFS
I days
Costs on 2C
basis
Commencement of defence by defendant 6 1 13,930 Pleading in response to amended pleading 2 1 5,970 Preparation for first CMC (incl discussion
about discovery)
1 1,990 Filing memorandum for first or subsequent
CMC or mentions hearing (5 conferences in total)
5 9,950 Appearance at mentions hearing 0.2 398 Appearance at first or subsequent case
management conference (5 in total)
3.5 6,965 List of documents on discovery 7 7 27,860 Inspection of documents 100,000 Filing interlocutory application (2) (i.e. two
interlocutory applications on different matters;
not one for each defendant on the same matter)
2 3,980 Filing opposition to interlocutory application
(2) (i.e. two notices of opposition on different matters; not one for each defendant on the same matter)
2 3,980 Preparation of written submissions (2) (i.e.
two hearings)
6 11,940 Preparation by applicant of bundle for hearing 1 1,990 Appearance at hearing of defended
application for sole or principal counsel
2 3,980 Second and subsequent counsel if allowed by
the court
1 1,990 Sealing order or judgment 0.2 398 Plaintiff's or defendant's preparation of briefs
or affidavits
5 9,950 Preparation for and appearance at issues
conference
1 1,990 Preparation for and appearance at pre-trial
conference
1 1,990 Defendant's preparation of list of issues,
authorities, and common bundle
4 7,960 Preparation for hearing 100,000 Appearance at hearing for sole / principal
counsel
20 39,800 Second and subsequent counsel if allowed by
court
10 19,900 Sealing order or judgment 0.2 398 TOTAL $377,309
[29] To this amount the defendants wish to add an additional $150,000 for expert witnesses’ (valuers’) fees. On their calculation that means that in total $527,309 is required for security. Existing security posted is $360,500 plus interest of $13,179 as at 10 December 2013, which leaves on the defendants’ case an additional $155,630 to be paid. This equates to $1,568 from each of the plaintiffs from whom security is sought.
[30] The defendants note that they have made an allowance for separate costs for the fourth defendant in relation to preparation of statements of defence, their likely amended statement of defence and list of documents on discovery. They say however that Melview was not added to the proceeding until after Gilbert J’s decision, so its costs were not taken into account at all for the purpose of calculating security for costs. They do accept however that in most respects its position is the same as the second defendant.
[31] In relation to the very significant inspection allowance, the defendants say that it is appropriate that there be some allowance for the fact that they are dealing with 105 plaintiffs. They therefore have provided for inspection on 50% of a 2B basis for each plaintiff, and evidence preparation costs at 10% of a 2C basis (in recognition that most of the trial preparation will be common to all plaintiffs).
[32] It is appropriate to reassess the calculation of security at this point both because Gilbert J’s calculation only took the proceeding up to the point of setting down,9 and because his calculation assumed a misrepresentation claim.
[33] Looking at the costs calculation advanced by the defendants in support of the application for additional security I make the following points:
(a) There should not be a separate allowance for Melview for pleading in response to the amended pleading. The time allocation for one
defendant is sufficient.
9 As it was then known and because the proceeding has developed in a significantly different manner to what was envisaged when Gilbert J made his assessment.
(b)List of documents on discovery. There should be an allowance for Melview as claimed in accordance with 2C scale. Melview had to follow the same process of examination and listing of documents as if it were the only defendant.
(c) The defendants claim an allowance of $100,000 for inspection of documents. This assumes a far greater time allocation than scale which provides a six day allocation for a complex proceeding. While there must be some uplift to allow for multiple plaintiffs, the order of uplift claimed by the defendants is excessive. With the removal of the misrepresentation cause of action, the fact of multiple plaintiffs really only bites in relation to the Securities Act claim. An uplift to an 18 day allocation is adequate to reflect this.
[34] Given those observations, a reasonable estimate of the defendant’s costs comes to $311,139.10 In combination with the $150,000 expert valuer figure, the payable amount of security is $461,139. Taking into account the $373,679 already paid as security,11 the appropriate quantum of further security is $87,460, which amounts to $893 each for the 98 plaintiffs against whom an order is sought.
Orders
[35] I order that:
1.The plaintiffs are entitled to discovery of the first category of documents sought, to be provided by 4 April 2014.
2. The defendants pay security for costs in the sum of $109,700.
3.The 98 plaintiffs against whom further security is sought provide further security of $893 each.
10 This figure is the defendant’s suggested estimate, but with a $35,820 inspection allowance and
no allocation for pleadings in response.
11 This figure includes interest as at the time of hearing.
[36] Given the measures of success obtained by both parties, my preliminary view is to order for costs to lie where they fall. If the parties wish to argue for a different outcome they should file memoranda within 15 days [4 April 2014].
Winkelmann J
Solicitors:
Anderson Creagh Lai, Auckland
Glaister Ennor, Auckland
Bell Gully, Auckland
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