The Phone Company Limited v M2 NZ Limited
[2021] NZHC 98
•4 February 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2015-404-002903
[2021] NZHC 98
BETWEEN THE PHONE COMPANY LIMITED
Plaintiff
AND
M2 NZ LIMITED
First Defendant
M2 TELECOMMUNICATIONS PTY LIMITED
Second Defendant
Hearing: 11 November 2020
(Further memoranda received 4 and 11 December 2020)
Counsel:
D W Grove for Plaintiff
L L Fraser and Z Wall-Manning for Defendants
Judgment:
4 February 2021
JUDGMENT OF EDWARDS J
This judgment was delivered by me on 4 February 2021 at 5.00 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Counsel: D W Grove, Auckland
Solicitors: Chapman Tripp, Auckland
THE PHONE COMPANY LTD v M2 NZ LTD [2021] NZHC 98 [4 February 2021]
[1] The plaintiff (TPC) seeks further and better discovery and orders requiring answers to interrogatories.
[2] The defendants (M2) oppose on the grounds they have complied with their discovery obligations, the documents sought do not exist, and the interrogatories are irrelevant.
Relevant facts
[3] The background to the proceeding is summarised in previous decisions of this Court,1 and the Court of Appeal.2 This judgment should be read together with those judgments.
[4] In brief, M2 and TPC formed a marketing alliance in 2005 which was documented in a Heads of Agreement. In 2006, the parties entered into a Termination Agreement which brought the Heads of Agreement to an end and provided for an ongoing commission to be payable to TPC (Termination Agreement).
[5] Fitzgerald J summarised the key terms of the Termination Agreement in an earlier judgment in this proceeding, and I adopt that summary as follows:3
(a)Pursuant to cl (a), the parties agree to terminate the earlier agreements between them, effective from the date of the Termination Agreement.
(b)Clause (e) provides:
TPC is entitled to receive a commission in perpetuity of two percent (2%) of the Net Receipts from all customers contracted to M2, or its related or subsidiary companies, (whether orally or in writing) by the following dealers: (1) Phone and Travel Limited (previously named Rex Distribution Limited), (2) Cytek Communications Ltd
(3) Etari Corporation Ltd and (4) The P2P Group Ltd.
(c)Clause (f) provides:
1 The Phone Company Ltd v M2 NZ Ltd [2018] NZHC 2167 [High Court judgment]; and The Phone Company Ltd v M2 NZ Ltd [2020] NZHC 577.
2 M2 NZ Ltd v The Phone Company Ltd [2019] NZCA 230 [Court of Appeal judgment].
3 The Phone Company Ltd v M2 NZ Ltd [2016] NZHC 2283 at [11].
TPC is entitled to receive an additional commission in perpetuity equal to one percent (1%) of Net Receipts arising from mobile phone services customers (“end users”) of M2 (or its related or subsidiary companies), including customers of M2 procured by any M2 contractor, dealer or agent in New Zealand when the Vodafone NZ mobile network is used to deliver the mobile services. For the avoidance of doubt, the Net Receipts used to calculate the commission set out in paragraph (e) will not be included in determining the commissions payable in accordance with this paragraph and no commission is payable to TPC in accordance with this paragraph for customers which may be procured via such wholesale arrangements and/or licensing arrangements, as are described below, which M2 may enter into with third parties in New Zealand with respect to mobile services. Wholesale arrangements are distribution models whereby M2 enters into a commercial wholesale arrangement to supply mobile or other services to a party for the purpose of that party on- selling the services to its own customers. Licensing arrangements are licensing models that are materially consistent with Attachment B to this letter of agreement.
(d)Clause (g) provides that the payments to TPC referred to in cls (e) and
(f) include all those from all customers which were contracted either prior to or after the date of the Termination Agreement, and are to be made “indefinitely” for each customer whilst M2, or its related or subsidiary companies, receive “Net Receipts” in relation to that customer.
(e)Clause (j) requires M2 to provide TPC with “prompt written notice” of the expiry or termination of any agreement between a “Dealer” and M2 (a “Dealer” being defined as the specific dealers referred to in cl (e), together with any successors, assignees, transferees or replacements to those dealers).
(f)Clause (l) records M2’s sole on-going obligations to TPC following execution of the Termination Agreement, including the provision of monthly summaries of the commission payments due to TPC under cls (e) and (f), and the actual payment of those commissions.
(g)Clause (m) gives TPC the right to engage, at TPC’s expense, an independent accountant/auditor to review the accuracy of the commission payments made to TPC in accordance with cls (e) and (f).
(h)A definition of “Net Receipts” for the purposes of cls (e) and (f) of the Termination Agreement follows cl (m), and provides:
… all the revenues received directly or indirectly by M2, or its related or subsidiary companies, from customers mentioned in paragraphs (e) and (f) of this document for telecommunications services, exclusive of any applicable taxes, statutory charges, fixed line rental income, any services categorised as a Telecom Smart Phone service and any equipment charges received by M2.
[6] Six years after the Termination Agreement was concluded, in 2012, the parties entered into a Deed of Variation which provided for a lump sum payment to TPC to bring the perpetual payment of commissions under the Termination Agreement to an end (Deed of Variation). In July 2012, M2 paid a lump sum calculated in accordance with the agreed formula under the Deed of Variation, and the Termination Agreement was brought to an end.
[7] TPC issued this proceeding in 2015. An order for tailored discovery was made by consent on 14 February 2017 (Discovery Order). That Discovery Order set out 15 categories of documents to be discovered. M2 served its first affidavit of documents in April 2017.
[8] In 2018, the parties sought the determination of a preliminary question concerning the correct interpretation of the clauses governing the calculation of commissions payable under the Termination Agreement. The argument in the High Court, and Court of Appeal, focused on the correct interpretation of cl (f), and in particular the meaning to be attributed to the comma appearing after “(or its related or subsidiary companies),” in the fourth line of the clause.
[9] The High Court found in favour of the interpretation put forward by TPC.4 The Court of Appeal disagreed, instead favouring an interpretation that neither party had put forward. The Court said the clause was to be interpreted as follows:5
[32] First, we consider that cl (f) plainly excludes net receipts from customers whose contracts with M2 were procured by the four dealers identified in cl (e) because the larger commission provided for in cl (e) is payable to that class of customers. Also excluded are net receipts from third parties in New Zealand with whom M2 makes wholesale and licensing arrangements pursuant to which M2 provides mobile or other services for on- sale by that contracting party to its own customers. These exclusions just mentioned give meaning to the following words in cl (f):
For the avoidance of doubt, the Net Receipts used to calculate the commission set out in paragraph (e) will not be included in determining the commissions payable in accordance with this paragraph and no commission is payable to TPC in accordance with this paragraph for customers which may be procured via such wholesale arrangements and/or licensing arrangements, as are described below, which M2 may enter into with third parties in New Zealand with respect to mobile services.
[33] Secondly, we consider the intended meaning of the more problematic part of cl (f) is as follows. TPC is entitled to a commission, in addition to the larger commission provided for in cl (e), in perpetuity, at one per cent of:
• net receipts arising from mobile phone services customers (end users) of M2 plus its related and subsidiary companies; and
• net receipts from customers of M2 that have been procured by any contractor to, dealer for or agent of M2 in New Zealand when the Vodafone NZ mobile network is used to deliver the mobile services for which the net receipts are received.
[34] This interpretation excludes net receipts received from customers of M2 who were procured by its contractors, dealers or agents where the end users have the services delivered on a mobile network other than that of Vodafone NZ.
[10] TPC amended its pleading following delivery of the Court of Appeal judgment. The current iteration is pleaded in the third amended statement of claim. TPC seeks orders setting aside the Deed of Variation and requiring M2 to comply with the terms of the Termination Agreement. It does so on the basis that it was induced to enter into the Deed of Variation as a result of misrepresentations made by M2 to the effect that M2’s business in New Zealand was failing.
4 High Court judgment, above n 1, at [48].
5 Court of Appeal judgment, above n 2 (footnotes omitted).
[11] M2 provided supplementary discovery on 1 April 2020, with a formal affidavit being provided on 17 June 2020, when COVID-19 restrictions lifted. TPC’s current application was filed on 16 September 2020.
Further and better discovery
[12] Rule 8.19 of the High Court Rules 2016 provides that the Court may make an order for particular discovery where it appears there are grounds for believing that a party has not discovered one or more documents or a group of documents that should have been discovered.
[13]Applications are approached in accordance with the four stages set out in
Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd, namely:6
(a)Are the documents sought relevant, and if so, how important will they be?
(b)Are there grounds for belief that the documents sought exist?
(c)Is discovery proportionate?
(d)Weighing and balancing these matters, in the Court’s discretion, is an order under r 8.19 appropriate?
Clause (e) of the Termination Agreement
[14] TPC seeks the following documents which it says are relevant to cl (e) of the Termination Agreement:
From 4 December 2006 to date provide all contracts/documents and communications with any direct or indirect successor, assignee, transferee or replacement of the dealer or dealership for the following companies:
a)Phone and Travel Limited (previously named Rex Distribution Limited);
b)Cytek Communications Limited;
6 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760, [2018] NZAR 600 at [14].
c)Etari Corporation Limited; and
d)P2P Group Limited.
In relation to all such entities please provide statements as to all Net Receipts received from these entities.
[15] Mr Holmes, the director of TPC, has sworn an affidavit in support of TPC’s application. He points out that an agreement with Cytek Communications Ltd (Cytek) has not been disclosed, nor are there any documents relating to Net Receipts for that company, and there is no disclosure of contracts with any “direct or indirect successor, assignee, transferee or replacement of the dealer or dealership”. Specifically, there are no documents relating to the Net Receipts of M Communications Ltd, a company which TPC believes was a direct or indirect successor, assignee, transferee or replacement dealer for Cytek.
[16] As M2 accepts, if the Cytek agreement exists, then it should have been discovered under the existing categories of the Discovery Order. M2 has provided two discovery affidavits setting out the steps it has taken to identify relevant documents. There is nothing to indicate that this process was flawed or inadequate. In the circumstances, I am not satisfied that there is sufficient evidence to suggest that the Cytek agreement exists.
[17] There is also no evidence to substantiate the suspicion that M Communications was a replacement dealer for Cytek. Mr Eele was a director of M Communications and has sworn an affidavit in support of M2’s opposition to the application. He deposes to setting up the M Communications dealership as a “stop gap” that operated until the M2 Black & White relationship was established and up and running. There is no basis to go behind this affidavit evidence.
[18] It follows that there are no grounds to suggest that there are documents in the possession or control of M2 relating to Net Receipts from any such replacement dealers either.
[19] The application for further and better discovery under cl (e) of the Termination Agreement is accordingly declined.
Clause (f) of the Termination Agreement
[20] The second category of documents sought by TPC relates to documents relevant to cl (f) of the Termination Agreement and is as follows:
From 4 December 2006 to date for both defendants and any related or subsidiary companies provide reports as to the Net Receipts for “telecommunication services”, being all revenues received “directly or indirectly” for:
a)Wired broadband, data or voice over IP;
b)Wired voice calling;
c)Wireless mobile, broadband, text messaging and data;
d)Wireless mobile voice calling;
e)Cloud and security, and as further particularised in the affidavit of B Holmes sworn 10 September 2020.
Such disclosure to be distinguished between Category A and Category B as particularised in the Court of Appeal's judgment at Paragraph 33.
[21] M2 has disclosed a spreadsheet which it says shows mobile revenue and costs of sales data. This data may be used to calculate “Net Receipts” under cl (f). TPC challenges the adequacy of this spreadsheet and the discovery of documents relating to cl (f) on several fronts.
[22] First, TPC challenges the form in which the data has been presented. Mr Holmes describes the spreadsheet as a “data dump”. What he seeks is a combination of the data provided in this spreadsheet with the reports that TPC received under the Termination Agreement which identified, amongst other matters, the customer name, service type, and the sales agent acting for the dealership.
[23] I have some sympathy for TPC’s position in relation to the format of the spreadsheet. This is key data required to calculate the revenues, and therefore commission, under the Termination Agreement. A “data dump” does not allow TPC to monitor whether there has been full disclosure of all relevant revenue. Nor does it allow TPC to easily calculate the commission that might otherwise be due and payable should its claim of misrepresentation succeed. Such a calculation is important to the assessment of litigation risk.
[24] On the other hand, it is apparent that documentation in the form sought by TPC no longer exists. The Chief Financial Officer of M2, Mr Smith, has sworn several affidavits in support of M2’s opposition to the application. He explains that M2 holds and reports revenue information at a group level and so compliance with this discovery request would require the creation of new documents which are not currently in existence.
[25] I agree with Ms Fraser, counsel for M2, that the creation of records or reports goes beyond the scope of an application for particular discovery. The affidavits filed on behalf of M2 also establish that such an exercise would be costly and time- consuming, and thus disproportionate in the circumstances. Further, the issue may resolve itself when the experts prepare evidence directed towards quantifying the Net Receipts under cl (f). The expectation is that there will be cooperation between the parties so that each set of experts works from the same data, and all parties understand what that data represents. If TPC’s experts are unable to prepare their evidence from the data provided by M2, then a separate application may be made at that time.
[26] In its second ground of challenge, TPC says that the spreadsheet only includes revenue from M2 NZ Ltd and not from M2 Telecommunications Pty Ltd. However, Mr Smith has sworn an affidavit confirming that the spreadsheet shows mobile revenue and cost of sales for the New Zealand and Australian businesses. That answers this aspect of TPC’s complaint.
[27] The third ground of challenge relates to the first two. TPC says that the existing disclosure has not been provided in a way that links the revenue to a specific M2 subsidiary or related company. TPC seeks a schedule particularising all related and subsidiary companies and disclosure thereafter of applicable Net Receipts.
[28] Mr Smith deposes to the spreadsheet containing all revenue and costs of sales information for “any and all subsidiaries to which the revenue/cost of sales information in question has been recorded”. Further, he says that because M2 holds and reports revenue information at a group level, the revenue information provided
shows all revenue for mobile services for the defendants’ related and subsidiary companies.
[29] It would clearly be preferable for the revenue data to be presented in a way that it could be linked to particular M2 entities. Transparency will assist in the accurate calculation of the commissions due. However, given Mr Smith’s affidavit, there is no reason to suggest that M2 has been selective in its disclosure. And, as with the first ground of challenge, the creation of records or reports goes beyond the scope of an application for particular discovery. Even if these hurdles could be overcome, on the basis of Mr Smith’s affidavit, I am satisfied that the time and cost in providing the further discovery in the form sought would be disproportionate in the circumstances.
[30] In TPC’s fourth ground of challenge, Mr Holmes complains that expenses appear to have been deducted from the data. He says that this is inconsistent with the definition of Net Receipts. This is an issue to be addressed in the evidence, rather than in an application for further and better discovery. This complaint falls outside the scope of the current application.
[31] The fifth ground of challenge concerns the proper interpretation of cl (f). TPC complains that the data set provided by M2 is restricted to “mobile services revenue”, rather than telecommunications revenue, which includes those services listed in the request. TPC’s concern arises out of the deletion of the word “telecommunications” by M2 in a supplementary affidavit of documents dated 17 June 2020, following delivery of the Court of Appeal judgment. TPC says that under cl (f), it is entitled to the commission on “Net Receipts” as defined, which includes telecommunication services, and is wider than mobile services revenue.
[32] In response, M2 says that the preliminary question before this Court, and the Court of Appeal, proceeded on the basis that commissions under the Heads of Agreement were for Net Receipts from revenue derived from M2 customers for mobile phone services. It says that this has been affirmed by the Court of Appeal.
[33] There are passages in the Court of Appeal’s judgment which support M2’s position. For example, TPC’s argument that the clause extends to telecommunication
services was before the Court.7 And, the Court said it was satisfied that the parties intended the contents of cls (e) and (f) to drive the nature and scope of the commissions payable to TPC, with the definition of “Net Receipts” being less influential.8
[34] Nevertheless, I am not persuaded that the Court of Appeal’s judgment provides a conclusive answer to the dispute. The contest between the parties in the preliminary question concerned whether the commission was limited to services delivered on the Vodafone network, or whether the commission was payable on all revenues received from M2’s mobile phone services customers regardless of the network provider. The present issue concerns the services received by M2’s customers. That is, whether revenue is limited to mobile phone services, or whether it encompasses all telecommunications revenue delivered to mobile phone service customers.
[35] The current application is not the occasion to resolve this interpretation question. Although the decision to jointly seek the determination of a preliminary question cannot be criticised, it has led to delays in the resolution of the proceeding, and, as it now appears, even further issues of interpretation. I am not prepared to rule whether cl (f) is limited to mobile phone services or includes all telecommunication services at this stage.
[36] However, I accept that if TPC’s argument is successful at trial, then discovery of all telecommunication revenue will be relevant to assessing damages. What is not clear is whether that revenue has been included in the spreadsheet disclosed. M2’s affidavits do not address this issue squarely. Mr Smith’s affidavits refer to “mobile revenue”, but he does not confirm whether this mobile revenue is solely for mobile phone services, or for the broader category of telecommunications services delivered to mobile phone services customers.
[37] Similarly, although Mr Smith deposes to the time and cost in presenting the revenue data differently, that evidence appears to respond to Mr Holmes’ suggestion that the data be presented on a customer by customer basis.
7 Court of Appeal judgment, above n 2, at [29].
8 At [38].
[38] On the information before the Court, I cannot be sure whether the current discovery includes telecommunications revenue or not, and, if the latter, whether provision of it would involve disproportionate time and cost. Further information is required to determine this aspect of the application. A conference will be convened for that purpose. The application for further and better discovery of this particular category of documents is adjourned in the meantime.
Documentation regarding the acquisition of the Call Plus Group and the Vocus merger
[39]The third category of documents sought by TPC is:
All documentation, memoranda and correspondence regarding the initial discussions and progressing acquisition for the purchase of the Call Plus group of companies and the Vocus and M2 merger.
[40] TPC says this category is relevant to the claim of misrepresentations made to Mr Holmes prior to the Deed of Variation being signed. The gist of the misrepresentations alleged is that M2’s business in New Zealand was failing and there was not enough margin in the models. Mr Holmes alleges that M2 represented that the growth prospects were limited and that the continued downward growth trend that had been experienced would continue to a point where it was likely to be totally extinguished. Mr Holmes says that was the context in which he entered into the Deed of Variation.
[41] M2 disclosed that it had acquired 100 per cent of the Call Plus Group in April 2015, reportedly for a price of NZ$250M. Mr Holmes says that the negotiations regarding this deal are likely to have taken place over many years prior to the announcement and accordingly he seeks documentation relating to that acquisition. He also seeks documents relating to the Vocus merger on the same grounds.
[42] I am not persuaded that these documents are relevant. Affidavits sworn on behalf of M2 confirm that discussions about the acquisition of the Australian and New Zealand Call Plus businesses did not commence until the years after the 2012 Deed of Variation was signed. If discussions about the Call Plus acquisition did not commence until the years after the 2012 Deed of Variation, then documents about that acquisition are not relevant to TPC’s claim of misrepresentation.
[43] The Vocus merger is distinct from the Call Plus acquisition. None of the affidavits before the Court establish when the Vocus merger took place. If it was around the same time, or later than the Call Plus acquisition, then the Vocus merger documents will also be irrelevant for the same reasons. Given the absence of any evidence establishing the relevance of this category of documents, the application must be declined.
[44] The application for further and better discovery of this category of documents is declined.
Documentation regarding the Termination and Variation Agreements
[45]The fourth category of documents TPC seeks is the following:
a)All documents and correspondence with the plaintiff, including without prejudice correspondence, dealing with and relating to and leading up to the Termination and Variation Agreements.
b)All internal documentation within the defendant companies in relation to the:
a.Form of the Agreement and compensation.
b.Discussions as to the basis that the Agreements were entered into.
c.Memorandum and approval, memoranda and documents leading up to and upon the decision to enter into the Termination and Variation Agreements.
[46] Category 1 of the Discovery Order included M2’s communications with TPC about the Termination Agreement and the Deed of Variation. M2 says it has disclosed all relevant documentation under this category. TPC has not put forward any grounds for belief that other correspondence between the parties exists.
[47] Furthermore, I am not persuaded that internal documentation relating to the form of the agreements, discussions as to the basis that the agreements were entered into and other memoranda and documents leading up to the decision to enter into the Termination Agreement and Deed of Variation are relevant to the claim as pleaded. The link between internal documents (particularly those related to the Termination Agreement) and the claim for misrepresentation is not made explicit. On
the current affidavit evidence, I am not satisfied that the documents sought either exist or are relevant to the claim.
[48]The application in relation to this category of documents is also declined.
Documentation in relation to the financial position of M2 companies from mid-2010 to mid-2012
[49]The fifth category of documents sought by TPC is as follows:
All financial documentation including budgets, reports, internal memoranda, management accounts and financial accounts and board minutes relating to the financial position of the defendants and their related subsidiary companies from mid-2010 to mid-2012.
[50] Category 2 of the Discovery Order provides for M2 NZ’s audited financial accounts from 2010 to currently available records to be provided. M2 says these documents were listed in its affidavit of documents dated 19 April 2017. The parties agreed that the disclosure of the audited financial accounts would be proportionate to establishing the financial position of M2’s New Zealand business at the relevant time. There is no basis to renegotiate the terms of the Discovery Order.
[51]The application for this category of documents is also declined.
Interrogatories
[52]TPC seeks answers to the following interrogatories:
(a)Please specify, from 2006 to date, all related and subsidiary companies of the defendants.
(b)At what time did the defendants, or any related or subsidiary companies, first consider acquiring Call Plus and/or Orcon, 2talk, Slingshot, Flip Limited and/or Vocus.
(c)When did Vaughn Bowan/the Defendants first enter into formal discussions about the purchase/merger of:
(i)Call Plus
(ii)Orcon
(iii)2talk
(iv)Slingshot
(v)Flip
(vi)Vocus.
[53] In respect of the first interrogatory, M2 has admitted TPC’s pleaded list of related and/or subsidiary companies in its statement of defence. It has also provided a list of the companies against which the mobile revenue information received since 2009 is associated. I agree with Ms Fraser that it is only entities which generate the revenue the subject of the commission clauses in the Termination Agreement that are relevant to this claim. Specification of all related and subsidiary companies of the defendants will not advance the claim, and the interrogatory is irrelevant.
[54] The second and third requests are met by Mr Bowen’s further affidavit sworn on behalf of M2, which confirms that internal discussions about the Call Plus acquisition did not happen until shortly before discussions about the purchase in 2015, and long after the 2012 Deed of Variation was executed. That affidavit also confirms that the “Call Plus acquisition” included the 2Talk, Orcon, Slingshot, and Flip businesses. This responds to interrogatories (b) and (c) and obviates the need for any order in the terms sought.
[55] Mr Grove, for TPC, points out that Mr Bowen’s further affidavit does not address the Vocus merger and so is not a response to the interrogatories. But, for the reasons previously outlined in relation to the further and better discovery request, I am not persuaded that the Vocus merger is relevant to the issues in the proceeding. There is no basis to answer interrogatories in relation to that merger.
[56] Accordingly, the application for orders directing answers to the interrogatories is declined.
Result
[57] The application by TPC for further and better discovery of the second category of documents is adjourned pending a further conference to be convened at the next available date. The application is otherwise declined.
[58] The application by TPC for orders requiring answers to interrogatories is declined.
[59] M2 has been substantially successful in opposing the application. Nevertheless, the outcome of the adjourned part of the application may have a bearing on costs. Accordingly, if costs cannot be agreed, they shall be fixed once the adjourned part of the application is finally determined.
Edwards J
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