Visual Group NZ Limited v Bytecraft Systems Pty Limited
[2018] NZHC 1292
•1 June 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-000362 [2018] NZHC 1292
BETWEEN VISUAL GROUP NZ LIMITED
Plaintiff
AND
BYTECRAFT SYSTEMS PTY LIMITED
Defendant
Hearing: 6 March 2018 Appearances:
N Tetzlaff for the Plaintiff
J Dickson for the Defendant
Judgment:
1 June 2018
JUDGMENT OF ASSOCIATE JUDGE SARGISSON
This judgment was delivered by me on 1 June 2018 at 3.30 p.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Solicitors:
Gaze Burt, Auckland Simpson Grierson, Auckland
VISUAL GROUP NZ LTD v BYTECRAFT SYSTEMS PTY LTD [2018] NZHC 1292 [1 June 2018]
[1]The defendant applies (in the one application) for orders that:
(a)The plaintiff provide particulars;
(b)The plaintiff provides security for the defendant’s costs up to and including the completion of discovery;
(c)Proceedings be stayed until such security is given; and
(d)Reserving leave to apply for further security following the completion of discovery;
(e)Costs.
[2] The particulars sought have now been provided after repeated requests; and the defendant wants costs to compensate it for having to pursue the request by a formal application. The question of quantum remains for determination.
[3] The request for security for costs also remains for determination. It is opposed by the plaintiff. At issue is whether the plaintiff would be unable to pay the defendant’s costs should its defence be successful; and if so, whether it would be just in all the circumstances for the Court to exercise its discretion to order the giving of security. The defendant also seeks costs on this part of the application.
Background
[4] The proceeding relates to a contract between the parties that operated from around 1 March 2012 to 25 October 2015. Under the contract the plaintiff was bound to provide support and maintenance services on behalf of the defendant for various items of electronic and IT equipment used by retail outlets operated by Woolworths Limited in New Zealand. The defendant terminated the contract with effect initially from 18 January 2016 (which the plaintiff agreed to), but subsequently gave notice to advance the date of termination to 25 October 2015, which the plaintiff says it did not agree to.
[5] On 8 March 2017, the plaintiff commenced this proceeding. In its claim it alleged a number of breaches of contract including wrongful termination. The defendant filed its statement of defence on 14 June 2017, and the plaintiff responded by serving its formal reply to the defence on 29 June 2017.
[6] When the defendant served the statement of defence it also gave the first of its notices requesting further particulars of the statement of claim. On 14 July 2017 it served the plaintiff with a second notice. Both notices went unanswered.
[7] At the first case management conference, held on 6 September 2017, Associate Judge Christiansen made an order, with the parties’ agreement, requiring the plaintiff to provide substantive responses to the defendant’s notices. The time fixed for compliance was 22 September 2017. In order to cover the possibility that an application for further particulars might be necessary, His Honour directed it must be filed and served by 13 October 2017.
[8] The plaintiff failed to provide a substantive response to the defendant’s notices by 22 September and on 6 October 2017, the defendant’s lawyers wrote to the plaintiff’s lawyers, advising that as the plaintiff had failed to comply with the order of Christiansen AJ to provide substantive responses by 22 September 2017, the defendant had no option but to prepare an application in accordance with the Court’s direction. The letter advised that full costs would be sought. Additionally, it raised concerns about the plaintiff’s asset position and its ability to meet any costs award that may be made against it. No response to this letter was forthcoming, and on 13 October 2017 the defendant’s application (both for particulars and security) was filed.
[9] On 30 October 2017, the plaintiff responded by filing and serving documents in opposition. These included two supporting affidavits, including one from the plaintiff’s director, Mr Cantwell. His affidavit records that preparation of an amended statement of claim to include further particulars was underway and that he anticipated that this would be filed and served within 15 working days (that is, by 20 November 2017). He also referred briefly to the plaintiff’s financial position.
[10] The second affidavit was from the plaintiff’s accountant, Mr Drumm. His evidence is to similar effect as Mr Cantwells, in that it refers briefly to the plaintiff’s financial position.
[11] A few days later, in a memorandum dated 6 November 2017, counsel for the plaintiff advised the Court and defendant that the plaintiff had earlier concluded that an amended statement of claim was a better alternative to providing further particulars on a piecemeal basis. While an amended statement of claim was already underway, counsel acknowledge that “regrettably” the defendant had not been advised of this. By direction of the Court this amended statement of claim was to be filed by 8 December 2017.
[12] Time passed. It was not until 15 February 2018, following further intervention from the Court, that the amended statement of claim was served. This was some eight months after the first notice requiring further particulars was served. The amended claim provided most but not all of the particulars sought and on 19 February 2018, the defendant gave notice with respect to the amended claim, requiring further particulars.
[13] Later the same day, by way of an email, plaintiff’s counsel advised that he was out of the office but would endeavour to consider the remaining particulars. No further correspondence was received from plaintiff’s counsel on the matter until 26 February 2018. That correspondence provided the last outstanding particulars but by that time counsel for the plaintiff had spent time preparing submissions.
Plaintiff’s claim
[14] The plaintiff is suing the defendant on a number of grounds. The claims are framed as breach of contract and wrongful termination of contract. They include breach of contract for failing to make payment for services provided by the plaintiff; wrongful termination of contract due to inadequate notice; and breach of contract for failure to supply the plaintiff with spare parts and service materials.
Legal framework
[15] The application for security is made in reliance on High Court Rule 5.45(1)(b), which provides for the circumstances in which a Judge may order a plaintiff to give security for the defendant’s costs. In Highgate on Broadway Ltd v Devine, Kos J states that there are three key questions at issue in a security for costs application:1
(a)Is there reason to believe the plaintiff will be unable to meet an award of costs against it?
(b)Is it appropriate for an order for security for costs to be made?
(c)How much security is appropriate?
[16] The first question represents a jurisdictional threshold. When answering this question, the Court is to bear in mind that neither side has the onus. The correct approach is to ask whether there is credible evidence that the plaintiff will be unable to pay costs ordered if his claim fails and the defendant successfully defends it. The court will not order a plaintiff to give security unless there is credible evidence for the belief that the plaintiff suffers an inability (as opposed to an unwillingness) to pay such costs.
[17] The second question is contained in r 5.42(2) and concerns the exercise of the court’s discretion. The court considers whether it is just to order security for costs in all the circumstances. The final question, that relating to the quantum, is also a matter for the Court’s discretion.
Discussion
Can the plaintiff meet a costs award made against it?
[18] It is not in dispute that if costs are ordered in favour of the defendant, they will be assessed on a 2B basis, and that for steps allowed under the High Court scale up to
1 Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1107 at [6].
and including the completion of discovery. The issue is whether the plaintiff will be able to pay costs in this magnitude.
[19] In the affidavits filed on behalf of the plaintiff, its director and its accountant set out reasons why they say the plaintiff would be able to pay such costs:
(a)The plaintiff company, with expected realisation of accounts receivable, is able to meet its ordinary commercial debts as they fall due. In short, they claim the plaintiff is solvent.
(b)The plaintiff is currently trading.
(c)The plaintiff is generally profitable.
(d)The IRD liquidation proceeding, which was ultimately not referred to by the defendant in their application, is of historical interest only.
[20] Counsel for the defendant disputes the adequacy of the plaintiff’s ability to pay costs. Counsel submits there is insufficient evidence of substance for placing any confidence in the plaintiff’s claims; rather, the evidence is sufficient for the court to infer that the plaintiff will not be able to meet and award of costs.2 She points to the following factors:
(a)Conduct characterised by delay and broken promises, including:
(i)Its failure to comply with notices requiring particulars;
(ii)Its unmet statement of intention in the joint memorandum of 3 July to respond at the “earliest opportunity”;
2 I could characterise the position as equivalent to that in Whangape Developments Ltd v Parker HC Auckland, CIV-2006-404-5909, 1 April 2008, where I said, at [26]: “However, there is nothing of substance in his evidence that demonstrates that he has the cash he claims, or that his chattels are worth what he claims or anything approaching that worth.”
(iii)Its failure to comply with the court’s directions to provide particulars by 22 September;
(iv)Failing to file an amended claim until 15 February despite an order requiring compliance by 8 December; and failing to seek an extension till 1 February; and
(v)Failing to properly engage on discovery;
(vi)Not responding to communications from defence counsel.
(b)Such conduct is not what would be anticipated from a plaintiff that was not in financial difficulty in respect of a claim that seeks substantial damages. Were the plaintiff not in financial difficulty, it can be anticipated that it would have proceeded swiftly in pursuing its claims.
(c)There is no financial information from the plaintiff, such as a balance sheet or mention of any assets;
(d)Mr Cantwell’s assertion that on the basis of expected realisation of accounts receivable the plaintiff is able to meet its ordinary commercials debts is not sufficient to infer it can pay the cost of litigation which can hardly be considered an ordinary debt.
(e)The fact that the plaintiff is trading and is said to be generally profitable is too vague to place confidence in the plaintiff’s ability to pay costs of the proceeding. Moreover, Mr Drumm’s asserted belief that the plaintiff has the ability to pay a costs award is of little to no probative value when it is unsupported by any solid grounds to substantiate it.
[21] Counsel for the plaintiff counters that the defendant is jumping to conclusions. Counsel says that is simply not enough to assert that the plaintiffs conduct supports the necessary inference and that there are other possible explanations (though none are given); it is not obliged to set out details of its financial position; and it should be given the benefit of any doubt given Mr Drumm’s evidence.
[22] It is true that a court will not impose security for costs simply because the plaintiff has been silent as to its financial position.3 Indeed, even if there some evidential basis to support the belief that a costs order would not be met, the court will not order security for costs unless the person is:4
… outside the usual run of plaintiffs … it is not enough for the defendant to challenge the plaintiff’s ability to pay costs and then seek security, relying on the plaintiff’s failure or refusal to furnish details of its financial position.
[23] However, I do not consider this a case about a plaintiff who has not been questioned adequately about his assets or a plaintiff that has been silent about its position. The plaintiff’s own evidence concerning its financial state does not provide this Court with complete confidence that it is a well-heeled enterprise. It is explicitly stated that it can meet its ordinary expenses of operating (and nothing more) provided that its accounts are paid and that it is “generally profitable”. I agree with counsel for the defence that the phrase “generally profitable” is vague and unhelpful. Moreover, a business that describes itself thus, could be understood as tacitly admitting that it is not always profitable, only generally, and that from time-to-time it may face financial difficulties.
[24] The plaintiff says that it anticipates it can meet an award of costs against it, but it does not go so far as to say that it can meet the entire costs of litigation. Such costs will be considerably higher and are not the kind of expenses a business would ordinarily expect to have to meet. The plaintiffs own costs of litigation, including payment to its own counsel will invariably take place before it meets any costs award against it, therefore whether it can pay the costs of the other side at the end of the day is unclear. Moreover, I agree with counsel for the defence that the accountant’s evidence is not illuminating when he says the plaintiff can pay a costs award – what amount it could pay would be much more meaningful.
[25] I agree with counsel for the defendant that the affidavits of the plaintiff do not provide credible evidence to rebut what appears to be an inability to pay an award of
3 NZ Kiwifruit Marketing Board v Maheatataka Cool Pack Ltd (1993) 7 PRNZ 209 at 212 and 213.
4 At 213. See also at 211.
costs from the plaintiff’s own resources. If anything, they tend towards supporting the position that the plaintiff may not be able to finance an award of costs made against it.
[26] In sum, I am satisfied there is credible evidence from which it may reasonably be inferred that the plaintiff will be unable to pay any such order.5 The jurisdictional threshold for making an order for security has therefore been met.
Is it appropriate for an order for security for costs to be made?
[27] There is no suggestion that if security is ordered, the plaintiff could not advance its claim; indeed, that is not the basis for its opposition. Its opposition is essentially based on the contention that it is an ordinary plaintiff with a prima facie meritorious claim, and it should not be confronted with unreasonable barriers in pursuing that claim and should not therefore have to put up security.
[28] The defendant relies on only one factor (apart from the threshold factor) in advancing the argument for security— the merits (or flaws) of the plaintiff’s claim. Counsel for the defendant posits that the rest of the considerations that the Court habitually looks at are of no real relevance in this case.
[29]As to the merits, counsel for the defendant submits that:
(a)On the first cause of action, the plaintiff contends that the defendant varied the agreement between the parties by increasing the number of sites to be serviced. However, counsel for the defendant retorts that the list of sites could be amended from time to time, and all services were covered by a fixed monthly fee. Counsel further argues that this was explicitly argued in its statement of defence, and the plaintiff did not deny it in its reply.
(b)On the third cause of action, the plaintiff contends that by accepting the defendant’s original notice of termination, the contract was varied and
5 Sharda Holdings Ltd v Gasoline Services Ltd HC Auckland CIV-2008-004-539, 13 November 2009 at [6] cited in Highgate on Broadway Ltd v Devine at [7].
therefore the defendant could no longer terminate early in accordance with the agreement. Against this the defendant argues that the agreement remained on foot and was still terminable with 30 days’ notice. This was also argued by the defendant in its statement of defence and not denied by the plaintiff in its reply.
(c)That the plaintiff, in the fourth cause of action, seeks to imply a term into the agreement between the parties, that the defendant was obliged to provide spare parts. However, the defendant argues that the onus under the contract was on the plaintiff to ensure it had sufficient spares to meet its service obligations. Once again, the defendant made this argument in its statement of defence, and the plaintiff did not deny it in its reply.
[30]In response, counsel for the plaintiff argues:
(a)The first and second causes of action, which are related, both have a reasonable chance of success. The argument being that the defendant varied the contract, to which the plaintiff made it clear that it did not agree to the variation without an increase in payment.
(b)The fourth and fifth causes of action, which are related, can hardly be doubted. The argument being that Bytecraft’s Subcontractor Master Agreement provided that Bytecraft would organise the supply of spare parts and materials.
(c)The sixth cause of action also has a reasonable chance of success. The argument being that the defendant, if obliged to organise the supply of spare parts, was also obliged to pay the freight costs.
[31] In my assessment, I consider the merits of the plaintiff’s case are not decisive in terms of the exercise of this Court’s discretion. I consider that without further material in front of me, including full copies of both the Bytecraft Sub-Contractor Master Agreement and the Woolworths Service Delivery Agreement, which were not
included in the bundle of documents, I cannot express a sufficiently reasoned opinion on the probable merits of either side’s position.
[32] I do, however, place weight on the plaintiff’s delay in prosecuting its claim. From this I derive three justifications for why I consider it appropriate to exercise my discretion in the present case to require security.
[33] First, the plaintiff has consistently dragged the chain in prosecuting its claim. It has failed to comply with orders of this Court to provide both particulars, in accordance with requests by the defence, and to provide an amended statement of claim, promptly and in accordance with the timetable directed by the Court. The delay in prosecuting its claim and the failure to comply with the Court’s directions are factors that may be taken into account in directing that it provide security for costs. Plaintiffs should be minded to pursue their claims diligently; failure to do that should invite the Court to “incentivise” their further compliance.
[34] Furthermore, when considered pragmatically, the failure of the plaintiff to comply with timetabling directions and to diligently prosecute its claim suggest potential weaknesses in the claim and in the plaintiff’s ability to convincingly prosecute it. I consider it is open to this Court to draw an inference from the plaintiff’s behaviour that it does not have full confidence in its own claim, considering the extent to which it has dragged its feet. A plaintiff who is properly resourced, and genuinely believes that its claim is strong, is unlikely to delay as consistently and to the same extent as the plaintiff in this case has done.
[35] I also consider that the delay not only supports an inference that the plaintiff lacks confidence in the strength of its case, but may well lack the conviction and ability needed to conscientiously prosecute it. The failure to prosecute the case conscientiously so far (and to meet Court imposed deadlines) suggests the plaintiff may be similarly disorganised in meeting any further obligations and marshalling its arguments competently. If that is the case, then it is unlikely to convince the Court of the strength of its claims when they come to trial.
[36] In the circumstances, I am satisfied that it is appropriate that the plaintiff should be ordered to provide security to ensure that there is some measure of compensation immediately available to the defendant if it is successful in its defence.
[37] As I have noted, there is no indication that such an order would place the plaintiff in a position where it would be unable to pursue the claim.
How much should be given by way of security?
[38] The defendant seeks security for costs at this stage of approximately $20,000. By contrast, the plaintiff sets out, with reference to the High Court Rules, its basis for assessing the costs reasonably incurred by the defendant, up to and including discovery, as just shy of $16,000. In the course of discussion with counsel at the hearing it emerged that the difference relates to the inclusion of filing fees and other disbursements.
[39] Counsel for the defendant notes that in Highgate, Kos J awarded security for costs in the full amount of the 2B costs calculated.6 However, that was a case where the assessment of scale costs was very modest and there was no argument as to quantum.
[40] I accept that what is required here is a balancing exercise to ensure, on the one hand, that a reasonable measure of comfort is provided to the defendant, but on the other hand that the burden of security is not so great as to become a positive disincentive to a plaintiff whose case is at least arguable.
[41] I am satisfied in the circumstances that an order for security for costs in the sum of $15,000 would be appropriate.
6 Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1107
Result
Particulars
[42] There is no disagreement. At the hearing it was agreed that a further amended claim to incorporate all of the further particulars that have been provided should be filed, and I directed by consent that the amended statement of claim was to be filed by 20 March 2018. If that has not happened, the amended claim must be filed and served not later than 5.00 pm on 8 June 2018. (The plaintiff can expect costs consequences if there is not compliance).
Security for costs
[43] The plaintiff is ordered to give security for costs up to and including discovery, to the value of $15,000 to the satisfaction of the Registrar. Such security is to be provided by 22 June 2018, failing which the proceeding will be stayed pending further order.
Costs
[44] As costs follow the event under the statutory costs regime, the plaintiff is to pay costs on a 2B basis on the entire application, plus a 15% uplift on those costs, plus disbursements as fixed by the Registrar.
[45] In making this order I do not overlook that the defendant seeks indemnity costs. However, I do not consider that the defendant has done nearly enough to persuade this Court that it should award indemnity costs. Having said that, I accept that the plaintiff has contributed unnecessarily to the costs of the proceeding by failing to comply with the Court’s directions; and putting the defendant to the unnecessary cost of making application for particulars. I consider that a reasonable measure of compensation for this would be provided by the increased costs I have awarded.
[46] Leave is reserved in the event that further orders are required. For that purpose a memorandum may be filed on 2 days’ notice. (Such leave will cover leave to seek further security for costs for steps up to and including trial, provided the request is made not later than 1 month before the close of pleadings date).
Associate Judge Sargisson
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