Waiwera Water New Zealand v Melrose
[2019] NZHC 221
•20 February 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-1256
[2019] NZHC 221
UNDER the Copyright Act 1994, Declaratory Judgments Act 1908, Designs Act 1953 and Fair Trading Act 1986 BETWEEN
WAIWERA WATER NEW ZEALAND LIMITED
Plaintiff and first counterclaim defendant
AND
DAVID MURRAY MELROSE
Defendant and counterclaim plaintiff
Cont.../2
Hearing: 20 February 2019 Appearances:
Ms B Rorrison for the Plaintiff (given leave to withdraw) Mr P Johns for the Defendant
Judgment:
20 February 2019
ORAL JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 20 February 2019, pursuant to r 11.3 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
Meredith Connell, Auckland D Marriott, Auckland
Baldwins, Auckland
WAIWERA WATER NEW ZEALAND LTD v MELROSE [2019] NZHC 221 [20 February 2019]
WAIWERA GROUP LIMITED
Second counterclaim defendant
MIKHAIL KHIMICH
Third counterclaim defendant
LEON FINGERHUT
Fourth counterclaim defendant
WAIWERA, LLC
Fifth counterclaim defendant
O-I OPERATIONS (NZ) LIMITED
Sixth counterclaim defendant
OWENS-ILLINOIS, INC
Seventh counterclaim defendant
LINK PLAS LIMITED
Eighth counterclaim defendant
[1]The defendant applies for an order for security for costs.
[2] The plaintiff filed a notice of opposition and an affidavit in opposition, and reply affidavits have since been filed for the defendant.
[3] The defendant filed his written submissions in support as directed by the Court on 31 October 2018, but the plaintiff failed to file its submissions by 13 February 2019 in accordance with the directions made on 31 October. Instead, on 13 February 2019, Mr Potter, the plaintiff's solicitor, filed an application for an order declaring that he had ceased to act as solicitor on record for the plaintiff. Mr Potter's application was accompanied by a short affidavit stating that, having given the plaintiff reasonable notice, the plaintiff's solicitors terminated the plaintiff's retainer for cause on 13 February 2019.
[4] Ms Rorrison appeared for the plaintiff at the hearing and sought leave to withdraw as counsel. That leave was granted. No other counsel has been instructed by the plaintiff, and there was no appearance on its behalf at today's hearing. In the
absence of any appearance by the plaintiff, or request for an adjournment, I directed that the hearing should proceed.
Background
[5] The defendant, Mr Melrose, is a designer specialising in bottle design. He says:1
5.Mr Melrose is a designer specialising in bottle design.
6.Mr Melrose says that in around April and May 2005, he and his assistants authored drawings ("Drawings") of a design of bottles to be used for a bottled water range ("Bottle Design"). He claims ownership of the copyright in the Drawings and associated electronic files. He is the owner of a registered design NZ407219 relating to the Bottle Design.
7.The Bottle Design was intended to be produced in a range of sizes in plastic and glass. The bottles were to be used by a business established by the defendant in conjunction with a company now named Kiwi Work Safe Limited but previously named Waiwera Water Ltd and Siesta Holdings Limited ("Siesta Holdings"). Mr Melrose has never been director or shareholder of Siesta Holdings. Siesta Holdings and Mr Melrose agreed that Mr Melrose would continue to own his rights in the Bottle Design.
8.From 2005 to about 2009-2010, the water bottling business was operated jointly by Mr Melrose and Siesta Holdings, using bottles made to the Bottle Design by O-I Glass and Link Plas. The business involved filling the bottles with water from a spring sited on leased premises at 21 Waiwera Road, Waiwera.
9.In about 2009-2010, Siesta Holdings sold certain business assets to the plaintiff. The plaintiff now claims that this included the benefit of an alleged "irrevocable royalty free licence or similar arrangement" allegedly granted by Mr Melrose to Siesta Holdings. Mr Melrose denies that such a licence or arrangement was ever granted. At about the same time, the lease for 21 Waiwera Road was assigned to Waiwera Thermal Resort Ltd, which was and is under common ownership with the plaintiff.
10.Mr Melrose pleads that negotiations were then undertaken between him and various representatives of the plaintiff regarding the acquisition or licensing of rights to use his intellectual property in the Bottle Design. No such acquisition or license was ever agreed. Nevertheless, the plaintiff continued to order, be supplied, fill and sell bottles of Mr Melrose's design made by O-I Glass and Link Plas.
11.In the absence of a concluded deal with the plaintiff, on or about 11 October 2016 Mr Melrose formally asserted that the manufacture
1 As summarised in Mr Johns' submissions.
or supply of the relevant bottles without his authorisation infringed his intellectual property rights and demanded that the plaintiff, O-I Glass and Link Plas cease dealing in such bottles without his authorisation.
12.The plaintiff commenced this proceeding on or about 27 June 2018. Given the nature of the claims made, Mr Melrose's statement of defence necessarily includes allegations that he owns the intellectual property in the Bottle Designs and that his rights in that respect have been infringed by the plaintiff, O-I Glass and Link Plas. He has accordingly pleaded counterclaims to that effect.
13.On or about 25 October 2018, Mr Melrose became aware that the lease for 21 Waiwera Road had been cancelled by the lessor. The lessor had re-entered the property and was preventing the plaintiff from operating the water bottling plant. Given that the plaintiff has no other known source of income or assets, Mr Melrose promptly made his application for security for costs.
[Footnotes omitted.]
The pleadings
[6]In this proceeding, the plaintiff seeks:
(a)cancellation of a registered design under s 28 of the Designs Act 1953;
(b)remedies for alleged groundless threats of infringement proceedings made to the plaintiff, O-I Glass and Link Plas under s 34 of the Designs Act;
(c)remedies in respect of the same conduct alleged to amount to groundless threats under ss 13(i) and 41 of the Fair Trading Act 1986;
(d)remedies in respect of the same conduct alleged to amount to groundless threats pursuant to ss 9 and 41 of the Fair Trading Act;
(e)a declaration of non-infringement of copyright; and
(f)a declaration of non-infringement of registered design.
[7] Mr Melrose has filed a statement of defence and counterclaim pleading that his claimed intellectual property rights are valid, enforceable and have been infringed by
each of the plaintiff, O-I Glass and Link Plas. He was therefore justified in making any threats of proceedings. His counterclaim alleges, inter alia, infringement of his copyright and design rights by the plaintiff, O-I Glass and Link Plas.
Security for costs applications — legal principals
[8]Rule 5.45 of the High Court Rules materially provides:
5.45 Order for security of costs
(1)Subclause (2) applies 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.
(2)A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.
(3)An order under subclause (2)—
(a)requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient—
(i)by paying that sum into court; or
(ii)by giving, to the satisfaction of the Judge or the Registrar, security for that sum; and
(b)may stay the proceeding until the sum is paid or the security given.
…
(5)A Judge may make an order under subclause (2) even if the defendant has taken a step in the proceeding before applying for security.
…
[9] An applicant for security for costs must persuade the Court that there is reason to believe that the plaintiff will be unable to pay the defendant's costs if the plaintiff is unsuccessful at trial. Once the Court is satisfied on that threshold issue, its discretion whether to make an order for security or not, and if an order for security is made the
amount of that security, is unfettered — there is no formal checklist of principles to be applied.2
[10] Once the threshold test is met, the Court's task is to balance the interests of the parties. That balancing exercise may include an assessment of the merits of the plaintiff's claim, but an assessment of the merits of the disputes at an interlocutory stage will usually only give the Court an impression — in most cases it will not be possible to form a view of the merits. An order for security which may have the effect of preventing a plaintiff from pursuing its claim will normally only be made 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 likely to be denied.3
[11] On the question of how much evidence will be required for a defendant to meet the threshold test of showing that the plaintiff will be unable to pay costs, there should at least be credible evidence of surrounding circumstances from which it may reasonably be inferred that the plaintiff will be unable to pay the costs. This does not mean that the defendant has to prove that the plaintiff will in fact be unable to pay the costs.4
[12] In Highgate on Broadway v Devine Koś J observed that one of the theoretical justifications for ordering security is that there may be an injustice to the defendant if the claimant would otherwise be effectively immune from a costs order.5 Delay by the defendant in making the application is a factor which may tell against the making of an order.6 However, the overriding and most important consideration is "how should the respective interests of the parties best be balanced?"7
[13] Security may be ordered to cover a defendant's witness' expenses. In Camelot Hotel Ltd v Square Holdings Ltd,8 $120,000 was ordered to be paid by way of security,
2 AS McLaughlin Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [13] and [14].
3 At [15].
4 Concorde Enterprises Ltd v Antony Motors (Hutt) Ltd (No. 2) [1977] 1 NZLR 516 (HC), at 519.
5 Highgate on Broadway v Devine [2012] NZHC 2288 at [20]; [2013] NZAR 1017.
6 At [23](c).
7 At [24](c).
8 Camelot Hotel Ltd v Square Holdings Ltd [2016] NZHC 82.
and that sum included a figure for expert witness fees based on the Court's general impression and experience.
The defendant's application and the plaintiff's notice of opposition
[14]In his application, the defendant relied on the following grounds:
1.there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in this proceeding;
2.the plaintiff is effectively owned and funded by foreign-based entities or individuals;
3.the defendant has moved expeditiously to seek security for costs once the full extent of the plaintiff's financial position was understood;
4.the order sought is in the interests of justice; and
[15]In its notice of opposition, the plaintiff pleaded the following grounds:
(a)The Application and evidence in support do not disclose any or any sufficient reason for the Court to conclude that the plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful.
(b)The plaintiff is trading and able to pay a costs award.
(c)The long-term risk to the plaintiff's ongoing trading is the actions of the defendant that are the very subject of this proceeding, namely his threats to sue the plaintiff's bottle suppliers if they continue supply.
(d)The large quantity of the likely costs of the proceeding will relate to the counter claims brought by the defendant — who has counter claimed against the plaintiff and joined seven further parties.
(e)The plaintiff has brought the proceeding bona fide and has a reasonably arguable case.
(f)The plaintiff and the defendant have proposed to the Court that the fundamental issues in the proceeding be determined by separate question, which:
(i)will be a cost-effective process that should precede any order for security; and
(ii)will be equally relevant to the defendant's counter claims as to the plaintiff's claim.
(g)The amount of security sought by the defendant is excessive and is well beyond:
(i)the amount awarded in analogous cases; or
(ii)any reasonable estimate of a costs award the defendant is likely to receive.
(h)It is unjust in all the circumstances to award security of costs.
The evidence in support of the application
[16] Mr Melrose gave evidence that on 25 October 2018 several reputable news outlets reported that the plaintiff's leased premises had been repossessed by the owner due to defaults on rental payments. He said that the repossessed property includes the plaintiff's registered office, its water bottling plant, and the thermal pool resort operated by its sister company, Waiwera Thermal Resort Ltd (Waiwera Thermal). The operation of Waiwera Thermal had been shut down in February 2018 after the company was said to have suffered heavy losses.
[17] Mr Melrose said he understood the only substantial tangible assets of the plaintiff are the stock, plant and other assets associated with its water bottling business. He said he understood those assets remained locked up in the repossessed premises.
[18] Mr Melrose confirmed that the shareholder of the plaintiff is the Ordover Trust, a trust apparently associated with the plaintiff's director, Mr Fingerhut.
[19] The second affidavit in support was from a private investigator, Mr John. Mr John visited the Waiwera site on 30 August 2018. The premises were then sealed off with wooden fencing, apparently while substantial refurbishment work was carried out. Mr John was told by the site foreman that his company had not been paid for the last six weeks of the construction work.
[20] In a reply affidavit, Mr Melrose noted Mr Fingerhut's assertion that the plaintiff was still trading. He said that his company had been in touch with one of the companies that had previously supplied the plaintiff's water. This company advised on 21 November 2018 that its last delivery of the plaintiff's water had been in August 2018, and that it had had no response to calls or emails to the plaintiff for nearly two months.
[21] The last of the reply affidavits to which I need to refer was an affidavit of Mr Ross Porter, sworn on 22 November 2018. Mr Porter is the asset manager for "Urban Partners" group of companies, which includes Waiwera Properties Ltd, the landlord of the Waiwera property formerly occupied by the plaintiff and Waiwera Thermal.
[22] Mr Porter confirmed that the property contains the plaintiff's water bottling plant. He said that he has regularly visited the property, and continues to do so.
[23] Mr Porter referred to the cancellation of the lease on 25 October 2018, because of Waiwera Thermal's failure to pay rent. Mr Porter effected re-entry on the landlord's behalf that day, and he arranged for replacement of all locks and the securing of the perimeter of the site. Since 25 October 2018, Mr Porter has been responsible for controlling access to the property. He said that the water bottling plant remains in place on the site, and that he has not permitted anyone to operate it.
Evidence in opposition
[24] Mr Fingerhut, a United States-based director of the plaintiff, provided an affidavit in opposition. He said that the plaintiff carries on business as a bottler and merchant of water derived from the Waiwera aquifer. It acquired its business in 2009 from Waiwera Water Ltd (previously Siesta Holdings Ltd).
[25] Mr Fingerhut pointed out that the plaintiff is distinct from Waiwera Thermal, which owns and operates the thermal resort and hot pools business, also derived from the Waiwera aquifer. He said that the bottling plant and the thermal resort are distinct and have always been held by separate companies. The financial difficulties of Waiwera Thermal9 are unrelated to the plaintiff's financial affairs.
[26] Mr Fingerhut appeared to acknowledge that the plaintiff has operated its business from the premises leased by Waiwera Thermal, and that the lease has been cancelled by the landlord. He said that Waiwera Thermal was in the process of applying for relief against the cancellation of its lease.
9 Waiwera Thermal was placed in liquidation by order of the Court made on 15 February 2019.
[27]Mr Fingerhut asserted:
(i)the plaintiff is currently trading and will continue to do so; and
(ii)Waiwera Thermal's landlord is not restricting the plaintiff's access to the bottling plant and assets; and
(iii)the plaintiff will be able to pay a costs award if it is unsuccessful in this case.
[28] Mr Fingerhut asserted that the most important issue that might affect the plaintiff's ongoing trading and profitability, if it is allowed to continue, is the defendant's threats and assertions made to the plaintiff's bottle suppliers, which are the subject of this case. He said that the plaintiff has brought the case to stop the defendant's threats and to resolve the related concerns of its bottle suppliers as soon as possible.
Discussion and conclusions
[29] I accept that the defendant has met the threshold test of "reason to believe that the plaintiff will be unable to meet a costs award if it is unsuccessful at trial". In my view the defendant has shown that there are surrounding circumstances from which it may reasonably be inferred that the plaintiff would not be able to meet a costs award.
[30] The plaintiff runs a bottling and bottled water supply business from premises at Waiwera from which it has been excluded since Waiwera Thermal's lease was cancelled on 25 October 2018. Although it is a separate entity, the plaintiff is a sister company of Waiwera Thermal and previously occupying the same leased land, and it seems likely that it must have had some responsibility for the unpaid rent (whether as a sublessee of Waiwera Thermal or on some less formal basis). The continued operation of its business would have been dependent on it obtaining access to its bottling plant, but it has apparently been unable to do that.
[31] Consistent with that is the evidence that, over a period of approximately two months between September and November 2018, the plaintiff failed to respond to calls and emails from a retailer it had previously supplied.
[32] Mr Fingerhut said that the plaintiff is continuing to trade, and that it would be able to pay a costs award if it is unsuccessful at trial, but he also said that Waiwera Thermal's landlord is not restricting the plaintiff's access to its bottling plant and assets. That evidence was contradicted by Mr Porter, and it appears to be quite wrong.
[33] I take into account also the fact that the proceeding involves consideration of potentially complex intellectual property claims, and there are so far eight named counterclaim defendants (in the main, suppliers of bottles to the plaintiff). While Mr Johns told me that some of the claims against the counterclaim defendants have been settled or may settle, the litigation nevertheless has the potential to be time consuming and expensive.
[34] In all of those circumstances I think the defendant has produced sufficient evidence by way of surrounding circumstances, that the plaintiff needed to do more than merely assert, without any supporting evidence, that it will be able to meet a costs award if it is unsuccessful at trial.
[35] Turning to the exercise of my discretion, I note first that the plaintiff has not suggested that if an order for security is made it will be unable to continue with the proceeding, and nor has it provided any evidential basis on which I might conclude that any impecuniosity has been caused by wrongful acts of the defendant. It has alleged that its business has been damaged by unjustified threats of breach made by the defendant, but the threats are said to have commenced as early as 2016 and there is nothing by way of evidence of their alleged financial effect on the plaintiff.
[36] I do not consider the defendant has been guilty of undue delay in making the application for security, and in any event that was not a matter raised by the plaintiff in its notice of opposition.
[37] It is difficult to form any clear view of the merits on the very limited information available at this early stage in the proceeding, and I do not place great weight on the merits in reaching my conclusion that this is a proper case for security. However, Mr Johns did note that the defendant holds a registered design, and that he is entitled to the presumption of validity that goes with the registration. Mr Johns also referred to the plaintiff's reliance on prior art going back to 1875 as part of its case alleging invalidity of the defendant's design registration. I note only that the depiction of the prior art appearing at para 4 of the defendant's amended statement of defence and counterclaim does not on its face appear to be particularly similar to the design shown in the defendant's design registration.
[38] For all of those reasons, I exercise my discretion in favour of ordering security for the defendant's costs.
[39] On the question of the quantum of the security, I note first that the plaintiff has contended in its notice of opposition that a substantial part of the hearing time is likely to be concerned not with its claim, but with the defendant's counterclaims. Mr Johns submits that there is a very substantial overlap between the claim and the counterclaims. It is true that to the extent the counterclaims involve a number of different parties their ambit seems likely to exceed that of the plaintiff's claim. But I accept also that there is a significant level of overlap between the two. To the extent that trial time and preparation time might be lengthened by aspects of the counterclaims that do not figure in the plaintiff's claim, that can no doubt be addressed by way of a modest reduction in the amount of security that might otherwise have been ordered.
[40] Mr Johns asks for a lump sum amount of $100,000 by way of security, but that figure was not supported by any evidence of how long the trial might take, how many witnesses might be called etc. In fact, it appears that the case is a long way from trial
— the parties have not yet completed discovery, and Mr Johns says that the defendant proposes to amend his defence and counterclaim. In those circumstances I consider this is a case for staged security, with the first tranche of security to cover the position up to and including the close of pleadings date.
[41] In my view the appropriate amount of security to fix for that period is the sum of $25,000. That sum should be sufficient to cover attendances through the remaining interlocutory stages, including what seems likely to be an extensive discovery process.
Result
[42]I make the following orders:
(1)The plaintiff is ordered to pay $25,000 into Court (or into any solicitor's trust account on which the parties may agree upon in writing), within 10 working days of the date of this order, as security for the defendant's costs up to the close of pleadings date. Leave is reserved to the defendant to apply at that time for additional security to cover further attendances from the close of pleadings date through to the end of the trial.
(2)If the $25,000 security has not been paid within 10 working days of the date of this order, this proceeding will be stayed insofar as it involves the plaintiff's claim, until such security is duly provided.
(3)The defendant is entitled to costs, which I fix on a 2B basis, with disbursements to be fixed by the Registrar.
Associate Judge Smith
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