Water Guard NZ Limited v Cynortic Water Systems

[2015] NZHC 1021

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-915 [2015] NZHC 1021

BETWEEN

WATER GUARD NZ LIMITED

Plaintiff

AND

CYNORTIC WATER SYSTEMS LIMITED

First Defendant

MARK JAMES SULLIVAN and SUSAN MARY SULLIVAN

CYNORTIC LIMITED Third Defendant

REINER GEORGE BRAGULLA Fourth Defendant

CYNORTIC INTERNATIONAL LIMITED

Fifth Defendant

Hearing:	30 April 2015
Appearances:	Mr M Fisher and Ms L Hui for plaintiff Mr A Marsh for first and second defendants Mr A Steel for fourth defendant (leave to withdraw)
Judgment:	15 May 2015

JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE

This judgment was delivered by me on

15.05.15 at 4 pm, pursuant to

Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

WATER GUARD NZ LIMITED v CYNORTIC WATER SYSTEMS LIMITED & ORS [2015] NZHC 1021 [15

May 2015]

[1]      The plaintiff has applied for orders for particular discovery.

[2]      Before I deal with that matter it is necessary to consider the position of the fourth defendant.  The fourth defendant has now filed and served a notice that he intends to act in person.  I am advised that the fourth defendant does not however seem  to  be  present  at  the  address  given  of  998-1002  Ohauiti  Road,  Ohauiti, Tauranga.  However, notwithstanding that he is apparently no longer at that address, it remains his address for service and documents can be left there by way of service. Mr Fisher, counsel for the applicant, also advises that the alternative address for service which is an email address supplied in the notice of change of representation, is not functioning.  Unfortunately nothing can be done about that unless the fourth defendant having received a copy of this judgment by way of service either activates the email address or provides an alternative one.

[3]      The fourth defendant has taken no steps in relation to the application for particular discovery.  He was not represented at the hearing before me on 30 April

2015.

[4]      The next matter to be considered is the application for particular discovery.

[5]      Before the hearing commenced, the plaintiff ’s counsel and counsel for the first and second defendants conferred and were largely able to resolve the issues between themselves arising from the application for particular discovery which the plaintiff has served on those defendants and the fourth defendant.   Subject to one matter which will be the subject of further consideration below, the plaintiff and the first and second defendants have, through counsel, been able to reach agreement.  A copy of those parties’ memorandum of agreement is annexed hereto and I make orders in terms of the consent contained in it.  The agreement while undated, was

reached on 30th April 2015.

[6]      There are nonetheless some issues that need to be considered which arise between the plaintiff and the first and second defendants on which it is necessary to

give a ruling.  I shall deal with those matters and thereafter consider the orders that the plaintiff seeks against the fourth defendant.

[7]      I  will  describe  the  particular  categories  of  disputed  documents  by  the reference which Mr Fisher used in his synopsis of submissions.

Issue one

[8]       This issue is concerned with document S 58 and attachment.

[9]      It is not necessary to set out in detail the claim which the plaintiff brings.  In short, I understand that the plaintiff alleges that it is entitled to rights under an Exclusive Distribution Agreement (EDA), which the third defendant entered into with a party called Midgen and which in turn, Midgen assigned to the plaintiff.  The third defendant has since entered into arrangements with the first and second defendants to sell them the manufacturing rights of the product.  The first and second defendants do not intend to recognise the EDA as binding them.   The plaintiff apparently claims that the various defendants, which include the third defendant and the first and second defendants, are either in breach of contractual relationships or have contributed to or attempted to contribute to breach of such contractual relationships.  The basis upon which the claim is made is not entirely clear to me but the above background sets out sufficiently the dispute between the parties for the purposes of this application.

[10]     Some additional brief background relating to the dispute in respect to part of the  documentation  and  discovery  needs  to  be  set  out.    At  the  time  the  fourth defendant (who was in control of Cynortic) was considering entering into an agreement to sell the manufacturing business to the company, which is now the first defendant.  He and the fourth defendant apparently retained solicitors in Tauranga, Annan Law.  The fourth defendant had also apparently sought legal advice from Mr K Patterson, who practices as a barrister in Tauranga.

[11]   On 16 November 2013 the fourth defendant sent an email to the third defendant’s solicitors, Annan Law, which described advice that had been received from counsel, Mr K. Patterson.   This is document S 58.   The first and second

defendants resist providing inspection of the attachment to that document on the ground that it is privileged.     The attachment was a draft letter marked “without prejudice”.    It was apparently intended that this letter should be sent to a firm of solicitors called “Dawsons”.

[12]     Mr Marsh, counsel for the first and second defendants, argued that because that document was headed “without prejudice”, a ground existed for resisting disclosure of it.  That point can be dealt with quickly.  The document in question does  not  make an  offer  for settlement  of a dispute.   Even  though  it  is  headed “without prejudice”, it is not entitled to such protection.

[13]     As well, as Mr Fisher pointed out, the document was a draft letter and not an actual communication and for that reason as well, it would not attract “without prejudice” protection.

[14]     The result is that the attached “without prejudice” document is to be made available for inspection, although it must be said it is unlikely to have any impact on the litigation between the parties.

[15]     Shortly before I issued this judgement there was sent to the Court a further letter in regard to which privilege was apparently sought.    This was a letter which the  third  defendant’s  solicitors,  Annan  Law  sent  to  the  third  defendant  on  22

November 2013.  That letter had been referred to in the hearing before me.  There is a dispute as to whether the first and second defendant can invoke privilege to resist disclosure of this document.

[16]     Having inspected that letter, I am able to confirm that the document contained legal advice and was privileged as between the initial parties to it.   The first and second defendants claim that it is legally privileged; even though they were not the clients of the solicitor and were not the original addressees of the letter.

[17]   Because the email was a communication with the solicitors acting for Cynortic/the fourth defendant, it is agreed that it was legally privileged and at least in the hands of those parties.

[18]     Apparently, the circumstances in which these documents found their way into the hands of the first and second defendants is that the third defendant, being aware that there could be a dispute between the plaintiffs and the first and second defendants, sent them copies of the advice that he had received.   I say apparently because any understanding of the background arises from inferences.

[19]     The first and second defendants have claimed that the two documents (the letter of 16 December 2013 and the attachment) are subject to legal professional privilege claims.   Mr Marsh put this submission forward on the basis that he considered  that  his  client  was  obliged  to  formally oppose the  documents  being produced for inspection or risk criticism from the fourth defendant for not doing so. The position taken is that the documents are exempt from disclosure on the ground of legal professional privilege.

Common interest privilege

[20]     It is possible that in circumstances of this kind, the Court, with appropriate evidence before it, will recognise that the parties have a joint interest in the matter which  is  the subject  of  the privileged  communication  and  where the  privileged communication has been communicated to the other party to the joint interest (being the party other than the one who was the immediate communicator with the lawyer). In such a circumstance where a relationship of this kind is recognised it may be possible to recognise that both parties to the joint interest can resist disclosure on the grounds of privilege.

[21]     A helpful authority in this area is the Queen’s Bench, Commercial Division case of Commercial Union v Mander.1   The case before the Court concerned whether a reinsurer had a common interest in the documents brought into existence in the course of obtaining advice from the insurer’s solicitors and which, for that reason, were supposedly privileged.  The case was one where the reinsurer sought to have access to those documents on the ground that there was a common interest between

himself and the insurer and in particular on questions concerning any right that the

insurer may have had to avoid liability under the contract.  The insurer was bound

1      Commercial Union v Mander [1996] 2 Lloyds Rep, 640 at 645.

under a “follow settlements” type clause which I understand refers to an obligation of the reinsurer to honour his obligations in the event that the insurer settles the claim under the policy.

[22]     It was held that in such a circumstance the parties had a common interest in the documents.  In such a circumstance, the judgment noted:2

… though the privilege does not protect one person with a joint interest from disclosing to the other matters which are the subject of that interest, both parties are entitled to maintain the privilege against the rest of the world…

A joint interest for these purposes is not rigidly defined concept… a mere common interest in the outcome of litigation will be sufficient to enable any party with that interest to rely on.

[23]     The Judge also said of common interest privilege that:3

It is concerned with the effect of the confidential communication of a privileged document to a person who has a common interest in its subject matter or in litigation in connection with which the document has been brought into being...It is the communication in confidence to another interested party under those circumstances that requires the privilege to be available in respect of the document in his hands, whether or not he had the right to require that the document be disclosed to him.

[24]     I respectfully agree with those comments.  Unless there exists some basis for resisting   disclosure   of   the   document   which   can   be   justified   by   the   non- communicator, then it must be disclosed.  That is because the non-communicator is not a party to a communication with the legal adviser that attracts its own privilege.

[25]     At the time when the letter from Annan Law was sent to the first and second defendants, the latter were legitimately concerned with the question of what, if any, rights the plaintiff might have to compel the continuation of the previous distribution arrangements.  Plainly, as the purchaser of the business which had been engaged in manufacture of the filter systems in question, the first and second defendants had a pressing interest to know whether they could make their own distribution arrangements in regard to those products or whether they were required to continue distribution through the third defendant – Midgen chain.  There was therefore a close

community of interest between the third defendant and them.  I therefore conclude

2      Commercial Union, above n 1, at 681 (footnote omitted).

3      Commercial Union, above n 1, at 681 (footnote omitted).

that the letter which Annan Law wrote on 22 November 2013 is privileged, in the hands of the first and second defendants.  The copy of the letter which is on the file is to be returned to the first and second defendants and is not to be disclosed to any other party.

[26]     Because I am not entirely clear that this determination resolves all of the questions of disputed privilege, I reserve leave for either party to apply for further directions within 15 working days of the date of this judgment.

Issue two

[27]     The first and second defendants, the plaintiff alleges, did not disclose the original electronic versions of all email communications in full email chains.  The first and second defendants did not dispute that they had an obligation to do this. Provision of electronic documents that have been altered in any way or in a way which does not comply with schedule 9, paragraph 8 of High Court Rules, is not acceptable.   The provision of the emails referred to in this paragraph appear to contravene the requirement and there will be an order that the applicant provide particular discovery in a compliant fashion.

Issue three

[28]     I accept that documents of the type referred to in paragraph 17.3 of the synopsis of counsel for the plaintiff are relevant, and if they are any documents in that category which the first and second defendants had in their control which would satisfy the adverse documents test, they ought to be discovered.   I also accept an inference arises from the circumstance that modifications were made to the Water Guard units after May 2014.   It is likely that documents were generated in that circumstance.

[29]     I therefore accept that an order ought to be made directing the first and second defendants to provide particular discovery of this class of documents.

Issue four

[30]     This part of the application seeks orders that the first and second defendants discover all documentation relating to any sales that they made in New Zealand or any attempts to make sales.

[31]     There is no evidence that any sales or attempts to sell took place.  I cannot agree that there is  an inference available to the applicant  to the effect that the documents exist but have not been discovered.  I decline to make an order in respect of these documents.

Issue five

[32]     I do not accept that there is any proper basis for making the orders sought under this category.

[33]     In certain circumstances it can be supposed that documents in this category would be discoverable because they would have the effect of supporting the case of the plaintiff or because they are adverse to the defence of the first and second defendants.  If, for example, the first and second defendants could be proved to have received documents from the fourth defendant which establish a request, incitement or suggestion to the first and second defendants to act in a way which would involve them in conduct constituting a breach of the fourth defendant’s contract with the plaintiff, then such documents would be discoverable.  They would assist in proving that the fourth defendant, at least, had acted in a way which constituted one or more of the torts in regard to which the plaintiff sues.

[34]     However, it has not been explained to me in detail how such a state of affairs came about and, for the applicant to suggest that documents had been received from the fourth defendant which the first and second defendants have not discovered, is an inadequate basis for making the order sought.

Issue six

[35]     The applicant must succeed on this part of the application.  On balance the evidence establishes that the first and second defendants knew about the defects with the filtration units. As I understand it they have not discovered documents relating to this topic.   It would seem likely that they received at least email communications relating to it either from the fourth defendant or the Midgens.   The applicant is entitled to the order sought.

Issue seven

[36]     This request relates to communications between the first defendant and its customers  and  plumbers  in  Australia  relating  to  defects  in  the  operation  or functioning of the water filtration units.  The plaintiff itself has been the recipient of complaints about Water Guard equipment.

[37]     The first and second defendants have accepted that such communications in fact occurred.  Such communications would tend to support the case of the plaintiff, if they raise complaints of substance about the quality of the units; however the response from the first and second defendants has apparently been to the effect that they were minor in nature.

[38]     The  fact  that  complaints  have  been  made  about  other  individual  items supplied under contract customers would apparently be relied upon as a type of similar fact evidence.   Of course, the fact that a complaint might have been made about a specific item supplied is not sufficient.   The function of these other complaints which might have been made is to show that because there were defects in other deliveries (not being matters which caused loss to the plaintiff but which they  have  heard  about  second  hand),  is  an  example  of  similar  fact  evidence. However, the making of complaints generally is not sufficient.  To take an example, proof that several complaints had been made that inadequate documentation had been provided with a product would not make it more or less likely that the product

also suffered from inherent defects of the mechanical kind.4

4      Silveroaks Group Ltd v Westpac Banking Corp [2014] NZHC 1468 at [58].

[39]     The fact that complaints have been made about Water Guard equipment in another context does not mean that those complaints will support the case of the plaintiff or be adverse to the case of the defendants.  The fact that complaints have been made about some of the products supplied does not give rise to an inference that there will be a body of documentation showing that the products generally suffer from a common design or manufacturing defect.

[40]     Rule 8.24 authorises the making of an order for the provision of a further affidavit where there are grounds for believing that a party has not discovered one or more documents.   The degree of substantiality of the grounds put forward in any case must be judged to determine whether there is a proper basis to go behind the affidavit of documents.   The grounds advanced here do not justify that step being directed. An order directing that the defendants give a further affidavit of documents concerning such documents is not justified.

Orders in regard to fourth defendant

[41]     I consider that the plaintiff is entitled to most of the orders which are sought.

[42]     There is no reason why discovery should not be made of items 21.1 and 21.2, as numbered in the plaintiff’s counsel’s synopsis.

[43]     The defendant has listed in schedule B to the notice of application various categories of documents in respect of which particular discovery is sought.   I will deal with that issue next.

[44]     I accept that it is self-explanatory that the documents which are identified in paragraphs 21.1 and 21.2 of the plaintiff’s synopsis (which cross refers to schedule B) required to be produced for inspection.   Such orders are required because the fourth defendant’s affidavit of documents discloses that they comprise attachments to other documents which are admittedly discoverable and, in the context, it is likely that the attachments themselves ought to be discoverable.

[45]     The next category is 21.3, which relates to all communications including emails letters and faxes between the fourth defendant and the chartered accountants

who undertook liquidation of the third defendant.   The fourth defendant has apparently discovered no documents concerning communications between himself and the accountants who took steps to liquidate the third defendant.  The plaintiff’s application presumes that:

a)       The fourth defendant, who was in control of the third defendant would have put in motion the liquidation of the third defendants; and

b)It is part of the case for the plaintiff that the step of placing the company  into  liquidation  was  one  of  several  acts  or  omissions forming part of a conspiracy to injure by unlawful means.

[46]     Because  the  involvement  of  the  fourth  defendant  in  that  process  is  a necessary foundation block for any conspiracy to injure, that fact will need to be established.  I infer that there will be documents in existence concerning at least that basic information.

[47]     There will therefore be an order as sought in 21.3.

[48]     The next matter concerns copies of documents which the fourth defendant has  control  of  relating  to  communications  relating  to  faults  or  defects  in  the operation  or  functioning  of  the  water  filtration  systems.     I  accept  that  such documents are potentially discoverable, as I discussed in relation to the application against the first and second defendants above.

[49]     However, it is not at all clear to me that the Court is able to conclude that there are grounds for believing that there are documents of this kind in existence. The supporting material is not convincing.   The spreadsheet which has been put before the Court (which was generated by the fourth defendant) apparently records that over a period of three years, “guarantee claims” totalled in value in the sum of

$813.00.  There is no evidence of what aspect of the equipment the guarantee claims are concerned with.   This would not seem to be indicative of a large scale or a fundamentally embedded problem with the equipment which one could suppose would lead to generation of substantial documentation.

[50]     The applicant has not made out the grounds for the order which counsel refers to in paragraph 21.4 of his synopsis.

[51]     The next category of documents which is sought to be discovered are the financial statements relevant to the plaintiff’s claim against the third and fourth defendants, and which essentially relate to the volume of sales of products stated to have been achieved by an entity, Midgen, which is not a party to this litigation but is involved in other litigation with the plaintiff

[52]      The  implicit  reasoning  of  the  applicant  is  that  financial  statements  may actually contain explicit information concerning the detail of sales volumes or, alternatively, that such information will be implicit in the financial statements and can be adduced from them.  The possibilities are, first, that the documents ought to have been disclosed because they are discoverable on ground 8.7(a) of the High Court Rules. That is to say, that they are documents on which “the party” (that is the party seeking discovery) relies.  Just which documents a party can be said to rely on or not is not a simple matter to come to a judgement about.   In the absence of submissions to the contrary, I assume that a party will be taken to rely upon the document if it is part of the case that is advanced and whether that is so or not will depend upon propositions that are put forward as part of the case that the other party files in Court, together with the necessary inferences therefrom.   It is possible, if unlikely, that there may be other documents that support the party’s case but which are not relied upon.  These latter documents are not discoverable on the application or request of the opposing party. That would seem to be the reason why r 8.7(a) does not refer to “documents which support the [discovering party’s] case” but instead makes reference to “documents on which the party relies”.

[53]     While I certainly accept that the documents would have been discoverable under the Peruvian Guano test, it has not been explained to me how in the light of the conclusions in the previous paragraph, the applicant can claim that the financial statements are necessarily discoverable.  If the financial statements in fact had the tendency to show that there had been a misrepresentation of the sales volumes they would  be  documents  that  “adversely  affect  [the  third  defendant’s]  case”  under r 8.7(b) and would be discoverable.

[54]     But the problem is that there is no basis upon which the Court can conclude that they are likely to have that effect and that therefore that there are grounds for supposing that complete discovery has not occurred.

[55]     The application for an order under r 8.19 must therefore be declined in regard to this category of documents.

[56]     At paragraph 21.7 of his synopsis, counsel for the  plaintiff submits that particular discovery ought to be ordered in regard to documents touching on or concerning  the  transfer  of  the  third  defendant’s  rights  under  the  Exclusive Distribution Agreement to the fifth defendant.

[57]     The documents described apparently relate to the acquisition of the Exclusive Distribution   Agreement   by   the   fifth   defendant,   which   is   owned   by   a Mrs R Hoffmann of Germany.  As I understand it, the chain of agreements initially was from the manufacturer (the third defendant) to a company associated with Mr Midgen, the latter of which was appointed the exclusive distributor within New Zealand.  Mr Midgen’s company then assigned its rights to the plaintiff.

[58]     An email that Ms Hoffman sent to Mr Morgan of the plaintiff company on

19 June 2014 indicates that her company, the fifth defendant, is the assignee and owner of the distribution agreements.  Based on the limited material available to me, I understand that the significance of this suggestion is that a parallel structure for distribution in New Zealand has therefore been created, which is separate and independent   of   the   original   arrangements   between   the   third   defendant   and Mr Midgen.   It was the third defendant – Midgen chain that gave rise to the entitlements of the plaintiff.  If my understanding is correct, the third defendant has elected to make other arrangements which are necessarily inconsistent with the third defendant – Midgen – plaintiff chain of distribution arrangements.  Evidence relating to the creation of this structure could be relevant to the claim of a conspiracy to injure by unlawful means.  The plaintiff is therefore entitled to know what the basic outlines of these arrangements were as a preliminary building block to establishing the tortuous claim.  The director of the plaintiff, Mr Morgan, has deposed that the fourth defendant has not discovered any documents relating to this matter.   It is

inconceivable that there are no documents.   Accordingly, an order for particular discovery is required.

[59]     Paragraph 21.7, to some extent, would seem to overlap with the documents described in the plaintiff ’s counsel’s synopsis at 21.6.  For the same reasons as I gave in  relation  to  paragraph  21.6,  I  consider  that  an  order  is  also  justified  under paragraph 21.7. There will be orders under both paragraphs accordingly.

[60]     I accept that there is proper ground for also making the order that is sought in paragraph 1.3 of the notice of application directing the fourth defendant to provide to the plaintiff copies of the documents described in the existing affidavit of documents. There will be an order accordingly.  I assume that if the fourth defendant complies with the direction to provide particular discovery there, may be a requirement for a further order that additional documents be provided for inspection in due course but I cannot anticipate that occurring at this stage.

[61]     I also note that the plaintiff seeks, in paragraph 1.4, an order directing the defendants to comply with certain orders that I made on 26 February 2015.  I am not clear on what basis such an order is sought.   If the order has been already made but has not been complied with then the plaintiff presumably has options for seeking a strikeout order or something of that kind.   I will, however, reserve leave to the plaintiff to file further brief submissions on this point in case I have misunderstood the purpose of the direction that is sought.

[62]     Costs on the applications are reserved.

[63]     The trial in this matter commences on 6 July 2015 and will take eight days. The plaintiff seeks a pre-trial conference, presumably with the trial Judge.   This matter is referred to the schedulers to explore the possibilities of arranging such a

conference.

J.P. Doogue

Associate Judge