Water Guard NZ Limited v Cynortic Water Systems Limited

[2015] NZHC 2717

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-000915 [2015] NZHC 2717

BETWEEN

WATER GUARD NZ LIMITED

Plaintiff

AND

CYNORTIC WATER SYSTEMS LIMITED

First Defendant

MARK JAMES SULLIVAN and SUSAN MARY SULLIVAN

Second Defendants

CYNORTIC LIMITED Third Defendant

REINER GEORGE BRAGULLA Fourth Defendant

CYNORTIC INTERNATIONAL LIMITED

Fifth Defendant

Hearing:	On the papers
Judgment:	4 November 2015

JUDGMENT OF ASHER J (Costs)

This judgment was delivered by me on Wednesday, 4 November 2015 at 11 am pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel: M Fisher, Auckland.

Castle/Brown Solicitors, Auckland.

DG Hurd, Auckland.

B Dwyer, Christchurch.

WATER GUARD NZ LTD v CYNORTIC WATER SYSTEMS LTD [2015] NZHC 2717 [4 November 2015]

[1]      I issued my substantive judgment in this proceeding on 15 September 2015.1

The decisions in relation to the first and second defendants were as follows:2

[281]   Sullivan Ltd (Cynortic Water Systems Ltd) and the Sullivans have admitted that they should account to the plaintiff for the loss of any profits as a result of any sales undertaken by them in New Zealand.   The sum in question is very small, as there were only a few sales over a short period. Sullivan Ltd consents to an account of profits for sales by it and has nominated a sum it will pay.  Any remaining issues as to quantum in that regard can be dealt with at the damages hearing.

[282]  However, save for this admission, no claim has been made out against Sullivan Ltd or the Sullivans.   I refuse to grant a declaration that the first defendant (Sullivan Ltd) has no interest in the EDA.   The claims for inducement to breach contract, conspiracy and the Fair Trading Act claims against Sullivan Ltd and Mr and Mrs Sullivan fail.

…

[286] I make the following orders and declarations:

…

(b) A declaration that the plaintiff is the distributor under the EDA.

…

[2]      The plaintiff seeks costs against the first and second defendants on a 2B basis together with disbursements.  In stark contrast, the first and second defendants seek costs from the plaintiff on a 2B basis uplifted by 50 per cent (which as it happens would be close to indemnity costs). They also seek disbursements.

[3]      In the proceeding before me the substantive issues were the plaintiff ’s claim against Cynortic Water Systems Ltd and the Sullivans as first and second defendants for various declarations relating to the exclusive distribution agreement (the EDA), and claims for inducement of breach of contract and unlawful conspiracy.   The plaintiff obtained declaratory orders which were not ultimately opposed by the first and second defendants, and it has a notional entitlement to a very small amount of damages for what the first and second defendants accepted at the hearing was wrongful behaviour on their part in trying to sell some Water Guard units themselves

rather than through the plaintiff.

1      Water Guard NZ Ltd v Midgen Enterprises Ltd [2015] NZHC 2227.

2 At [286].

[4]      There were certain broad dynamics in the case which made it unusual.  The Sullivans  and  their  company,  the  first  defendant,  purchased  a  business  which supplied water systems to Mr Morgan’s company, the plaintiff.  In a late change of direction  the  Sullivans’ company did  not  purchase  the  supplier’s  core  business, which was the subject of the EDA between the original supplier Cynortic Ltd and the original  distributor,  Midgen  Enterprises  Ltd.    The  change  was  effected  by  a document called “the addendum” which had the effect of the Sullivans’ company not acquiring the supply rights under the agreement which remained with the original supplier Cynortic Ltd, and thereby losing their ability to directly enforce the agreement against the plaintiff.

[5]      Nevertheless, the Sullivans did through their company acquire the intellectual property and the effective manufacturing rights for the Water Guard units.   They have through this proceeding oscillated between positions where they have treated themselves as a party to the EDA and not a party to the EDA.   However, I have found that they did not have any long term agenda to damage Mr Morgan or the plaintiff.

[6]      The plaintiff failed in its endeavour to obtain a declaration, which for tactical purposes it sought, declaring that the Sullivans had no interest in the EDA.  It also failed entirely in its tort causes of action.  In the end the only relief it obtained was that consented to or not opposed by the defendants.

[7]      Under r 14.2(a) of the High Court Rules a party who fails in a proceeding should pay costs to the party who succeeds.  The modern approach to the allocation of costs is reflected in the statement of the Court of Appeal in Packing In Ltd (in liquidation) v Chilcott where it was stated:3

Success or failure in this context is better assessed by a realistic appraisal of the end result rather than by focusing on who initiated what step, and the extent to which that step succeeded or failed.

[8]      On its face the first and second defendants are entitled to costs as the parties that were largely successful.  It is true as Mr Fisher has pointed out, that the position

3      Packing In Ltd (in liquidation) v Chilcott (2003) 16 PRNZ 869 (CA) at [6].

of the first and second defendants to the declarations made by consent did not become clear until towards the end of the hearing.  However, little time was spent arguing about the terms of the declarations that were ultimately consented to, and the evidence  was  much  the  same  as  it  would  have  been  if  the  declarations  were consented to from the outset.

[9]      In my view, following the general rule that costs follow the event, the first and second defendants are entitled to costs from the plaintiff and I propose making an order on that basis.

[10]     There would be some reason to consider an order for increased costs.  I found

Mr Morgan’s behaviour to have been very unreasonable and combative.

[11]     However, I am not prepared to order any increased costs for two reasons. First, the Sullivans did at one point attempt to appoint other distributors in New Zealand and their actions compelled the plaintiff to issue proceedings and seek, ultimately by consent, interim injunctive orders.  They then purported to terminate the EDA by letter dated 10 December 2014 forcing the plaintiff to successfully seek an interim injunction.  Second, there is something in Mr Fisher’s point that the first and second defendants did not make their position clear as to the substantive issues relating to the EDA until late in the piece.

[12]     Turning to the plaintiff ’s claim for costs, it fails as the plaintiff was largely unsuccessful in the trial against the Sullivan interests.  While the plaintiff must pay the first and second defendants’ costs on scale for the trial, that is not the case for the interim injunctions.   The first and second defendants were in the wrong in taking positions (from which they later resiled) contrary to the interests of the plaintiff, forcing the plaintiff to bring those applications.   They should not get costs on the interim injunctions.  However, Mr Morgan’s unreasonable and bullying behavior was such that I consider in my discretion that the Sullivans should not have to pay the plaintiff’s costs.

[13]     As to the first injunction, the defendants admitted from the outset that their action  in  selling units  was  wrong  and  they  immediately undertook  to  stop  that

activity.   The plaintiff continued with the injunction, and Fogarty J in a telephone conference  minute  dated  1  July  2014  warned  that  the  plaintiff  was  at  risk  of indemnity costs by attempting to pursue the matter further in these circumstances. He noted he had formed the impression that the first and second defendants had been consistently trying to assure the plaintiff that they had no intention of exercising any power (which they did not think they had) to appoint further distributors.  The matter was in the end resolved by the making of orders along the lines of the undertakings offered by the defendants at the outset.

[14]     In  respect  of  the  second  injunction,  the  root  cause  of  the  defendant’s behaviour was Mr Morgan’s unconstructive and bullying behavior.  Moreover, there is  no  evidence Morgan  Ltd  ever actually purchased Water Guard systems  from Cynortic Ltd, which was a condition imposed as part of the grant of the injunctive relief.  My view following the trial was that the plaintiff was plainly in breach of the EDA, and having heard Mr Morgan give evidence, that he did not intend to ever

place any orders for units or parts.4    The plaintiff cannot obtain costs for obtaining

the second injunction when it did not comply with the conditions of the injunction or the conditions of the EDA.

[15]     Thus, in respect of the interim injunction applications there was fault on both sides, and the costs and reasonable disbursements relating to those specific applications will lie where they fall.

[16]     There  is  also  an  issue  relating  to  an  application  for  leave  to  file  a counterclaim.  The first and second defendants were in essence unsuccessful on their application to file an amended counterclaim, but were successful in the trial.  The Sullivans will not get costs on the application to amend.

[17]     The plaintiff sought further and better discovery.  It does seem as if the first and second defendants’ initial list of documents was incomplete.  However, it is my assessment that the plaintiff acted prematurely in applying to obtain an order.  The correspondence shows that there was no attempt between counsel to discuss the

particular discovery issues and to resolve them.  Ultimately as could be expected the

4 At [245].

issues were resolved by consent.  The plaintiff should have had discussions with the defendants, as required by rr 8.2 and 8.11(1) of the High Court Rules.

[18]     Therefore in my assessment it is fair that costs will lie where they fall in relation to the further discovery.

[19]     The end result is that the plaintiff will pay the first and second defendants’ costs and disbursements on a 2B basis.  Excluded from this are all costs relating to the interim injunction applications, the application to amend the counterclaim, and for further and better discovery. Those costs will lie where they fall.

[20]     I  am  unable  to  approve  or  apportion  the  specific  items  listed  in  the memoranda summarising costs filed by counsel, as it is not clear from the notations whether and if so how they related to the interim injunction and discovery applications.  I will have to leave that to counsel.

[21]     I hope that the parties will now agree on the exact quantum of costs.  Leave is reserved to apply further.

……………………………..

Asher J