CHONGQING JINZHIRAN JIABOCHENG BUILDING MATERIALS CO LTD v HUANG [2022] NZHC 1035

CHONGQING JINZHIRAN JIABOCHENG BUILDING MATERIALS CO LTD v HUANG [2022] NZHC 1035[13 May 2022]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2021-404-000832[2022] NZHC 1035BETWEEN CHONGQING JINZHIRAN JIABOCHENGBUILDING MATERIALS CO LIMITEDPlaintiffAND YUANCHENG HUANGFirst DefendantSHIHAO HUANGSecond Respondent/Proposed SecondDefendantCIV-2021-404-001097BETWEEN SHANGHAI ZHENGTONG VENTURECAPITAL COPlaintiffAND YUANCHENG HUANGFirst DefendantSHIHAO HUANGSecond Respondent / Proposed SecondDefendantHearing: 2 May 2022Appearances: S M Lowery and D J D van Hout for PlaintiffsR J Hollyman QC, T P Mullins ands E J Mills for DefendantJudgment: 13 May 2022JUDGMENT OF ASSOCIATE JUDGE P J ANDREWThis judgment was delivered by Associate Judge Andrew on 13 May 2022 at 3.00 pm pursuant to r 11.5 of theHigh Court RulesRegistrar / Deputy Registrar – Date: Introduction[1] In these two separate, distinct proceedings:(a) Chongqing Jinzhiran Jiabocheng Building Materials Co Ltd,1 hasbrought claims against the defendant, Mr Huang, seeking theenforcement of three decisions of the Tongliang District Court in thePeople's Republic of China2 and bringing a separate claim for breachof contract; and(b) Shanghai Zhengtong Venture Capital Co Ltd,3 has brought separateclaims against Mr Huang seeking the enforcement of an award madeby the Shanghai Arbitration Commission and making a separate claimfor breach of contract.[2] In the context of discussions between the parties about security for costs, theplaintiffs disclosed that a US company, Dessner Investments LLC,4 was funding bothplaintiffs' proceedings. The plaintiffs have subsequently advised that their New Yorkattorneys, DGW Kramer LLP,5 not the plaintiffs themselves, entered into the fundingarrangement with Dessner.[3] In the present interlocutory application, Mr Huang seeks disclosure of thenature and basis of the funding relationship between the plaintiffs, DGW and Dessner.Mr Huang says the disclosure of the terms of the funding arrangements are necessaryfor the Court to properly assess his application for security for costs against bothplaintiffs.[4] The plaintiffs accept that they should pay security for costs; the only issue isthe quantum of the security. The plaintiffs say that further information about thefunding arrangements is not relevant to the issue of quantum.1 Chongqing.2 PRC.3 Zhengtong.4 Dessner.5 DGW.[5] The principal issue I must determine is whether the terms of the fundingarrangements are relevant to the security for costs application.Factual background[6] The plaintiffs seek to recover debts they say are owed by Mr Huang to themand arising from Mr Huang's business dealings in China.[7] While the proceedings have the same defendant, they are separate and concerndifferent plaintiffs, different facts and different claims. The proceedings are connectedonly through their representation and funding arrangements.[8] Both plaintiffs are companies incorporated in China, with no tangible orrealisable assets in New Zealand, and are entirely unrelated.[9] Both plaintiffs are represented by the same New York law firm, DGW, and theyare also represented by the same New Zealand solicitors, Russell Legal.[10] On 2 December 2021, counsel for Mr Huang wrote to the plaintiffs' NewZealand solicitors requesting that they put forward a proposal for security for costs ineach proceeding.[11] In their letter of response of 19 January 2022, the plaintiffs disclosed thateffective 19 November 2021, Dessner was funding both proceedings. The solicitorsadvised that Dessner is a "Delaware LLC and a related company to Burford CapitalLLC,6 a Delaware corporation listed on the London and New York stock exchanges".[12] On 28 January 2022, Mr Huang's solicitors sent a letter to the plaintiffs'solicitors requesting that the plaintiffs provide a copy of the litigation fundingagreement and related documents. Mr Huang's solicitors also noted that there was noway of verifying the relationship between Dessner and Burford, and that searches forDessner yielded no results.6 Burford.[13] On 28 January 2022, Mr Huang applied for security for costs in bothproceedings. He seeks security of $825,950 per proceeding ($1,651,900 across thetwo proceedings), to be paid on a staged basis.[14] The plaintiffs acknowledge that security is appropriate in both proceedings butoppose the quantum sought by Mr Huang. The plaintiffs proposed security in eachcase of $250,000, with a credit in each case of $50,000 from the $200,000 paid to theCourt in July 2021, as security for the plaintiffs' undertakings as to damages.[15] This application for disclosure is being held in advance of the application forsecurity for costs.[16] On 11 February 2022, Mr Rongping Wu, a partner at DGW, filed an affidavitin opposition to Mr Huang's application for security for costs. In that affidavit, Mr Wustated that on 19 November 2021 DGW, not the plaintiffs, entered into a fundingarrangement with Dessner.[17] Dessner is described in Mr Wu's affidavit as a "limited liability companyresident in Delaware, United States of America and a related company to BurfordCapital LLC". Mr Wu states further that Burford is listed on the New York stockexchange and London stock exchange and is the world's largest provider of specialisedlegal finance.[18] Mr Wu also states in his affidavit that Dessner is providing funding for "severalof DGW's matters, including Chongqing's and Zhengtong's proceedings" and thatunder the funding arrangement Dessner is not liable for any adverse costs award.[19] On 16 February 2022, the plaintiffs' solicitors sent Mr Huang's solicitors afurther letter advising that they refused to provide the funding agreement and relateddocuments. They advised that no further information would be disclosed other thanwhat was already disclosed in Mr Wu's affidavit.Relevant legal principles[20] The leading authority in disclosure of litigation funding arrangements in NewZealand is Waterhouse v Contractors Bonding Ltd.7 In that case, the Court establisheda number of general principles regarding disclosure of litigation fundingarrangements:(a) It is not the role of the courts to act as general regulators of litigationfunding arrangements, nor to give prior approval to such arrangements;(b) The power of the Court to stay a proceeding for abuse of process (underthe High Court Rules 2016 or under its inherent jurisdiction) is notlimited to the narrow tort of abuse of process, and it is not an abuse ofprocess for a funder not to provide indemnity for costs to the fundedparty;(c) Where proceedings are funded by a third-party, unrelated litigationfunder that has no prior interest in the proceedings and whoseremuneration is tied to the success of the proceedings, or has somecontrol over the conduct of the proceedings, the identity and locationof the third-party funder and its amenability to the jurisdiction of theNew Zealand courts must be disclosed; and(d) Where an application for a stay is made on the grounds of abuse ofprocess, the Court can order disclosure of the litigation fundingagreement, subject to redactions relating to confidentiality, andlitigation sensitive and privileged matters.[21] The Supreme Court also identified three particular applications where theexistence and terms of a litigation funding agreement may be relevant:8(i) Applications for a stay on abuse of process grounds;7 Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91.8 Waterhouse v Contractors Bonding Ltd , above n 7, at [60].(ii) Applications for security for costs; and(iii) Applications for costs.Analysis and decision[22] In contending that the terms of the funding agreement are not relevant becausethe sole matter at issue is the quantum of security for costs, and not whether securityshould be ordered, Mr Lowery argued as follows. The plaintiffs have complied withtheir obligations of disclosure in accordance with the Waterhouse principles. Both theidentity and location of the funder and its amenability to the New Zealand jurisdictionhave been disclosed and nothing further is required. The plaintiffs have agreed toprovide significant security in the form of cash and virtually none of the critical factorsare in dispute. That includes the fact that the plaintiffs are foreign companies, are notimpecunious, that the only application before the Court is an application for securityfor costs, and the plaintiffs have advised that under the funding arrangements Dessneris not liable for any adverse costs award.[23] I agree with Mr Lowery's submission that in accordance with the principles ofWaterhouse, it is not "a given" that the terms of the funding agreement are to bedisclosed. I also accept his submission that the plaintiffs here have met the minimumrequirements of Waterhouse, having disclosed the two critical factors of the identityand location of the funder and its amenability to the New Zealand jurisdiction. Theplaintiffs have not disclosed the financial standing or viability of the funder, nor theterms on which funding can be withdrawn and the consequences of withdrawal.However, the Supreme Court, overruling the Court of Appeal, held that there was noobligation in that case to disclose either of those factors.9[24] In Waterhouse, the Supreme Court clearly left open the possibility that thecourts may require disclosure of the relevant terms of a funding agreement in thecontext of an application for security for costs.10 The key test is clearly relevancewhich, obviously, is to be determined by reference to what is in dispute.119 Waterhouse v Contractors Bonding Ltd, above n 7, at [70] and [71].10 Waterhouse v Contractors Bonding Ltd above n 7, at [63].11 See Evidence Act 2006, s 7.[25] As Mr Hollyman submitted, the exercise of the discretion under r 5.45 of theHigh Court Rules 2016 (order for security for costs) is a wide one; the discretionextends to both whether security should be ordered and quantum.12 In my view, afunding arrangement may be relevant both to whether security will be ordered and thequantum of such security. In Walker v Forbes,13 a security for costs case, Lang Jfollowed the approach of Dobson J in Houghton v Saunders,14 and held:[33] I take a similar approach. The existence of a litigation funder in thepresent case is an important factor that influences the exercise of the discretionfor several reasons. The first of these is that the plaintiffs will not be precludedfrom continuing with their claims if a significant order for security is made.Furthermore, SPF [the funder] stands to receive most, if not all, of theproceeds of any successful claim. It has no interest in the litigation beyondthe profit it hopes to derive from what it clearly regards as a commercialventure. Commercial ventures generally require an investor to take risks andto incur expenditure as the price to be paid for the chance of success. SPFshould therefore be required, as a matter of policy, to contribute significantlyto the defendants' costs if the claims are unsuccessful.[26] His Honour took into account the specific terms of the funding agreement inexercising his discretion that security should be provided in the sum of $2,630,000.[27] In Shanghai Neuhof Trade Company Ltd v Zespri International Ltd, Wylie Jheld that the terms of any funding agreement should be disclosed where an applicationis made to which the terms of the agreement could be relevant.15 While his Honourgave as an express example, an application for a non-party costs order, it is clear thathe also contemplated that the disclosure of the terms of a funding agreement might berequired for an application for security for costs. His Honour held:[23] The fact that there is a litigation funder and the identity of that fundershould be disclosed to the other party or parties when the litigation iscommenced, because the existence of the litigation funder can be relevant toapplications for security for costs and for costs orders. Further, the terms ofany funding agreement should be disclosed where an application is made towhich the terms of the agreement could be relevant, for example, where thereis an application for a non-party costs order. The Court can require a plaintiff12 See A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) and Hamilton v PapakuraDistrict Council (1997) 11 PRNZ 333 (HC).13 Walker v Forbes [2017] NZHC 1212 at [33].14 Houghton v Saunders [2013] NZHC 1824 at [107], where Dobson J held, referring to the NSWCourt of Appeal decision Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd[2008] NSWCA 148, that a "meaningful order" for security for costs should be made.15 Shanghai Neuhof Trade Company Ltd v Zespri International Ltd [2020] NZHC 987, (2020) 25PRNZ 319 at [23].to disclose the identity of a non-party funder, particulars of the fundingarrangement, and the amount of funding.[28] The other cases that Mr Lowery relies upon, namely Patel v Patel16 and Whitev James Hardie New Zealand,17 are, in my view, of little assistance. Neither caseexpressly addresses or analyses the critical issue here, namely whether the terms ofthe funding agreement could be relevant to the issue of quantum of security for costsand the Court's overall broad exercise of discretion in determining a security for costsapplication.[29] I find that the terms of the funding agreement here are relevant to this issue ofquantum. I reach that conclusion in the context of a case which contains some unusualfeatures. The first is that the funding arrangements were entered into by the plaintiffs'New York attorneys, namely DGW. While I accept that they are not the New Zealandbased solicitors, r 5.46 of the High Court Rules expressly prohibits a party's solicitorfrom being a surety for a security for costs order under r 5.45(2). As Mr Hollymansubmitted, even if not a technical breach of r 5.46, the parallels raise concerns whichmay become serious on any review of the arrangements.[30] There are further relevant unusual features. All of these factors, whenconsidered together, support a conclusion that there should be disclosure of the termsof the funding agreement. They include:(a) The funding agreement covers investigative and enforcement fundingfor "several of DGW's matters", which include but are not confined to,the current two proceedings;18(b) Dessner is not liable under the funding agreement for any adverse costsaward but Mr Wu has not addressed the position of DGW or Burfordand there is no material evidencing that before the Court;16 Patel v Patel [2014] NZHC 1744.17 White v James Hardie New Zealand [2019] NZHC 188, (2019) 24 PRNZ 493.18 Affidavit of Mr Wu sworn 11 February 2022 at [4].(c) Both plaintiffs claim not to be impecunious but are still relying on afunding arrangement. The plaintiffs have provided only a very limitedexplanation for this, namely "a desire to apply working capital to morepressing or higher-yield activities";19(d) The two proceedings are connected only through their representationand funding arrangements; the plaintiffs are different, as are the factsand the claims.[31] The terms of any funding agreement and, in particular, the degree of controlthat the funder has over the litigation, may be relevant to whether the proceedingsconstitute an abuse of process. In New Zealand, the assignment of a bare cause ofaction is not permitted and will amount to an abuse of process.20 In Cain v Mettrick,Paulsen AJ granted a stay of the proceedings on the grounds that it was an abuse ofprocess, principally based on factors relating to the identity of the litigation funder andthe terms of the funding arrangement.21 His Honour referred to the relevant principlesof Waterhouse summarised by the Court of Appeal in PricewaterhouseCoopers vWalker.22 They include:(d) The role of the lawyers acting may be relevant in the inquiry into afunding arrangement. Here the Court instanced a representative action inwhich the plaintiff's lawyers reported to the funder and in addition to theirusual fees took an undisclosed success fee from the funder, conflicting withtheir duty to act only in their lay clients' interests. These features exacerbatedthe majority's concern that the funder, which had referred plaintiffs to thelawyers, was trafficking in litigation.[32] I accept that in this case there is no extant application for a stay on the groundsof an abuse of process. However, I agree with Mr Hollyman's submission that securityfor costs is a future-looking exercise and if there is an abuse of process or somethingclose to that, because for example of the terms of control by the funder, then thequantum or amount of security required might well be significant. The terms of thefunding arrangement, even if not meeting the threshold of an abuse of process, could19 I note that the defendant challenges the "bare assertions" that the plaintiffs make about them notbeing impecunious.20 Waterhouse v Contractors Bonding Ltd, above n 7, at [57].21 Cain v Mettrick [2020] NZHC 2125.22 PricewaterhouseCoopers v Walker [2016] NZCA 338, (2016) 23 PRNZ 612 at [14].have an important bearing on the Court's exercise of its discretion. Mr Huang seekssecurity in a sum substantially in excess of that offered to date by the plaintiffs.[33] I also note that in the present application the defendant has expressly soughtleave to bring a further application for a stay of proceedings on the grounds of abuseof process. I reject Mr Lowery's submission that in this case disclosure should not bemade until such time as an abuse of process application is a live issue. Mr Huang hasestablished a proper basis for disclosure to be ordered now. It would be inefficient toproceed otherwise and any concerns about confidentiality can of course be addressedby the making of relevant orders.[34] I conclude that the terms of the funding arrangements are to be disclosed andthe application is accordingly granted.The terms of the order[35] It is clear that the essential terms of the funding arrangements, including thoserelating to the degree of control that the funder has over the litigation, should bedisclosed. However, there appears to be some merit to Mr Lowery's submission thatthe particular terms of the orders sought at [1] of the defendant's application of 7 April2022, are too wide.[36] I direct that the parties are to confer and address the issue of the terms of theorder based on the findings in this judgment. If agreement cannot be reached, thenmemoranda are to be filed with the Court, in accordance with the timetable set outbelow.[37] I decline to grant a stay of proceedings pending receipt of an affidavit from theplaintiff disclosing the relevant information. I see no need for a stay at this stage.[38] Leave is reserved for the defendant to bring an application for a stay on thegrounds of an abuse of process and/or in relation to any failure to disclose the relevantterms of the funding arrangement.Result[39] I grant the defendant's application for disclosure dated 7 April 2022.[40] The parties are to confer on the particular terms of any order to be made. Ifagreement cannot be reached, then memoranda (no more than three pages) are to befiled and served by 27 May 2022.[41] I decline to grant an adjournment of the defendant's application for security forcosts or to stay the proceedings pending receipt of an affidavit from the plaintiffs aboutthe funding arrangements. However, leave is reserved on the terms set out above.[42] As to costs, I am of the preliminary view that the defendant, having succeeded,should be awarded costs and on a 2B basis._________________________Associate Judge P J Andrew