FILTER SOLUTIONS LTD AND ANOR V DONALDSON AUSTRALASIA PTY LTD AND ANOR HC AK CIV 2005-404-1095

FILTER SOLUTIONS LTD AND ANOR V DONALDSON AUSTRALASIA PTY LTD AND ANOR HC AK CIV 2005-404-1095 26 September 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2005-404-1095BETWEEN FILTER SOLUTIONS LIMITED First Plaintiff AND NM AND JM CONSULTANTS LIMITED Second Plaintiff AND DONALDSON AUSTRALASIA PTY LIMITED Defendant AND NEIL MALCOLM MCCORKINDALE Counterclaim Defendant Hearing: 5 July 2007 Appearances: V T Bruton for Defendant (Applicant) G J Thwaite for First and Second Plaintiffs (Respondents) and Counterclaim Defendant Judgment: 26 September 2007 at 10:00am(RESERVED) JUDGMENT OF ANDREWS J [Application by defendant for security for costs and stay]This judgment was delivered by Justice Andrews on26 September 2007 at 10:00ampursuant to r 540(4) of the High Court Rules. Registrar/Deputy Registrar Date: Solicitors: Brookfields, PO Box 240, Auckland G J Thwaite, PO Box 2062, AucklandIntroduction[1] In this proceeding the first plaintiff ("Filter Solutions") and the second plaintiff ("McCorkindale Consultants") claim damages against the defendant ("Donaldson") on causes of action arising out of Donaldson's termination of agreements entered into with each of the plaintiffs for the sale of the Donaldson's products in New Zealand. Donaldson has applied for an order under r 60 of the High Court Rules that the plaintiffs give security for costs, and for a stay of the proceedings until such time as security is given. Donaldson argues that there is reason to believe that each of the plaintiffs will be unable to pay costs to Donaldson, should they not succeed in their proceeding.Background[2] The background facts do not appear to be in dispute. Donaldson is an Australian-registered company that manufactures and distributes oil filters. By agreements executed on 30 April 2001, Donaldson, Filter Solutions and McCorkindale Consultants agreed that Filter Solutions would sell Donaldson's product in New Zealand for a 15% commission, and McCorkindale Consultants would provide sales services and ensure that sales objectives were met. Each agreement provided that it was governed by the laws of New South Wales. [3] Donaldson terminated the agreements in November 2002, pursuant to provisions in each agreement under which either party could give four weeks' notice of termination in writing. According to an affidavit sworn on 10 June 2005 by Mr Neil McCorkindale, who is a director of each of Filter Solutions and McCorkindale Consultants, it was agreed between himself and Mr Ken Morgan, Managing Director of Donaldson, that the termination would not take effect until early 2003. [4] By a letter dated 12 March 2003 Filter Solutions gave notice of the existence of disputes between it and Donaldson. The matters in dispute were said to be: a) Actionable breaches by Donaldson of pre-contractual representations;b) Misleading and deceptive conduct-in-trade by Donaldson, actionable in terms of New South Wales law; c) A short payment of $5,294.19 for sales generated to 31 January 2003. [5] The letter went to say that if the disputes were not resolved within 15 days after service of the Notice, they were, pursuant to the agreement between Filter Solutions and Donaldson, to be submitted to mediation. [6] In his letter to Filter Solutions dated 1 April 2003 Mr Morgan said that as the agreement between Donaldson and Filter Solutions had been terminated, it was not possible for Filter Solutions to refer a matter of dispute between the parties to the dispute resolution process under the agreement. He further noted that Donaldson denied the allegations noted at [4](a) and (b) above, and that the matter of the "short payment" had been resolved. [7] There was further correspondence in May 2003, then a solicitor's letter to Donaldson, sent in March 2005. The plaintiffs' proceeding was served on Donaldson on 30 March 2005.Procedural history[8] Progress of the proceeding has been slow. Donaldson responded to service of the claim on 26 April 2005 by filing a Notice protesting jurisdiction. On 10 June 2005 the plaintiffs filed an application to set aside the protest. That application was set down for a hearing before Associate Judge Doogue on 20 December 2005. The application was part heard on that day, and resumed on 6 June 2005. Associate Judge Doogue's ruling on the application was delivered on 4 July 2006. The ruling may be summarised as follows: a) Filter Solutions had demonstrated that it had a good arguable case on one of its causes of action, based on an alleged failure by Donaldson to provide sufficient product. The Judge expressed doubt as to the other causes of action.b) New Zealand was forum conveniens. [9] On 11 July 2006 Donaldson filed an application to review Associate Judge Doogue's ruling. On 29 August 2006 Donaldson filed an application to strike out the plaintiffs' claim, an application for summary judgment and an application for security for costs. The plaintiffs filed notices of opposition to all applications. [10] A judicial settlement conference was held in October 2006. Settlement was not reached. [11] At a Mentions hearing on 7 December 2006 it was noted that Donaldson had abandoned its application for review of Associate Judge Doogue's ruling, the application for strike out and the application for summary judgment. That left the application for security for costs to be argued. [12] The plaintiffs' claim has been amended. The current pleading is the plaintiffs' fourth amended statement of claim.Applications for security for costs[13] Under r 60(1)(b) of the High Court Rules, the Court may order a plaintiff to give security for costs where it is satisfied: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 [14] In this application Donaldson seeks security of $100,000. It claims that its costs on a 2B basis will be $78,720, and that in addition it will incur substantial disbursements in the form of expert accounting costs and expert evidence as to New South Wales law. Hence the claim for $100,000. [15] The threshold requirement is for Donaldson to satisfy the Court that there is reason to believe that the plaintiffs will be unable to pay costs if they do not succeed in their claim.[16] In order to establish "reason to believe" that a plaintiff will be unable to pay costs, something more must be shown than a difficulty with payment. Difficulty in paying costs if unsuccessful is the likely outcome of litigation for many plaintiffs. As Thomas J pointed out in NZ Kiwifruit Marketing Board v Maheatataka Cool Pack Ltd,1 few individuals can face the prospect of paying the other party's Court costs with equanimity. [17] Failure by a plaintiff to disclose its financial circumstances may give rise to an adverse inference as to ability to pay costs. 2 Further, the Court will give due weight to a plaintiff's sworn assertion that it will be able to pay costs, but that will not be decisive. 3[18] As to the discretion to order costs, once the threshold test is satisfied, the learned authors of McGechan on Procedure (at HR 60.03) (after noting the Court of Appeal's warning in AS McLachlan Limited v MEL Network Ltd4 against "constructing 'principles' from the facts of previous cases") set out the following as being factors that are "regularly regarded" as relevant in dealing with applications for security for costs: a) Balancing the interests of the plaintiff and the defendant: will an order for security prevent the plaintiff from pursuing the claim? Should the defendant be protected against being drawn into unjustified litigation? b) The merits of the plaintiff's claim – to the extent possible, bearing in mind the early stage of the proceeding. c) Whether it is "reasonably probable" (established by persuasive evidence) that the plaintiff's impecuniosity results from the defendant's alleged actions.1 NZ Kiwifruit Marketing Board v Maheatataka Cool Pack Ltd (1993) 7 PRNZ 209, at 212-2132 Arklow Investments Ltd v MacLean (1994) 8 PRNZ 188, at 1913 Nikau Holdings Ltd v BNZ (1992) 5 PRNZ 430, at 4364 AS McLachlan Limited v MEL Network Ltd (2002) 16 PRNZ 747d) Delay: was the application made as soon as the defendant became aware of the plaintiff's likely inability to meet costs? Has there been any needless delay, designed to prejudice the plaintiff? Has any delay actually prejudiced the plaintiff? [19] In Aquaculture Corporation v McFarlane Laboratories (1984) Limited5,McGechan J said that the Court's discretion is to be exercised by taking into account all the circumstances of the case and arriving at the conclusion which will do justice between the parties. [20] The quantum of an order for security is equally within the Court's discretion. It is not necessarily to be fixed by reference to a likely costs award: A S McLachlanat [27], citing National Bank of NZ Limited v Donald Export Trading Limited6.[21] In my view, the appropriate process for determining Donaldson's application is to consider the following questions: a) Has Donaldson satisfied me that there is reason to believe that the plaintiffs will be unable to pay costs to it if the plaintiffs do not succeed in their claim. b) If yes, then should security for costs be ordered. c) If yes, then in what amount.Am I satisfied that there is reason to believe that the plaintiffs will be unable to pay costs?[22] On behalf of Donaldson, Ms Bruton argued that the plaintiffs' own affidavit evidence provides strong grounds to believe that they could not pay costs. She referred me to the following statements by Mr McCorkindale:5 Aquaculture Corporation v McFarlane Laboratories (1984) Limited (1987) 1 PRNZ 467, at 4706 National Bank of NZ Limited v Donald Export Trading Limited [1980] 1 NZLR 97 (CA) at 103(Affidavit 10 June 2005): I determined to pay off all debts of both Plaintiffs. Those debts came to $170,000. I have paid off those debts completely. (Affidavit 18 December 2006), on behalf of Filter Solutions: [Filter Solutions] continues in legal existence. However, it is not trading. Its only present connection is with its solicitor in this litigation. Apart from its liability to its solicitor it has no debts. My expectation is that [Filter Solutions] has considerable tax losses which can be carried forward. (Affidavit 18 December 2006, on behalf of McCorkindale Consultants): [McCorkindale Consultants] continues in legal existence. [McCorkindale Consultants] continues to receive an income. Apart from any liability to pay its solicitor, it has no outstanding debts and is able to pay debts as they fall due. My expectation is that [McCorkindale Consultants] has considerable tax losses, which can be carried forward.[23] Ms Bruton submitted that these statements showed conclusively that, at least at the time they were made, neither plaintiff could itself pay its debts. [24] Further, Ms Bruton submitted that there was no evidence that either plaintiff could now pay costs. The fact that Filter Solutions is not trading makes it "almost certain" that it could not pay costs. With respect to McCorkindale Consultants, she submitted that the fact that Mr McCorkindale had met its costs following termination of the agreement with Donaldson provided reason to believe it could not now meet an award of costs. She submitted that the assertion that it could pay debts was unsupported by any objective evidence. [25] Another factor relied on by Ms Bruton is that Donaldson has repeatedly asked the plaintiffs for copies of accounts for the plaintiff companies (either final, signed accounts or draft accounts) and an undertaking from the shareholders of the plaintiff companies that they will pay any costs awarded against the plaintiffs. Neither has been forthcoming (Mr McCorkindale said in an affidavit dated 29 June 2007 that accounts for the years from 30 June 2002 had not been completed),although an offer was made to guarantee payment of a sum considerably power than that sought by Donaldson . Ms Bruton submitted that it is reasonable to infer from the refusal to provide accounts an/or any other financial information that if provided, it would confirm the parlous financial state of the plaintiffs, and their inability to pay costs. [26] Mr Thwaite submitted that the threshold test was not met, because Donaldson has provided no direct evidence as to the plaintiffs' financial position, and no evidence of any liquidation application, outstanding judgment, or other unsatisfied demand by a creditor. [27] I am satisfied that, in this case, there is reason to believe that the plaintiffs would not be able to pay costs. I accept Ms Bruton's submission that Mr McCorkindale's statements in his affidavits suggest strongly that the reason he paid their costs was that they were unable to do so. Further, I am satisfied that it is appropriate to make an adverse inference from the plaintiffs' refusal to provide any information as to their financial position, despite repeated requests from Donaldson.Should I order security for costs?[28] Mr Thwaite submitted that if I found that the threshold requirement was satisfied, I should decline to exercise my discretion to order that the plaintiffs give security for costs. His arguments may be summarised as follows: a) Donaldson has abused Court process to date. The proceeding has been on foot for (now) 33 months, Donaldson has stretched it out, by the protest to jurisdiction, filing an application for review and then an appeal, both of which were later withdrawn, requiring extensive particulars, putting undue effort into interlocutory matters. Donaldson had delayed in paying costs ordered against it. Mr Thwaite noted that the proceeding has only reached the stage of a statement of defence (which he says is defective). All delay could, he submitted, be sheeted home to Donaldson.b) Donaldson refused to engage in alternate dispute resolution. The ADR clause was inserted in the agreement with Filter Solutions by Donaldson. c) Donaldson's conduct in the litigation should not be rewarded, and the plaintiffs should not be impeded, penalised, or disadvantaged by the fact that they had commenced litigation in New Zealand. d) The plaintiffs' claims have merit. Mr Thwaite submitted that in his judgment Associate Judge Doogue had held that Filter Solutions at least had a good arguable case. Further, additional causes of action had been included in the plaintiffs' latest statement of claim. Both are substantial, Mr Thwaite submitted, and have merit. e) To the extent that the plaintiffs are in a difficult financial position, that is attributable to Donaldson's conduct: by not promoting the supply of product, by cancelling the contracts, and by not engaging in alternate dispute resolution. [29] I deal with these in turn.Has Donaldson abused Court processes and caused undue delay in the proceeding?[30] Ms Bruton resisted any suggestion of abuse or delay on the part of Donaldson. a) She noted that the application for security for costs had been made at the earliest opportunity after the protest to jurisdiction had been resolved, and prior to filing a statement of defence. b) She submitted that there had been no delay in paying costs, other than that caused by the Christmas break, and a change in calculations made by Mr Thwaite.c) Further, she submitted that the protest had been largely successful for Donaldson: Associate Judge Doogue found that only part of one of Filter Solutions' causes of action was arguable, and that none of McCorkindale Consultants' causes of action reached the standard of a good arguable case. Thus, serious doubt was cast on all but $559,000 of the plaintiffs' claims, out of the original claim of some $2.85 million. d) She argued that the slow progress in the proceeding was not one- sided: the plaintiffs' prolix and unfocused statements of claim had been amended repeatedly, and Donaldson had had to require particulars. e) Finally, she submitted that delay was not a good reason for the Court to exercise its discretion against ordering security for costs, when all other relevant factors are taken into account and balanced. [31] I do not consider that Donaldson has been responsible for undue delay in the proceeding. The steps it has taken have not been unreasonable. I have concluded that "delay" is a neutral factor in the overall balancing exercise in determining whether to exercise my discretion to award costs. [32] The plaintiffs' arguments set out at [28](c) above largely repeated those in respect of delay and abuse of process, and do not require to be addressed further.Refusal to engage in alternative dispute resolution[33] Mr Thwaite argued strongly that Donaldson had refused to engage in alternate dispute resolution, and that any expense it incurred in the litigation flowed directly from that refusal. Accordingly, he argued, in seeking security for costs, it was seeking to take advantage of its own wrongdoing. [34] Ms Bruton submitted that the matters raisedion Filter Solutions' notice of dispute did not fall within the ambit of the dispute resolution clause, and that theplaintiffs had never specifically invoked the arbitration clause, which required arbitration in Sydney. Donaldson had agreed to go to arbitration in Sydney, but that was refused by the plaintiffs. [35] I do not consider that a refusal to engage in alternate dispute resolution would justify, on its own, refusal to order security for costs. That said, I accept that, if there has been such a refusal, that would be a matter that may be taken into account in the balancing exercise. However, it is far from clear that Donaldson has, wrongly, refused to engage in alternate dispute resolution, as the plaintiffs claim. Accordingly, I cannot count "refusal to engage in alternate dispute resolution" as a factor against ordering security.What are the merits and prospects of success of the plaintiffs' claims?[36] In Nikau Holdings it was noted that the Court should endeavour to assess the merits of the statements of claim and defence in order to form some view as to the respective prospects of success – as far as it is possible to do that at this early stage of the proceeding. [37] Mr Thwaite submitted that it is clear from the judgment of Associate Judge Doogue that Filter Solutions, at least, has a good arguable case, and that the Court should not look beyond that judgment. Ms Bruton submitted that it is clear from his judgment that Associate Judge Doogue considered that even with that cause of action, Filter Solutions still had difficulties to overcome. [38] I agree that I should not look beyond the judgment of Associate Judge Doogue. I cannot conclude, from that judgment, that the plaintiffs' claims are totally without merit. However, equally, they cannot be said to be assured of success. As a factor in the balancing exercise, this one is tilted slightly in favour of Donaldson.Is the plaintiffs' impecuniosity attributable to Donaldson?[39] Mr Thwaite submitted that, to the extent that the plaintiffs are in a difficult financial position, that is attributable to Donaldson's conduct: first, in the course ofthe agreement, in not promoting the supply of product, secondly in cancelling the agreements, and thirdly in refusing to engage in alternate dispute resolution. [40] I am not satisfied that this factor falls in favour of the plaintiffs. First, there is not evidence in support of it – Mr McCorkindale in his affidavit dated 18 December 2006, in opposition to Donaldson's application makes no mention of it. In his judgment in Davy v Howell7 at 145, Barker J noted that where it is asserted that the plaintiff's impecuniosity has been caused by the defendant's wrongful actions, evidence should be provided as to the assertion. In that case, there had been an assertion in the plaintiff's affidavit. Here, there is not even any such assertion, other than in argument.Summary: Should the Court's discretion be exercised to order security for costs?[41] In balancing the interests of the plaintiffs and of Donaldson, I have considered whether, if an order is made, the plaintiffs will in effect be prevented from pursuing their claims. It was not submitted on behalf of the plaintiffs that that would be the effect of an order, and there is no evidence to support any such submission. [42] Having considered all of the factors set out above, I am satisfied that in this case it is appropriate to order that the plaintiffs pay security for costs.Quantum[43] I therefore turn to consider what amount should be paid by way of security. Donaldson seeks an order for $100,000. Ms Bruton argued that this represented likely scale costs on a 2B basis (amounting to $78,720), together with disbursements. It is apparent from the calculation annexed to Donaldson's application that the calculation is based on the trial requiring 2 weeks' hearing time, and on costs being allowed for second counsel.7 Davy v Howell (1993) 7 PRNZ 141[44] Mr Thwaite submitted that, if security were ordered, then Ms Bruton's calculation was far too generous. An appropriate figure for scale costs was, he said, $32,000. This took into account a more realistic time estimate of 5 days, no allowance for second counsel, and reductions for errors and double-counting. [45] The principal point of difference between the parties' positions lies in the time estimate for trial. At this stage I am unable to determine with any precision what may be required. Accordingly, it is appropriate to take a point that is towards the mid-point between the two time estimates.Result[46] Security in the sum of $65,000 (which includes an allowance for disbursements) is to be given within one month of the delivery of this judgment. The proceeding is stayed until that security is provided. [47] Donaldson is entitled to costs on this application, on a 2B basis, together with disbursements as fixed by the registrar. _____________________________ Andrews J