HEALTH AT HAND LIMITED v GREEN CROSS HEALTH LIMITED [2018] NZHC 1779

HEALTH AT HAND LIMITED v GREEN CROSS HEALTH LIMITED [2018] NZHC 1779 [18 July 2018]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2017-404-2643[2018] NZHC 1779BETWEEN HEALTH AT HAND LIMITEDPlaintiffAND GREEN CROSS HEALTH LIMITEDDefendantHearing: 18 July 2018Appearances: A G Stuart for the PlaintiffS Cameron and B E Smith for the DefendantJudgment: 18 July 2018ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELLSolicitors:Webster Malcolm (A G Stuart), Warkworth, for the PlaintiffCook Morris Quinn (S Cameron/B E Smith), Auckland, for the Defendant[1] Green Cross Health Ltd, the defendant, applies for security for costs underr 5.45 of the High Court Rules 2016. It estimates that the costs it will recover on adefended hearing for five days will be approximately $50,000. It proposes securityfor costs in the sum of $40,000.Case management[2] The case has a fixture in this court for five days beginning on 11 February2019. The parties have not yet carried out discovery. That has been put on hold toawait the outcome of the security for costs application. Counsel have conferred andfiled a joint memorandum setting out proposed timetabling directions through to thehearing on 11 February 2019, beginning with a close of pleadings date for 26 October2018.[3] When the case was started, the plaintiff claimed damages of $356,000 andancillary relief. Under the plaintiff's amended statement of claim, the relief soughthas been reduced to $198,000 plus ancillary relief. Both sides agree that there is noprospect of the amounts claimed in this case exceeding $350,000. The case isaccordingly within the civil jurisdiction of the District Court. Neither side suggestedthat there were good reasons for keeping the case in this court if the fixture for11 February 2019 was not kept. Because I shall order security, it seems unlikely thatthe present fixture can be maintained. The plaintiff will be required to provide securityand until it does provide that security, the proceeding will be stayed.[4] Once the stay is lifted, the parties will have to attend to discovery. It seemsunlikely that those steps will be carried out by the proposed close of pleadings date,26 October 2018. Accordingly, while I will order security to stay the proceeding, thecase will be re-allocated a further case management conference after security has beenprovided. At that conference, the court may make an order transferring the proceedingto the District Court.[5] The plaintiff is based in Warkworth. The defendant has its head office inAuckland. Following normal practice, it seems appropriate that the transfer be to theAuckland District Court, being the court nearest to the defendant.Security for costs application[6] Rule 5.45 of the High Court Rules says:5.45 Order for security of costs(1) Subclause (2) applies if a Judge is satisfied, on the application of adefendant,—(a) that a plaintiff—(i) is resident out of New Zealand; or(ii) is a corporation incorporated outside New Zealand; or(iii) is a subsidiary (within the meaning of section 5 of theCompanies Act 1993) of a corporation incorporatedoutside New Zealand; or(b) that there is reason to believe that a plaintiff will be unable topay the costs of the defendant if the plaintiff is unsuccessfulin 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 ismade to give security for costs as directed for a sum that theJudge considers sufficient—(i) by paying that sum into court; or(ii) by giving, to the satisfaction of the Judge or theRegistrar, security for that sum; and(b) may stay the proceeding until the sum is paid or the securitygiven.(4) A Judge may treat a plaintiff as being resident out of New Zealandeven though the plaintiff is temporarily resident in New Zealand.(5) A Judge may make an order under subclause (2) even if the defendanthas taken a step in the proceeding before applying for security.(6) References in this rule to a plaintiff and defendant are references tothe person (however described on the record) who, because of adocument filed in the proceeding (for example, a counterclaim), is inthe position of plaintiff or defendant.Normally an application for security for costs follows these steps:(a) Has the applicant satisfied the court of the threshold under r 5.45(1)?(b) How should the court exercise its discretion under r 5.45(2)?(c) What amount should security for costs be fixed at or should a stay beordered?(d) Should a stay be ordered?[7] In this case, the plaintiff accepts that the defendant has shown that the plaintiffwill be unable to pay the defendant's costs if the plaintiff is unsuccessful in thisproceeding. The application turns very much on the exercise of the discretion of thesecond step and what form security should take.[8] As to the exercise of the discretion, there is important guidance in the Court ofAppeal's decision in A S McLachlan Ltd v MEL Network Ltd:1[13] Whether or not to order security and, if so, the quantum arediscretionary. They are matters for the Judge if he or she thinks fit in all thecircumstances. The discretion is not to be fettered by construing "principles"from the facts of previous cases.[14] While collections of authorities can be of assistance, they cannotsubstitute for a careful assessment of the circumstances of the particular case.It is not a matter of going through a checklist of so-called principles. Thatcreates a risk that a factor accorded weight in a particular case will be givendisproportionate weight, or be treated as the requirement for the making orrefusing of an order, in quite different circumstances.[15] The rule itself contemplates an order for security where the plaintiffwill be unable to meet an adverse award of costs. That must be taken acontemplating also that an order for substantial security may, in effect, preventthe plaintiff from pursuing the claim. An order having that effect should bemade only after careful consideration and in a case in which the claim has1 A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [13]–[16].little chance of success. Access to the Courts for a genuine plaintiff is notlikely to be denied.[16] Of course, the interests of defendants must also be weighed. Theymust be protected against being drawn into unjustified litigation, where it isover-complicated and unnecessarily protracted.[9] In Highgate on Broadway Ltd v Devine, Kós J set out a number of factors whichpoint towards security being ordered:2(a) Is the plaintiff a nominal one?(b) Is there evidence of the plaintiff disposing of assets to avoid meetingan adverse costs order?(c) Is the plaintiff's substantive claim prima facie unmeritorious?(d) Does the plaintiff have access to third party funding?(e) Would the denial of security for costs in the circumstances of thislitigation be oppressive to the reasonable interests of the defendantand parties other than the plaintiff?He also set out matters which point in the opposite direction:(a) Is it reasonably probable that impecuniosity was caused by thedefendant?(b) Would ordering security deprive the plaintiff of the capacity toadvance a prime facie meritorious claim?(c) Has the applicant delayed unduly in applying for security?He referred to matters of a general nature but which must be considered:3(f) Is the conduct of either party relevant?(g) Are there any other relevant considerations?(h) How should the respective interest of the parties best be balanced?[10] The defendant, Green Cross Health Ltd, provides health care services. It is aprofitable and prominent public company. One arm of its business is pharmacies. Itholds the franchise for the Unichem and Life Pharmacies brands, apparently licensedto 350 pharmacies throughout New Zealand. It has equity interest in about 80 of those2 Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017 at [22]–[23].3 At [24].pharmacies. Many of the licensed pharmacies also hold shares in Green Cross HealthLtd. It acts as the marketing and purchasing agent for its member pharmacies. Forproduct suppliers it offers access to Unichem and Life pharmacies. It offers marketingpackages under which suppliers' goods are given enhanced promotion and visibilityin the pharmacies and in Green Cross Health's sales promotions.[11] Health at Hand Ltd is a small company based in Wellsford. The main manbehind the company is Mr Paul Price, the director and majority shareholder. At onestage he was the only shareholder but has transferred some of the shares to his elderlyfather, Hugh. Health at Hand obtained the New Zealand and Australia distributionrights for products manufactured by a French company, Laboratoire Dielen. This caseconcerns two of those products, "Molval" and "Osteocalm". Molval is a fish proteincapsule alleged to have significant cardio-vascular benefits and is said to be better thanfish oil. Osteocalm is also a fish product, which is said to be good for joints bycontributing to cartilage, bone and muscle function.[12] Towards the end of 2014, Health at Hand Ltd was looking to how it couldlaunch Molval and Osteocalm in New Zealand. Both Mr Hugh Price and his son PaulPrice had background experience in pharmacies and in supplying products topharmacies. Paul Price says that he has worked in pharmacy supply companies forover 20 years. But at the end of 2014 his circumstances were relatively modest. Healthat Hand Ltd did not have significant capital to promote a major launch of Molval andOsteocalm. They decided that a way of launching the products would be through anorganisation such as Green Cross Health Ltd, which would allow a large bulk orderfor the products. That would then provide further finance to fund further stockpurchases. It might also provide a basis for obtaining finance from banks or investors.It understood that Green Cross Health Ltd was a dominant force in the pharmacymarket, said to have between 50 and 60 per cent of the retail pharmacy trade. Fromenquiries by Paul Price and his father in the market they had established that it wasimportant that a product be "core-ranged". That gave some assurance that Green CrossHealth Ltd would support the product being supplied to pharmacies within its group.It did not ensure guaranteed stocking, but it did indicate a strong level of support andrecommendation for products to be stocked.[13] Approaches were made to Green Cross Health Ltd towards the end of 2014.That led to a meeting on 6 March 2015 between Mr Paul Price and Mr Kevin Anstiss,a senior category manager at Green Cross Health. They discussed how Molval andOsteocalm could be marketed through Green Cross Health. Mr Anstiss provided MrPrice with a brochure, "Driving Sales through Pharmacy", sub-titled "2015/2016 SalesOpportunities for Unichem and Life Pharmacies." According to Mr Price, Mr Anstissreferred to the "Premium Package" as suitable for Health at Hand Ltd's products. Apurchase order for the products would allow Health at Hand Ltd to prepare and planaround a large fixed order with a known time-frame and size. The page describing thepremium package says that the price for it is $18,400. "Product distribution" wouldbe:Stockweight based on allocation to at least 200 pharmacies on a sale or returnbasis."In Store Execution" would include:Gondola End Shelf4Gondola Point of Sale and Ticketing PackageProduct Spot in Sales CompanionProduct Spot on in-store Digital Signage.Advertising in the catalogue campaign would include:1 x Hero Product Spot52 x Standard Product Spot[14] Mr Price says Mr Anstiss stipulated that Health at Hand Ltd would have to givemore margin to Green Cross pharmacy members, there would be a rebate on sales andalso a compliance fee, and the terms of sale would be "sale or return". That meantthat for any product not sold Health at Hand Ltd would have to take the product back4 A "gondola" is a structure used for shelving for setting out goods inside pharmacies and otherretail outlets.5 A hero spot means that prominence is given to a particular product.and refund any price paid. There were ongoing discussions and contact betweenMr Price and Mr Anstiss. Mr Price says that he signed forms on 17 March 2015 for asupplier trading terms agreement.[15] There is a dispute as to how much product was to be ordered and whether GreenCross Health Ltd had the sole say in the quantities ordered. Mr Price says that therewould be 6,000 units altogether – 3,000 of Molval and 3,000 of Osteocalm, and thatwas on the basis that he would take two premium packages. That seems to have beenmodified later on, with 4,500 units being supplied and that was subject to approval byPDC. I was informed that PDC is a separate company that operates as a wholesalepharmacy operation under the trade name, Pro-Pharma.[16] Confident that he had a basis for launching his products in Green CrossHealth's pharmacies, Mr Price ordered Molval and Osteocalm. The products wereunsuccessful. There were limited sales. There was also limited uptake from thepharmacies.[17] The plaintiff's case is that only 154 pharmacies bought the product rather thanthe 200 that had been represented under the premium package. Although the figuresvary between the parties, it seems that approximately 850 units of Molval weresupplied to pharmacies and a similar quantity of Osteocalm. Some of the productswere returned but some were not.[18] Health at Hand Ltd not only ordered enough for the supplies to Green CrossHealth pharmacies – that is, 6,000 units – but it ordered additional quantities in thehope of having back-up quantities if the launch was successful. Health at Hand Ltdsays that Green Cross Health Ltd did not purchase the agreed initial quantity of 6,000.It delayed in placing its order. It did not allocate stock to the minimum 200 members;it failed to include the products in the hero product spots to give them prominence;and the Malvol advertisement fell well short of describing the product accurately. Itwas misdescribed as a "fish oil".[19] Health at Hand Ltd says Green Cross Health Ltd is responsible for the failureof the launch. It sues for breach of contract. It also alleges contractualmisrepresentation under s 35 of the Contract and Commercial Law Act 2017 andmisleading and deceptive conduct under s 9 of the Fair Trading Act 1986. It claimsdamages of $198,903.83. That is made up:(a) $85,305.44 for the costs of purchasing the Molval and Osteocalm;(b) $75,245.07 for the costs of engaging sales representatives to promotethe product from July 2015 to January 2016;(c) $22,708.16 for the costs of marketing and advertising to support thesales team and marketing services between July 2015 and January2016; and(d) $15,645.16 for the financing charges from the ASB Bank whichprovided a facility for $60,000.[20] A feature of the security for costs application is that Green Cross Health Ltdhas tried to set matters up so that it is bound to obtain an order for costs against Healthat Hand Ltd, whatever the outcome of the trial. It has made an open offer of settlementto Health at Hand Ltd. Green Cross Health Ltd has offered Health at Hand Ltd $60,000in full and final settlement. Its submissions were directed, to a large part, in showingwhy that was an appropriate offer of settlement, even if there should be findings ofliability against it. It accepts that there was a mistake in the advertising of Molval andit has reversed the charge for the premium package.[21] Green Cross Health Ltd has analysed the plaintiff's claim. It says that even ifthe plaintiff had sold 6,000 units - 3,000 of Molval and 3,000 of Osteocalm - the grosssales would have come to $115,680. Given that the costs to import and promote theproducts are $198,903.83, Health at Hand Ltd would inevitably suffer a loss of$83,223.83, even if all 6,000 units had been purchased and allocated to pharmacies.That loss of $83,223.83 is irrecoverable because it was sustained right at the outset,whether or not there had been any breach of contract or any misleading or deceptiveconduct on the part of Green Cross Health Ltd. It also points out that the plaintiff hasalready been paid $28,771.83 for goods ordered, and that reduces the amount of theclaim in turn to $86,908.17 as a maximum amount of damages. It also proposes that,just as the goods were supplied on sale or return and there were returns, there is likelyto have been returns of product even if everything had been sold in the first place. Itproposes a further deduction on that account, suggesting a figure of $14,600.00.[22] That would seem to bring the plaintiff's claim down to about $72,000.00 as themaximum amount of damages. The defendant also suggests other areas to attack theamount of damages. The general thrust is that the $60,000.00 amount looks a fairlygood estimate of its potential liability if the case goes against it. On that basis, itanticipates receiving an order for costs even if Health at Hand Ltd can prove someliability.[23] The submission for Green Cross Health Ltd on likely damages was mainly forthe claim for breach of contract. As to the claim for contractual misrepresentation, itpointed out that there is the same measure of damages for a claim for breach of contractas for a claim for contractual misrepresentation. As to the Fair Trading Act, it notedthe implausibility of the claim because – while it did not put it in quite these words –it saw the Fair Trading Act allegations as a repackaging of the claims for breach ofcontract. It made the point that, recognised in the case law, merely because acontractual promise has not been performed, does not mean that the promisor is liablefor misleading or deceptive conduct under s 9 of the Fair Trading Act. It accepted, ofcourse, that a false promise may be misleading conduct, but pointed out that there wasno such misleading conduct here.[24] Mr Stuart, on the other hand, submitted that the plaintiff's strongest cause ofaction was under the Fair Trading Act. He said that the misleading conduct was inindicating that the products would be core-ranged – and that was not done – and thatthere would be allocations to 200 pharmacies. That led Health at Hand Ltd to believethat Green Cross Health Ltd did have significant influence so that it could ensure thatthe product was launched in 200 pharmacies. Green Cross Health Ltd does not acceptthose allegations. It points, for example, to emails where Mr Anstiss made it clear toHealth at Hand Ltd that any supplies would be subject to approval by PDC. Mr Pricesays in response that Mr Anstiss assured him that PDC would do what Green CrossHealth Ltd said.[25] Ultimately Green Cross Health Ltd submits that it is not responsible for thefailure of the launch because the product did not sell well. In submitting that, itdisclaims any responsibility for the product not selling well. It says that itsresponsibilities were to give the opportunity for the product to sell, but it did not giveany contractual promises or make any representations as to future sales of the productfor which it could be liable. Part of its evidence suggests possible reasons why theproduct did not sell. It points out that, alongside any launch in the pharmacies, theproduct had to be promoted to the public at large to elicit customer interest. That wasnot done. That seems to have been because Health at Hand Ltd did not have the fundsto launch the product in a major way in the media.[26] Green Cross Health Ltd also points out that if any Fair Trading Act liabilitywere established, under the approach in Red Eagle Corporation Ltd v Ellis,6 there willbe significant causation issues and it cannot necessarily be held liable for all losseswhich Health at Hand Ltd may have suffered. It points to other factors which made itlikely that Health at Hand Ltd would suffer losses; the first being that it could not hopeto cover all its costs for the initial launch, the absence of any major advertising andthe poor financial position of Health at Hand Ltd at the outset.[27] Mr Price says that his circumstances do not allow him to make any contributionto the defendant's costs at all. He says that he is now a beneficiary and he appears tohave partial blindness. He has no significant assets. Perhaps in a show of bravado, hesays he is prepared to go bankrupt if need be. Health at Hand Ltd appears to have noassets of any significance. Green Cross Health Ltd, to a certain extent, queries thesepleas of absolute absence of assets. It points out that Health at Hand Ltd has engageda lawyer to bring the proceeding and the lawyer must be paid somehow.[28] In my judgment, it is appropriate to require Health at Hand Ltd to providesecurity. While I do not say that its claim is hopeless, there appear to be significantchallenges for it to establish liability in the first place, and any monetary relief is likelyto be extremely modest – certainly unlikely to be more than $100,000. The presentindications are that its present impecuniosity is not chiefly attributable to Green Cross6 Red Eagle Corporation Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492.Health Ltd. It started off with limited funds, its venture was unsuccessful but thefailure of the venture seems to be equally explainable by other factors than the conductof Green Cross Health Ltd, primarily, I think, because of the initial undercapitalisationof Health at Hand Ltd.[29] Notwithstanding that, Health at Hand Ltd ought to be given the opportunity tohave its case heard. It is still a strong call to deny a litigant the opportunity of havingtheir case heard in court. Against that is to be balanced the need of a defendant to beprotected against a barren order for costs. In that context, it ought to be borne in mindthat the prospect of liability for costs affects parties' conduct in litigation generally.Parties take costs seriously. Even if the sums are not large in the overall context of thecase, the prospect of adverse cost orders tends to dampen any enthusiasm forirresponsible litigation. Green Cross Health Ltd is entitled to make the point that thatdiscipline does not operate on Health at Hand Ltd at present.[30] Green Cross Health Ltd proposes that security for costs of $40,000 be orderedto be paid into Court and that the proceeding be stayed until then. I put to the partiesmy decision in Oxygen Air Limited v LG Electronics Australia Pty Ltd.7 In that casean insolvent company with a single director and shareholder brought a proceedingalleging breaches of a distribution agreement. The defendant, a substantialcorporation, sought security for costs. I ordered the director of the company to providean undertaking to pay any costs ordered in favour of the defendant if the plaintiff failedin its claim against the defendant. I did not order security for the defendant'scounterclaim against the plaintiff. The plaintiff in that case had no assets. Requiringthe director to provide the undertaking allowed the plaintiff in that case to continue itsproceeding to a hearing; whereas requiring funds to be put up by way of security wouldhave required a stay. The case was less likely to get to a hearing. The merits of thatcase were not easy to ascertain on the material, admittedly substantial, which wasprovided.[31] Green Cross Health Ltd opposes my making a similar order in this case becauseit points to Mr Price's admitted insolvency and his statement that he does not mind if7 Oxygen Air Limited v LG Electronics Australia Pty Ltd [2018] NZHC 945.he goes bankrupt. In my experience, while some businessmen may be indifferent totheir companies going into liquidation, they take personal solvency far more seriously.Most businessmen are very anxious to avoid going bankrupt. It imposes a restraint ontheir freedom to go into business on their own account or to be involved in directingcompanies or managing any business. Mr Price is clearly entrepreneurial. While hehas difficulties at present, he is likely to resent any fetter on his ability to go intobusiness afresh. I therefore consider that there will be the appropriate discipline if heis required to give an undertaking that he personally will meet any order for costs.[32] I order that Mr Price is to give Green Cross Health Ltd a written undertakingthat he will meet any order for costs which Green Cross Health Ltd may obtain againstHealth at Hand Ltd in this proceeding. I ask the parties to confer and agree as to theterms of the undertaking.[33] I direct a telephone conference. A minute will issue giving the date and time.That is to ensure that the terms of the undertaking are agreed.[34] Mr Price will then have until 10 August 2018 in which to sign the undertaking.If he does not sign the undertaking by then, the proceeding will be stayed. If he doessign the undertaking, I will give directions for the proceeding to be transferred to theDistrict Court at Auckland. Discovery can be carried out in the District Courtproceeding rather than here. Discovery is available in the District Court under theDistrict Court Civil Rules. If Mr Price does not sign the undertaking by31 October 2018, Green Cross Health Ltd will be entitled to apply for the proceedingto be struck out.Costs[35] Green Cross Health Ltd is entitled to costs for the hearing today. I trust counselwill be able to agree on costs. If they cannot, a memorandum may be filed..Associate Judge R M Bell