SAFER CORPORATION LTD V THE NZ AUTOMOBILE ASSOCIATION INC HC AK CIV 2007-404-003217

SAFER CORPORATION LTD V THE NZ AUTOMOBILE ASSOCIATION INC HC AK CIV 2007-404- 003217 30 July 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2007-404-003217BETWEEN SAFER CORPORATION LIMITED Plaintiff AND THE NEW ZEALAND AUTOMOBILE ASSOCIATION INCORPORATED Defendant Hearing: 22 July 2008 Counsel: G M Illingworth QC for the Plaintiff J E McLennan for the Defendant Judgment: 30 July 2008 at 2:30 pmJUDGMENT OF ASSOCIATE JUDGE HOLEThis judgment was delivered by me on 30 July 2008 at 2:30pm pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy Registrar Date: .Solicitors/Counsel: Duthie Whyte (P A Craighead), PO Box 6444, Wellesley Street, Auckland Holmden Horrocks, PO Box 1108, Auckland G M Illingworth QC, PO Box 7205, Wellesley Street, AucklandApplication[1] The defendant has applied to the Court for security for costs in accordance with Rule 60 High Court Rules. In this regard, there is no issue between the parties that the plaintiff is unable to pay costs. The issue is whether the Court should exercise its discretion to order security for costs in the circumstances of this case. In support of the application the defendant claims that the plaintiffs case against it is weak and it denies that any wrongful conduct on its behalf caused the plaintiff's impecuniosity [2] The plaintiff argues that this is not an appropriate case to award security for costs. It says that the reason for its impecuniosity is the wrongful conduct of the defendant.Introduction[3] The defendant was licensed by Land Transport New Zealand ("LTNZ") as a Transport Service Delivery Agent ("TSD Agent"). As such, from June 2002 to 29 September 2006 it provided inspection services for new and used vehicles imported into New Zealand. These were undertaken at the plaintiff's site in accordance with successive "AA Technical Services Agreements". The plaintiff introduced the customers to the site in order that the defendant's staff could undertake the inspections and certification. The defendant paid to the plaintiff rental for the use of the site: the plaintiff paid the defendant a fee for each vehicle inspected.First cause of action[4] From June 2002 one of the inspectors employed the defendant was Mr Mark Patmore. In October 2003 LTNZ undertook a performance review of Mr Patmore's performance and as a result of his poor performance suspended him as a vehicle inspector. Despite this, he remained in the employ of the defendant and continued to carry out inspections and certification procedures. Ultimately, these activities were discovered by the management of the defendant who terminated Mr Patmore'sinspection and certification services. Between the time of his suspension and the termination of his activities Mr Patmore inspected and certified 169 motor vehicles. The total number of vehicles inspected and certified by Mr Patmore throughout the whole period was 2,497 vehicles. Throughout the relevant period the plaintiff paid the defendant $80 plus GST per vehicle for the services undertaken by the defendant. [5] The plaintiff claims a refund of the $80 plus GST per vehicle upon the basis that the defendant failed to perform its contractual duty to provide customers of the plaintiff with valid certificates for their vehicles. In short, the plaintiff alleges a total failure of consideration. It claims that the certificates provided by the defendant are invalid and worthless. Not only has the plaintiff had to pay for worthless certificates, it has also been exposed to potential claims from vehicle owners. [6] The plaintiff's claim in respect of the first cause of action is for $200,000 plus interest and costs.Second cause of action[7] In the second cause of action the plaintiff claims damages in the sum of $3,000,000 plus interest and costs. In this regard, there was a written AA Technical Services Agreement in existence for the year 2005-2006. It expired in May 2006. Before its expiry, the plaintiff and defendant undertook negotiations for a new agreement. The plaintiff claims that the defendant submitted to the plaintiff a proposed written agreement dated May 2006. The plaintiff executed two copies of this. It was never executed by the defendant. Regardless, the plaintiff continued to engage the services of the defendant and made no arrangements for an alternative supply of vehicle inspection services. [8] The agreement which expired in May 2006 could be terminated on 3 months notice without cause or immediately for cause. It is alleged that the same conditions applied to the unsigned agreement. [9] On 29 September 2006 the defendant served a notice of immediate termination on the plaintiff. That notice recorded that the proposed new agreementhad not been executed. The principal reason given for the immediate termination was that the defendant had constantly been in breach of the agreement by not making payments when due. [10] Immediately after service of the notice of termination the defendant withdrew its inspection team from the premises and refused to provide further services. [11] The plaintiff claims that the plaintiff was not in default under the agreement in respect of overdue accounts. If there had been previous irregularities in that regard, these had been remedied before the date of the notice. [12] In addition, the plaintiff alleges that at the same time the defendant falsely advised other transport services delivery agents that there had been irregularities and/or financial difficulties with the plaintiff's business and warned them not to deal with the plaintiff. [13] As a result of the defendant's alleged wrongful conduct, the plaintiff was unable to carry on business and was forced to cease trading except for a small mechanical repair workshop. The plaintiff claims that the goodwill of the plaintiff's business was irreparably injured and that its loss and damage is estimated in the sum of $3,000,000.Principles[14] I do not intend to undertake an exhaustive review of the authorities. The principles applicable to an application for security for costs are well known. The starting point is r 60 where, in this instance, if there is reason to believe that the plaintiff is unable to pay the costs of the defendant if the plaintiff proves to be unsuccessful in its proceedings, then the Court may order the giving for security for costs. Thus, whether or not to order security and, if so, the amount thereof, is discretionary. In McLachlan & Others v MEL Network Limited (2002) 16 PRNZ 747(CA) the Court of Appeal noted that while a review of the authorities can be of assistance, it is more important to undertake a careful assessment of the circumstances. Significantly, at paragraph 15 the Court noted:The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the Courts for a genuine plaintiff is not likely to be denied.[15] In this case the most relevant factors are: a) The merits of the claim; b) Whether it is arguable that the plaintiff's impecuniosity was brought about by the defendant's wrongful actions; and c) Whether an order for security will deny the plaintiff access to justice.Merits[16] At this preliminary stage of the proceeding, as always, it is difficult to properly assess the merits of the claim. [17] In respect of the first cause of action, it is questionable if the plaintiff will be able to establish a total failure of consideration. This is because: a) While the plaintiff claims that Mr Patmore was incompetent and not properly trained as a vehicle inspector, that assertion is not supported in the letter from LTNZ dated 8 June 2007 recording his suspension. All that the letter says is that his authority was suspended "as a result of a poor performance review system (PRS) review." That statement seems to mean that Mr Patmore failed LTNZ's test. It does not automatically follow that Mr Patmore was incompetent or, more importantly, that he failed to adequately inspect the vehicles; b) It follows, that the certificates issued by Mr Patmore may not have been invalid and worthless as claimed by the plaintiff;c) Support for this contention can be gleaned from evidence to the effect that the defendant has subsequently conducted warrant of fitness history checks in respect of the 169 vehicles and that none of them exhibited any safety concerns relative to the inspections undertaken by Mr Patmore. I recognise that this evidence is not conclusive and does not apply to the balance of the 2,497 vehicles. Nevertheless, it seems to me that the plaintiff would need to prove that the certificates issued by Mr Patmore were, indeed, worthless. This may be difficult; d) There is no record of claims made by any of the owners of the affected vehicles. The potential for future claims must evaporate in time. The problem with Mr Patmore dates back to 2003, some 5 years ago. [18] In respect of the second cause of action there are the following issues between the parties: a) Was there an AA Technical Services Agreement in force as at 29 September 2006; if so what were its terms? b) In any event, did the plaintiff fail to make appropriate payments when due entitling the defendant to terminate the agreement without notice? c) Did the defendant make statements prejudicial to the plaintiff's ability to carry on business after the termination? [19] If each of these questions were answered favourably for the plaintiff, then the plaintiff would still need to prove its loss. The only evidence as to its projected profits comes from the letter dated 27 March 2008 from the plaintiff's solicitors to the solicitors for the defendant which indicates that the $3,000,000 claim was calculated by multiplying the plaintiff's projected profits of $600,000 per annum by 5 years. In this regard, even if there were a written AA Technical Services Agreement in existence between the parties or one could be implied, and that the defendant was not entitled to terminate for cause but had to give 3 months notice, thearrangement between the parties was always a tenuous one. In these circumstances, to extrapolate the projected profits out by 5 years seems unrealistic. Furthermore, the projected profits of $600,000 per annum seems high given that all indications are that this was a relatively small scale business. Its principal activity was arranging for the inspection and certification of the motor vehicles. Its other activities were relatively minor. Significantly, according to the plaintiff, as soon as the defendant terminated the agreement, the plaintiff's business collapsed. This confirms a relatively small and very vulnerable business. I note that the projected profits figure of $600,000 does not record whether the profits were gross profits or net profits. [20] Looking at the second cause of action in the light most favourable to the plaintiff, it does not seem a strong claim on its own merits. More importantly, even if the plaintiff were to succeed on all its claims, on the information before the Court, it is unlikely to obtain damages anywhere near the $3,000,000 claim.Did the defendant cause the plaintiff's precarious financial position?[21] The plaintiff claims that the immediate termination of the arrangement between the parties prevented it from having sufficient time to obtain an alternative supplier for inspection and certification services on site. This brought about the immediate collapse of the plaintiffs business. In addition, its situation was not helped by the alleged prejudicial statements made to others in the industry by or on behalf of the defendant. The defendant, on the other hand denies the prejudicial statements and claims that it was entitled to terminate the arrangement as it did. [22] The Court has no direct evidence of the prejudicial statements. However, there is evidence that an alternative supplier of inspection and certification services was not going to be available to the plaintiff whether or not it had 3 months to undertake its inquiries. Two suppliers indicated that they were not interested in providing such services to the plaintiff's site because of a downturn in business. I accept that this evidence can be questioned. Nevertheless, at this stage of the proceeding, it exists and is documented whereas the plaintiff's claim is not.[23] When one adds to the matrix the fact that the arrangement between the parties was always a tenuous one which could be terminated on 3 months notice, it could be argued that any wrongful conduct on the part of the defendant was unlikely to have had a great effect upon the plaintiff's business becoming unviable. The real problem was the nature of the arrangement in the first place. I conclude therefore, that the link between the alleged wrongful conduct of the defendant and the plaintiff's impecuniosity is tenuous at the most.Plaintiff's access to justice[24] Whether or not an order requiring the plaintiff to give security for costs will prevent the plaintiff from proceeding further is difficult to ascertain. The Court has no idea of the plaintiff's financial circumstances or resources. However, the Court is aware that Mr Smith, who ran the business of the plaintiff over the relevant period has now formed a new company known as Safer Seatbelts Limited. This company has managed to obtain certification from LTNZ for inspection and certification purposes. Thus while the plaintiff maybe out of business, it seems that its operator may have the ability to resource funds from alternative sources.Conclusion[25] I have not been convinced that the plaintiff's case is strong. It seems that it may have difficulty in substantiating the first cause of action. The merits pertaining to the second cause of action are difficult to ascertain at this stage. The plaintiff's case is not helped by its failure to provide any evidence as to the quantification of the claim for $3,000,000. The statement of claim is dated 1 June 2007. Some information as to what its claim really is could reasonably have been available to the Court by now. [26] I am not satisfied that there is a sufficient link between the alleged wrongful conduct on the part of the defendant and the plaintiff's impecuniosity as to deny the defendant's application.[27] There is not sufficient evidence before the Court to enable me to conclude that an injustice will result if this application is granted. [28] The plaintiff seeks security in the sum of $45,000. This is roughly the total costs which would be incurred by the plaintiff if it were to succeed in the action and if costs were awarded in accordance with category 2B. [29] It is unusual to award security for the full amount of estimated scale costs. There needs to be some discount and, in particular, this should have regard to the Court's assessment of the merits of the plaintiff's claim. In my opinion the discount to be applied in this case is in the order of 33%. [30] In its application, the defendant asked that the Court make an "unless" order to the effect that if security were not provided within a reasonable time the proceeding be struck out. As indicated at the hearing this part of the application will not be granted. Its effect could well be to deny the plaintiff the opportunity of proceeding at all. Whilst I may have some reservations as to the merits of the plaintiff's claims, that does not mean that I think that it is in the interests of justice that the plaintiff should be deprived of the opportunity of proceeding with its claims. The appropriate solution is provided by the rule itself which contemplates a stay of proceeding in appropriate circumstances. [31] The Court orders as follows: a) That the plaintiff pay security for the defendant's costs in the sum of $30,000 into Court; b) The security for costs is to have been paid within 42 days of the date of this judgment; c) If the security for costs is not paid in accordance with order (b) then the proceeding shall be stayed until such time as the security for costs is paid;d) Either party may apply to the Court upon 3 days notice to have the stay uplifted; e) As the defendant has succeeded in its application, costs are awarded in its favour calculated in accordance with category 2B. _____________________ Associate Judge J D Hole