SHANGHAI NEUHOF TRADE CO LTD v ZESPRI INTERNATIONAL LTD [2019] NZHC 617

SHANGHAI NEUHOF TRADE CO LTD v ZESPRI INTERNATIONAL LTD [2019] NZHC 617 [28 March2019]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2014-404-001316[2019] NZHC 617BETWEEN SHANGHAI NEUHOF TRADECOMPANY LIMITEDFirst Plaintiff/First RespondentSHANGHAI HUI ZHAN LOGISTICLIMITEDSecond Plaintiff/Second RespondentAND ZESPRI INTERNATIONAL LIMITEDDefendant/ApplicantHearing: 18 March 2019Appearances: B Gray QC and K Muller for Plaintiffs/RespondentsM Corlett QC and B McKinnon for Defendant/ApplicantJudgment: 28 March 2019JUDGMENT OF WYLIE JThis judgment was delivered by Justice WylieOn 28 March 2019 at 11.30amPursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:Solicitors/counsel:Winston Wang & Associates/B D Gray QC/K Muller, AucklandBuddle Findlay, Wellington/M Corlett QC, AucklandIntroduction[1] The defendant/applicant, Zespri International Limited ("Zespri"), has filed twointerlocutory applications. It seeks:(a) to vary an order reserving costs made by me on 26 March 2018; and(b) further security for costs.[2] Both applications are opposed by the plaintiffs/respondents, Shanghai NeuhofTrade Company Limited and Shanghai Hui Zhan Logistic Limited ("ShanghaiNeuhof" and "Shanghai Hui Zhan" respectively – jointly "the respondents").[3] I deal with each application in turn.(a) Application to vary order reserving costsBackground[4] On 26 March 2018, I gave an oral judgment in relation to an application forunless orders made by Zespri.1 Zespri was alleging that the respondents had failed tocomply with various discovery orders made by the Court. I dismissed some of Zespri'sassertions but accepted others, and I ordered the respondents to take certain additionalsteps in relation to discovery. I nevertheless declined Zespri's application for unlessorders. At the suggestion of Mr Gray QC, appearing for the respondents, and with theagreement of Mr Sizer, then acting for Zespri, I reserved costs. I held that costs couldbest be determined when the substantive proceedings come on for trial, and noted thatonly then would I be in a position to ascertain whether or not Zespri's repeated requestsfor the discovery of various documents, including Shanghai Neuhof's VAT returns,were unreasonable, or whether the respondents' delays in attending fully to discoverywere inappropriate.2[5] Notwithstanding that it agreed to the order reserving costs at the time, on 29June 2018, Zespri filed an interlocutory application, seeking to vary the order. It relied1 Shanghai Neuhof Trade Co Ltd v Zespri International Ltd [2018] NZHC 559 at [41].2 At [41].on an affidavit that had been filed by a Shanghai based lawyer retained by therespondents, Haixuan Hong, sworn on 27 April 2018. It asserted that that affidavitvindicated its position, established that Shanghai Neuhof's VAT returns had at allmaterial times been controlled by Shanghai Neuhof, and that obtaining copies of theVAT returns had always been a straightforward exercise. It said that the "specialreasons" which made it appropriate to reserve costs at the time no longer existed, andit sought costs of $58,537.50 (costs of $29,268.75 on a 2B basis with a 100 per centuplift) plus disbursements of $148,789.36.[6] The respondents filed a notice of opposition to the application. They arguedthat the order reserving costs was appropriate when it was made, that Zespri cannotnow establish that the order should not have been made, and that there continue to be"special reasons" justifying an order deferring a decision on costs until the substantiveproceeding is determined.Relevant law[7] It was common ground between counsel that I had jurisdiction to reverse theearlier order pursuant to r 14.8(2) High Court Rules 2016.3 It provides as follows:14.8 Costs on interlocutory applications[](2) Despite subclause (1), the court may reverse, discharge, or vary anorder for costs on an interlocutory application if satisfied subsequentlythat the original order should not have been made.[8] It was also common ground that there is little guidance in the decided cases asto the application of this provision but that a degree of analogy with the provisions ofr 7.49 – allowing the review of interlocutory orders – may be appropriate.[9] Zespri argued the requirement under r 14.8(2) that the Court be "satisfied" is alow standard, and noted that it has been held in a number of contexts that the word"satisfied" requires simply that the Court "make up its mind", and that "it is indicativeof a state where the Court on the evidence comes to a judicial decision".43 All references to rules are to the High Court Rules 2016 unless otherwise stated.4 Blythe v Blythe [1996] AC 643 (HL).[10] The plaintiffs did not agree that the use of the word "satisfied' sets a lowstandard, and argued that the wording of the rule speaks for itself.Analysis[11] Unless there are "special reasons to the contrary", costs on an opposedinterlocutory application should be fixed when the application is determined –r 14.8(1). Both parties, in effect, accepted that there were special reasons not to fixcosts on 26 March 2018 and I so ordered.[12] Rule 14.8(2) does not expressly prohibit the Court from acting when theoriginal order was made by consent – as in this case. This is in contrast to r 7.49. Itprovides that no application can be made to vary or rescind an interlocutory ordermade with the consent of the parties – r 7.49(2)(a). I nevertheless consider that thefact that the order reserving costs was made by consent is a relevant consideration,which I can properly take into account, and Mr Corlett QC, appearing for Zespri,properly accepted that it is for Zespri to satisfy the Court that the order reserving costsshould be reversed or varied.[13] Various consent orders had been made in relation to discovery – by Heath J on24 March 2016, by me on 14 June 2016, and by Muir J on 11 October 2016. Thoseorders required the respondents to, inter alia, discover Shanghai Neuhof's VAT returns.The respondents did not do so and Zespri filed an interlocutory application seeking tostay or strike out the proceedings in April 2017. In support of that application, Zesprifiled an affidavit from Mr Bao, who explained the process for the retrieval of VATreturns from the taxation authorities in China. The application came before me. In aninterim judgment issued on 5 July 2017, and by consent, I adjourned Zespri'sapplication for a stay or strike out, and required the respondents to take the varioussteps set out in a schedule attached to my judgment.[14] Affidavit evidence later filed disclosed that, in September 2017, therespondents, through a Mr Chen, sought the VAT returns from the relevant Chinesetaxation authorities, but had been unable to obtain them. Rather, they obtained only asummary of the amount of VAT paid.[15] Zespri was not happy with the steps taken by the respondents, and sought thatits adjourned April 2017 application for a stay or strike out should be brought on forhearing.[16] This led to the hearing on 26 March 2018. At the hearing, Zespri complainedthat the respondents' application to the Chinese authorities for the VAT returns hadbeen incorrectly worded, and it argued that a number of the steps which I had directedshould be taken in my interim judgment of 5 July 2017 were still outstanding. Therespondents asserted in reply that they had made their request in the correct form, andthey were adamant that they had taken all reasonable steps required by my interimjudgment, but had nevertheless been unable to obtain the VAT returns.[17] In my judgment of 26 March 2017, I rejected parts of Zespri's affidavitevidence as being speculative, and other parts as not being of material assistance. Iwas not, on the materials then before me, prepared to require the respondents to re-take the various steps set out in the interim judgment, but instead using the terminologywhich Zespri asserted they should have used in the first place. I considered that to doso would be disproportionate, and that what Zespri was asserting should be done wasnot required by my interim judgment. I was not persuaded that the respondents hadbreached the obligations imposed on them by one clause in the schedule to the interimjudgment – cl 17. I was however satisfied that the respondents had failed to complywith another clause – cl 18. Inter alia, that clause required the respondents to file adocument known as a Request for Verification with a body in China called the InitialTax Authority pursuant to a document headed "The Announcement of the StateAdministration of Taxation on Promulgating the Administrative Measures for TaxRelated Information Inquiry". I ordered the respondents to file a Request forVerification with the authorities in China and to apply for reconsideration of the initialdisclosure application to the State Administration for Taxation (SAT) under therelevant Chinese legal provisions.[18] Mr Hong, an independent solicitor in Shanghai, was engaged by therespondents to take the various steps necessary to comply with my orders. Hisaffidavit sworn on 27 April 2018 disclosed that, on 16 April 2018, the tax authoritiesin China rejected the Request for Verification. Nevertheless, Mr Hong had adiscussion with the responsible tax administrator – Ms Wang – and she requested therespondents to resubmit their initial application. Mr Hong did so, and that eventuallyresulted in the provision of the VAT returns requested. They have since beendiscovered.[19] Mr Corlett submitted that I should revisit the order reserving costs, arguing thatI can now assess the merits of the parties' respective positions.[20] I am not sure that Mr Hong's affidavit is as clear as Mr Corlett suggests.[21] Mr Hong's affidavit sets out his interactions with Ms Wang. She hadpreviously dealt with the tax information request submitted by Mr Chen on ShanghaiNeuhof's behalf in September 2017. Mr Hong deposes that the request was drafted inaccordance with relevant Chinese legal requirements. As directed by me, he submitteda Request for Verification. His evidence is that Ms Wang was initially uncooperativeand that she refused either to accept the request or to provide any written notice of itsrejection. Ms Wang gave what Mr Hong considered to be a confusing explanation ofher dealings with Mr Chen in September 2017, claiming that she had disclosed thelimited information given to Mr Chen under "internal Shanghai SAT rules", and notthe apparently applicable Information Inquiry Law, but providing no explanation forthis. She also asserted that, as the SAT's response was not issued under theInformation Inquiry Law, she could not accept the Request for Verification.[22] It is difficult to know from the materials filed what to make of the events inChina. As noted, according to Mr Hong, the tax information request that Mr Chensubmitted was in the relevant form required by the Information Inquiry Law in China.It appears it was to be in the same form as a request submitted by a Mr Yan on behalfof one of Zespri's Chinese subsidiaries, which Ms Wang did act on. While Mr Corlettargued that two Chinese characters were missing, there is no expert evidence tosupport that submission.[23] I do not consider that I am much better placed now than I was at the time ofthe hearing on 26 March 2018 to determine whether or not Zespri's repeated requestsfor discovery of the VAT returns were unreasonable and disproportionate, or whetherthe respondents' delay in discovering the same, was inappropriate and improper.[24] In short, I am not presently persuaded that the issue is as simple as Mr Corlettsuggests – namely that the VAT returns were always within the respondents' control,that they were readily available and the respondents needed only have filled out theform correctly.[25] Further, I consider that I am not, at present, sufficiently informed to knowwhether or not the provision of the VAT returns was as essential as Zespri suggests, orwhether Zespri's oft repeated requests that the respondents should discover the samewere harassment, as Mr Gray suggests.[26] These matters will only become clear at the substantive trial. There were andthere continue to be "special reasons" to reserve costs on Zespri's application heardon 26 March 2018. Accordingly, I decline Zespri's request to vary the order reservingcosts made by me on that date.(b) Application for further security for costsBackground[27] On 27 June 2018, Zespri made application seeking additional security for costs.[28] In 2014, the parties agreed that the respondents would pay $165,266 by way ofsecurity for costs. That agreement was based on a 3B calculation of the then estimatedsteps to trial, and assumed a three-week trial. Security was to be paid in stages:(a) $40,000 immediately;(b) $40,000 on completion of discovery;(c) $40,000 when the proceeding was set down to be heard; and(d) $45,266 one month before trial.[29] The first three payments have been made.[30] At the time of the original agreement, Zespri expressly reserved the ability toapply for further security if the sums agreed were considered to be inadequate at a laterstage in the proceeding.Submissions[31] Zespri now considers that the sum ordered to be paid as security for costs isinadequate. It has recently estimated its costs on a mixed 3B/3C basis, plusdisbursements and Court fees (assuming a 30 day trial) at $320,532. It estimates thatit will incur additional disbursements in obtaining expert evidence in the amount of$228,250 (inclusive of GST), and it initially sought that security for costs should beincreased to $548,782. In the course of the argument before me, Mr Corlett acceptedthat Zespri would be entitled to claim the GST component in its likely experts' feesback from the Inland Revenue Department. He accepted that it followed that its claimfor disbursements should be reduced accordingly.[32] Mr Corlett nevertheless argued that the previously agreed sum is nowsubstantively inadequate to cover Zespri's reasonable scale costs should therespondents be unsuccessful at trial. He acknowledged that two of Zespri's affirmativedefences have also been pleaded as counterclaims, but submitted that thecounterclaims do not add any additional complexity or create additional evidentialrequirements beyond the matters pleaded by Zespri in its affirmative defences. Heargued that the hearing time will not be increased because of the counterclaims, andthat, therefore, there should be no deduction in the quantum of security on the basisthat the counterclaims have been filed.[33] Mr Gray, for the respondents, argued that no increase in the sum ordered in2014 is warranted, let alone the uplift sought by Zespri. He submitted that the sumssought are unreasonable and disproportionate and that much of the additional costslikely to be incurred are due to the complexity, processes, and extra hearing timerequired as a result of Zespri's introduction into the proceedings of the counterclaimsalleging conspiracy by the respondents to defraud and deceit.Analysis[34] The application was brought pursuant to r 5.45 of the High Court Rules.Relevantly, that rule provides: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) [](ii) is a corporation incorporated outside New Zealand; or(iii) [][](2) A Judge may, if the Judge thinks it is just in all the circumstances,order the giving of security for costs.[](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[35] The respondents accepted the Court has jurisdiction to make an order under therule and that the making of the consent order in 2014 does not preclude a subsequentreview by the Court of the sum ordered. Nor was there any dispute that the Court'sjurisdiction to make an award for security for costs is triggered, because bothrespondents are companies domiciled in China.[36] It was common ground that, where a plaintiff is resident overseas, thefollowing principles are relevant:5(a) there is no inflexible principle that such a plaintiff with no assets withinthe jurisdiction should normally be ordered to give security;5 Aquaculture Corp v McFarlane Laboratories (1984) Ltd (1987) 1 PRNZ 467 (HC).(b) the Court's discretion is to be exercised by taking into account all thecircumstances of the case and arriving at the conclusion which will dojustice between the parties;(c) the ease, convenience and cost of enforcing costs judgment in theplaintiff's country of residence are primary considerations; and(d) otherwise the principles applicable to applications for security by aplaintiff resident overseas are those applicable under r 5.45(1)(b).[37] Counsel also agreed that the quantum of security does not necessarily permitof mathematical calculation, and that the amount should be fixed by reference to whatthe Court thinks fit in all the circumstances. Those circumstances can include theamount and nature of the relief claimed, the nature of the proceeding, including thecomplexity and novelty of the issues, the estimated duration of the trial, and theprobable costs payable if the plaintiff is unsuccessful, and perhaps also the defendant'sestimated actual (solicitor and client) costs.[38] I turn to consider the circumstances of this case.[39] Here, neither of the respondents has assets in New Zealand. Moreover, therespondents through their solicitors have indicated they are being funded by familymembers, including trusts associated with those family members. It is likely that therecould be a very real issue for Zespri in the event that it had to enforce any costs order.There is no certainty that a costs order issued by a New Zealand Court would berecognised in China, or enforced in that country. Mr Corlett was only able to refer meto two cases in which a Chinese court had recognised a judgment issued by a court ina foreign country, and in both cases a bilateral enforcement treaty was in place.6Mr Corlett advised me that no bilateral treaty currently exists between China and NewZealand insofar as he was aware. Mr Gray did not take issue with this. At the veryleast, enforcement of a civil costs judgment in China is likely to be very costly.6 Kolmar Group AG v Giang SU Textile Industry (Group) Import & Export Co Ltd (2016) (Manjing)and Liu v Taoli & Tong Wu (2015) (Wuhan).[40] The respondents have pleaded two claims – both in contract. First, therespondents sue on the primary contract they say was in place between them andZespri between 2000 and 2011. They allege that Zespri has breached that contract byfailing to reimburse them for duty paid by them to the customs authorities in China.Secondly, they sue on a second contract they allege existed. They say that Zespriasked Shanghai Neuhof to build a cool store for it, and agreed that it would purchasefrom them cool storage and services in respect of a specified number of trays ofkiwifruit each year. They say that when Zespri terminated the primary contract withthem, it thereby breached the cool store contract. The total amount claimed in respectof the main contract is approximately NZD 8,200,000, together with interest and costs.A further NZD 17,600,000, together with interest and costs, is claimed in regard to thecool store contract.[41] As I have already commented earlier in these proceedings, the claims pleadedby the plaintiffs are relatively straightforward.7 I suspect that the devil will be in thedetail.[42] Zespri, for its part, denies the terms of the main contract between it and therespondents, and it says it has no liability to pay the amount of duty claimed by therespondents. It also says that even if the respondents were entitled to deduct theamount claimed from future consignments of kiwifruit (which is denied), then, fromat least January 2012, Shanghai Neuhof was liable to pay it for goods received, againstwhich it would have deducted or set-off the amount claimed. It denies the cool storecontract as alleged. Zespri also raises four affirmative defences, namely that:(a) the respondents' claims are founded on unlawful acts;(b) there was no shortfall of duty;(c) it is entitled to an equitable set-off because there was a conspiracy toinjure by the respondents; and7 Shanghai Neuhof Trade Company Ltd v Zespri International Ltd, HC, Auckland CIV-2014-404-001316, minute dated 8 February 2019 at [5(a)].(d) it is entitled to an equitable set-off, consequent on an alleged deceit bythe respondents.The third and fourth affirmative defences result in counterclaims against the plaintiffs.The first counterclaim seeks damages of some $37 million (NZ) plus interest and costsand in the second counterclaim damages are claimed of some $20 million (NZ) plusinterest and costs.[43] I have already observed that the third and fourth affirmative defences, and thecounterclaims that arise from them, do not, in my view, flow on from the matters raisedby the respondents.8 Rather, they are discreet and separate allegations. Both arefounded on an assertion that the respondents tried to recover both duty and the VATpayable from Zespri, and that Zespri was liable to reimburse the respondents only forduty and not VAT. It is asserted that spreadsheets sent by the respondents to Zespriclaimed the total amount, and sought to induce Zespri to reimburse them for that totalsum.[44] The respondents for their part deny the factual allegations relied on by Zespri,and also argue that the counterclaims are statute barred.[45] Conspiracy and deceit are of course serious allegations, and because they arecounterclaims, they are, at law, separate proceedings in their own right. They willstand or fall regardless of the fate of the respondents' claims.[46] The hearing of proceedings is likely to take longer than was originallyestimated. Security for costs was originally fixed on the basis of a three week trial.The matter has now been allocated a six week trial, currently due to commence on 1July 2019. Mr Gray tells me that the respondents will be calling four or five witnesses.He also accepts that the hearing is likely to progress slowly, given that some of thewitnesses will need interpreters to give their evidence.[47] I accept Zespri's calculation of its costs on a 3B/3C basis, and I also acceptMr Corlett's submission that Zespri's actual costs are likely to be substantially in8 At [5(c)].excess of that sum. Indeed, the affidavit evidence suggests that Zespri's actual costsare likely to exceed $1 million.[48] I note however that no attempt has been made by Zespri to break down thecosts it will incur in defending the respondents' claims against it, and the costs it willincur in prosecuting its counterclaims against the respondents. The respondents are inthe position of defendants in terms of r 5.45(6) in relation to Zespri's counterclaims.Requiring a defendant to provide security for costs to a plaintiff is not somethingcontemplated by the rules. I do not consider that the respondents should be requiredto provide security for costs for steps taken or to be taken by Zespri to pursue itscounterclaims. Nor do I consider that the counterclaims are inextricably mixed withthe subject matter of the respondents' claims and the other affirmative defences. TheVAT claims and the allegations of conspiracy and deceit are separate and distinct.[49] Nevertheless, I consider that it is appropriate to increase the quantum of thesecurity for costs ordered to recognise the reality of the situation. Zespri will havedifficulty in enforcing any costs award it may receive. It will face significant costs inresisting the respondents' claims. Zespri seeks a substantial uplift. It is impossible toapply a mathematical approach, because it is not known how much time will be takenin considering Zespri's counterclaims, or what disbursements will be incurred as aresult of the counterclaims.[50] Looking at the matter holistically, and taking into account that interest earnedon the monies paid into Court will be available, in my view, security overall in the sumof $300,000 is appropriate. From that the amount, the sum already agreed and in partpaid, must be deducted – leaving a balance of $134,734. I make an order increasingthe quantum of the security for costs ordered by that amount.[51] Zespri was not opposed to the staged payment of any additional securityordered.[52] I direct that the sum of $134,734 (together with the amount of $45,266outstanding under the initial order) is to be paid or otherwise secured as provided forin r 5.45(34)(a) as follows:(a) $44,911.33 by 12 April 2019;(b) $44,911.33 two months before trial; and(c) $90,177.34 ($44,911.34 plus $45,266 payable under the initial order)one month before trial.[53] I do not at this stage propose to order a stay if the payments are not made asdirected. All payments to date have been made on time and there is no reason toassume that that pattern will not continue. I do however reserve leave to either partyto apply to the Court for further orders if that proves necessary.Costs[54] Zespri has failed in its application to set aside the order reserving costs. It hassucceeded in part its application for increased security. It is my preliminary view thatcosts and disbursements should lie where they fall.[55] If the either party disagrees with that new assessment, then I make thefollowing directions:(a) within 10 working days of the date of this judgment:(i) the respondents are to file a memorandum seeking costs anddisbursements in regard to the application to set aside the orderreserving costs; and(ii) Zespri are to file a memorandum for costs and disbursements inregard to the application seeking increased security;(b) within a further 10 working days, both parties are to file memoranda inreply to the other party's memoranda;(c) all memoranda are not to exceed five pages.I will then deal with the issue of costs and disbursements on the papers, unless I requirethe assistance of counsel._____________________________________Wylie J