Tom Ryan Cartage Limited v W Stevenson & Sons Limited HC Auckland CIV 2009-404-5582 [2011] NZHC 270 (29 March 2011)

Last Updated: 25 June 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV 2009-404-5582}

BETWEEN TOM RYAN CARTAGE LIMITED Plaintiff

AND W STEVENSON & SONS LIMITED Defendant

Hearing: 17 December 2010

Appearances: E Telle for plaintiff

A I Denton and J S Langstone for Defendant

Judgment: 29 March 2011

_{JUDGMENT OF ALLAN J}

In accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 11.30 am on Tuesday 29 March 2011

Solicitors:

Neilsons Lawyers, Onehunga, [e-mail]

_{Wilson Harle, Auckland,} [e-mail]

TOM RYAN CARTAGE LIMITED V W STEVENSON & SONS LIMITED HC AK CIV 2009-404-5582 29

March 2011

[1] This is an application by the plaintiff for particular discovery. Following the filing of the application, the plaintiff has filed a third amended statement of claim and the defendant has filed a statement of defence to that statement of claim. So the pleadings have been significantly refined since the application was first made.

[2] The plaintiff is a transport operator and general carrier. The defendant is a supplier of building products. For some years the plaintiff provided cartage services for the defendant in relation to the latter’s masonry business.

[3] In or about August 2006, the defendant suggested to the plaintiff that the latter become the preferred carrier for the whole of the defendant’s masonry products business. Negotiations followed. They culminated in a contract, the terms of which are materially in dispute. It was envisaged by the parties that the contract operate for a four year period between 1 January 2007 and 31 December 2010, although there was a right of earlier termination on either side.

[4] In order to service the defendant’s requirements, the plaintiff was obliged to acquire a fleet of heavy trucks, for which it obtained very substantial loan finance. Unfortunately, the defendant’s masonry business was in financial difficulties and, in December 2008, the plaintiff was told that the defendant was seeking to sell the business.

[5] In February 2009, a sale was effected. The result was that, from about

1 March 2009, no further cartage work was available from the defendant. The plaintiff was obliged to lay off staff and to sell the fleet of trucks acquired to service the defendant’s requirements. In doing so, it says that it suffered significant financial losses, for which the defendant has wrongfully denied any legal liability. This proceeding has followed.

The statement of claim

[6] The plaintiff’s third amended statement of claim is dated 24 August 2010, some weeks after the filing of the present application. This latest pleading appreciably widens the range of allegations against the defendant.

[7] The current statement of claim is extensive; it pleads six causes of action incorporating detailed factual allegations. For present purposes it is sufficient to summarise the factual aspects of the pleading in the following way:

(a) During the course of preliminary negotiations in the latter part of

2006, the parties agreed that the contractual arrangements would involve a four year term, but there was a general understanding that if the business was successful it would extend beyond that;

(b) The plaintiff would need to provide a dedicated fleet of new trucks and trailers to service the defendant’s requests;

(c) The plaintiff initially prepared a draft written contract which was largely (but on the plaintiff’s case not entirely) superseded by what transpired later;

(d) There was an oral representation on behalf of the defendant that if the contract was terminated by the defendant before the expiry of the four year term, the defendant would buy the fleet from the plaintiff;

(e) The defendant made certain representations to the plaintiff as to the income stream that would be derived by the plaintiff from the work likely to be available from the defendant;

(f) In November 2006 the defendant drafted its own version of a proposed contract, later slightly modified;

(g) No version of the written contract was ever signed by the parties;

(h) A right of prior termination on either side was to be exercised by the giving of a six months written notice;

(i) Between early 2007 and early 2009 the defendant took various steps aimed at selling its masonry business;

(j) Ultimately, the business was sold in February 2009 to Fletcher Building/Firth, the purchasers having obtained Commerce Commission approval for the purpose;

(k) The defendant closed its business in late February 2009 without having given a six month written notice or any reasonable or proper notice to the plaintiff;

(l) The defendant refused to purchase the plaintiff’s fleet of trucks

following the closure of the business.

[8] The plaintiff’s alleged losses are set out in paragraph 24 of the third amended statement of claim. They total approximately $2.43 million and comprise principally the sums repaid to the finance companies, wages paid post termination, insurance, repainting costs for the trucks, and a sum of $440,000 claimed for loss of profits between the date of cancellation and the termination of the four year term. The plaintiff allows a credit of $1.156 million in respect of the value of the retained trucks.

The causes of action

[9] The plaintiff first pleads three separate breaches of contract. The first alleges wrongful cancellation of the contract prior to expiration of the four year term. The second alleges a wrongful refusal to purchase the trucks from the plaintiff upon termination. The third reads:

[The defendant] failed to give six months notice in writing and/or any reasonable or proper notice of the termination in writing, specifying to the plaintiff all of the defendant’s intentions in relation to when and how the

masonry contract would and/or could be brought to an end prior to

31 December 2010.

[10] The second cause of action alleges breaches of a contractual duty of good faith in that:

(a) The defendant failed to inform the plaintiff during negotiations that the defendant’s masonry business had suffered substantial losses since about early 2006, or that it had attempted to sell the business in about

2005;

(b) Certain oral assurances given on behalf of the defendant as to the level of work likely to be derived by the plaintiff were inconsistent with the defendant’s on-going losses, and further, the defendant failed to advise the plaintiff of the risk of early termination of the agreement by reason of those losses.

[11] It is further asserted that the defendant was in breach of a contractual duty of good faith by:

(a) Not informing the plaintiff of the steps it was taking to sell the masonry business until late December 2008;

(b) Failing to purchase the fleet from the plaintiff;

(c) Failing to involve the plaintiff in discussions with purchasers;

(d) Failing to ensure that the sale of the masonry business made provision

for the continuation of the plaintiff’s masonry cartage business.

[12] A third cause of action pleads breach of collateral contract as an alternative to the preceding causes of action.

[13] A fourth cause of action alleges breaches of pre-contractual representations as to:

(a) The defendant’s intention to repurchase the fleet in the event of

termination of the contract prior to the expiry of the four year term; (b) The level of the income stream likely to be derived by the plaintiff; (c) The overall strength of the defendant’s masonry business;

(d) Prospects for a further extension of the business relationship at the expiration of the four year term.

[14] A fifth cause of action pleads the provisions of the Fair Trading Act 1986 and a sixth pleads an estoppel, which it is alleged precludes the defendant from relying on any alleged waiver on the part of the plaintiff.

The statement of defence

[15] In its statement of defence the defendant:

(a) Admits that the defendant’s masonry business had been suffering

losses since at least 2006;

(b) Pleads that the first draft contract prepared by the plaintiff was subsequently entirely superseded by the defendant’s draft agreement;

(c) Says that the entire agreement of the parties is to be found in the written agreement prepared by the defendant;

(d) Denies there was ever any representation or agreement as to the purchase of the fleet by the defendant in the event of termination;

(e) Accepts that the plaintiff would have had access to certain historical delivery data, but denies any representation as to the plaintiff’s future revenue or profits;

(f) Alleges that following the sale of the defendant’s masonry business, the parties to the proceeding agreed that their agreement had come to an end, and that the defendant had no continuing obligation to the plaintiff;

(g) Pleads that the plaintiff waived any entitlement to a six months notice from the defendant upon sale of the masonry business, or alternatively is estopped from asserting that the defendant was required to give written notice;

(h) Denies that it was under any obligation to provide any particular level of business to the defendant during the currency of the agreement.

(i) Denies that any contractual duty of good faith arose but that if it did, the defendant was not in breach. In particular, it denies that it was under any obligation to involve the plaintiff in the sale of the business, or to consult with it;

(j) Denies on various grounds that the plaintiff is entitled to the damages claimed.

[16] Of particular importance for present purposes is the acknowledgement that the defendant was, at the time of its negotiations with the plaintiff in 2006, suffering losses in its masonry business and had been doing so since at least the commencement of that year.

The application

[17] In its original form the plaintiff’s application sought discovery in the following terms:

1. The defendant provide further and better/particular discovery to the plaintiff by a verified list of documents to include the following documents:

1.1 Computer generated print-outs evidencing and/or identifying the date of creation of the following documents:

(a) File note of telephone conversation with Tom Ryan

23 December 2008 (document 191 of the

defendant’s verified affidavit of documents

9 February 2010).

(b) File note of meeting with Tom Ryan 9 March 2009 (document 192 of the defendant’s verified affidavit of documents 9 February 2010).

1.2 All documents showing the financial losses suffered by the defendant in relation to the masonry business from 1 January

2005 to 31 March 2009

(a) Year ending and/or six monthly and/or quarterly financial statements/company accounts showing profit/loss of the masonry business;

(b) Any internal financial analysis/report about that loss; (c) Any external financial report from any

accountant/financial adviser/consultant engaged by

the defendant in relation to the masonry business.

1.3 All documents created as a result of discussions and/or negotiations for the proposed purchase and later eventual purchase of the masonry business by Firth/Fletcher building (Firth) from the defendant between 1 January 2005 to

1 March 2009 as follows:

(a) All correspondence, file notes, memoranda, meeting minutes and reports exchanged directly between Firth and/or its legal advisers and the defendant and/or its legal advisers or created as a result of meetings and/or discussions between the defendant and Firth and/or their legal advisers;

(b) Any application, decision, correspondence, memoranda and file notes between the defendant and/or its lawyers and the Commerce Commission and/or created as a result of discussions or meetings between the defendant and/or its lawyers and the Commerce Commission concerning Firth’s/the defendant’s applications pursuant to s 66 of the Commerce Act 1986 for consent for Firth to acquire the plaintiff’s masonry business;

(c) Sale and purchase agreement(s) entered into between First and the defendant for the sale and purchase of the masonry business.

1.4 Extracts of all Board of Directors’ meetings and internal management meetings of the defendant in relation to the defendant’s masonry business between 1 January 2006 to

31 March 2009 in relation to:

(a) Losses suffered by the masonry business;

(b) Discussions and/or negotiations for the proposed sale of the masonry business to Firth and other parties which entered into any discussions and/or negotiations with the defendant for the proposed sale and purchase of the defendant’s masonry business.

(c) Any application made by the defendant and/or Firth to the Commerce Commission for the sale of the defendant’s masonry business to Firth;

(d) Contracting and later terminating the plaintiff as the defendant’s preferred supplier for the distribution of its masonry products in relation to the masonry business;

(e) Selling of the masonry business by the defendant to

Firth.

1.5 Any other internal or external documents created by and/or for the defendant in relation to the defendant’s exit strategy to sell the masonry business and/or release it from any of its obligations pursuant to the masonry business between

1 January 2005 and 31 March 2009.

1.6 Any other relevant documents that arise out of the above particular discovery.

Legal principles

[18] It is common ground that the well established principles set out in Compagnie Financiere et Commerciale du Pacifique v Peruvian Guano[1] apply. A party’s discovery obligation extends to every document which relates to matters in question in a proceeding, including documents which may enable the opposite party to advance its own case, or damage that of its adversary, or which may fairly lead to a relevant train of inquiry. But a document relating to an undisputed matter need not be discovered.[2] The documents required must be described with sufficient

_{particularity to enable the Court to ascertain exactly what is being sought.}[3]

[19] Relevance is to be determined by reference to the issues in dispute. Those issues in turn are to be determined by reference to the pleadings.[4]

Discussion

[20] It is appropriate to observe at the outset that the Court has been hampered somewhat by the generality which pervaded the plaintiff’s submissions. The Court is advised that no reliance is now placed on paragraph 1.1 of the application, but that the plaintiff seeks the orders set out in paragraphs 1.2 and 1.5, as to all documents containing financial information and falling within those sub-paragraphs. Where certain discovery has already been made in redacted form, an order is sought directing that the redacted material be reinstated.

[21] Much of the material sought is concerned with the plaintiff’s allegation that it was given to understand at the time of the negotiations preceding the contract that the defendant’s masonry business was thriving and that the plaintiff could expect its new cartage business to be profitable accordingly. Various alleged representations along those lines appear in the third amended statement of claim.

[22] Mr Ryan, managing director of the plaintiff, says that he would never have permitted the plaintiff to enter into the contract had he been aware that the defendant was suffering on-going losses at the time of the negotiations.

[23] In its statement of defence the defendant admits that losses were being suffered in the masonry business “ ...since at least 2006”.

[24] In argument, Mr Telle contends that that admission does not go far enough from the point of view of the plaintiff, which will argue at trial that the defendant knew, during the negotiations and at the time of entering into the contract, that its losses were on-going and unsustainable.

[25] In response, Mr Denton advises the Court that the defendant is prepared to amend its pleading to incorporate an admission that its masonry division had been

suffering substantial losses from at least the beginning of 2006, which were not disclosed to the plaintiff during the negotiations, or at the time of entering into the contract.

[26] Mr Telle argues that an admission couched in those terms remains unsatisfactory for the plaintiff’s purposes, in that it does not include an acknowledgement that the on-going losses were “unsustainable”. It seems to me that the distinction is immaterial. The plaintiff’s position is that, had it known that the defendant’s masonry business was sustaining substantial losses throughout 2006, it would never have contemplated entering into the contract with the defendant.

[27] That being so, the fact and materiality of the defendant’s losses during 2006 being admitted, they are no longer a matter in issue in the proceeding. It follows that documents concerned with that issue need not be discovered.

[28] Beyond that, the Court is hindered to a degree by the breadth both of Mr Telle’s written synopsis and his oral argument. In essence, the plaintiff simply seeks all of the documents falling into categories 1.2-1.5 inclusive, and justifies the application by reference to the statement of claim as a whole.

[29] That approach is less than satisfactory. Applications for particular discovery ought to be supported by focused argument which directs the Court’s attention to particular classes of document in the context of identified disputed issues.

[30] The plaintiff seeks, in effect, all of the defendant’s documents containing financial information for the period 1 January 2005 to 31 March 2009. The documents are required, Mr Telle argues, because they will enable the plaintiff to establish at trial:

(a) what the defendant ought to have disclosed to the plaintiff during negotiations with respect to the financial position of the masonry business;

(b) the extent to which the financial information actually disclosed to the plaintiff during those negotiations was misleading;

(c) that the defendant ought to have given a six month notice to the plaintiff prior to termination.

[31] As to the last of these identified issues, there seems an element of inconsistency between an argument of that sort on the one hand, and a claim that the defendant was not entitled to terminate the agreement at all on the other. But that is a matter for trial.

[32] The defendant accepts that, from early 2006 on, it was making substantial losses. During the course of applications to the Commerce Commission it advised that body that the losses were unsustainable. The plaintiff has already obtained a number of documents lodged with the Commission during the determination of those applications. The fact of the on-going losses is not a matter in dispute. I have not been persuaded that the plaintiff ought to have further discovery of documents going to that issue. It may be that the plaintiff, by refining its argument and narrowing down the scope of its application, can demonstrate an entitlement to particular documents, but the present application, couched in such wide terms, cannot succeed.

[33] The defendant has given discovery of its internal documents which touch upon the defendant’s entry into the contract with the plaintiff. It has also discovered pre-contractual correspondence between the parties. Financial material relating to amounts paid to the plaintiff has also been discovered.

[34] Mr Denton submits that the defendant’s overall financial position at the time of any alleged representation to the plaintiff about the plaintiff’s future contractual income is irrelevant to the matters remaining in issue. I accept that submission. Any documents actually shown to the plaintiff during the contractual negotiations are obviously relevant. It is not suggested that such documents have not been discovered. At trial the issue will be whether the pleaded representations were made, and whether or not they were misleading. The plaintiff will be able to compare the financial and business material appearing in the documents it was actually shown,

with results actually achieved. It will be able to rely as well on the defendant’s

admission that at all material times it was sustaining substantial losses.

[35] Having said that, the plaintiff does not appear to be claiming damages for any shortfall between represented revenue and what was actually achieved during the currency of the contract.

[36] Mr Telle submits that financial documents after February 2007 are relevant to the circumstances in which the contract was terminated, because the plaintiff will assert that the defendant should have given earlier notice of termination. The defendant’s position is that it was not required to give any such notice. It is difficult to see how the defendant’s financial information will assist in a determination of that question, which will turn on disputed issues of fact and law. If the plaintiff is correct, then the defendant was in breach by not giving a six months notice. If the defendant is correct, then no notice was required. But the financial documents do not assist on the point. If the plaintiff is here relying on a contractual duty of good faith to keep it in the loop during 2007-2008, it has the defendant’s admission of substantial on-going losses to rely on.

[37] It is perhaps worth observing that the plaintiff does not allege that the defendant is in breach of any pre-contractual representation regarding the overall profitability of the defendant’s masonry business. There is nothing to suggest that the plaintiff undertook a due diligence exercise, or that it made inquiries about the profitability of that business. So the underlying profitability of the masonry business, as distinct from the volume of business available to the plaintiff, is not a matter in issue in the proceeding. The plaintiff has pleaded the making of pre- contractual representations as to the revenue and profitability of the cartage work that the plaintiff would enjoy, but that raises quite different issues.

[38] Mr Telle says further that the plaintiff is entitled to discovery of all documents relating to the defendant’s sale of the masonry business to a third party in February 2009. He links that contention with the plaintiff’s allegation that it ought to have been involved in those negotiations and its interests safeguarded. But the plaintiff does not need the defendant’s documents in order to pursue that argument.

If it is correct in its claim that the defendant was in breach of an obligation to look after the plaintiff ’s interests at the time of the sale, then certain legal and financial consequences may flow. But the existence of the obligation will not be determined by reference to the defendant’s documents concerning the sale. It is common ground that the plaintiff was not involved, and that the defendant did not secure for the plaintiff an on-going contract with the purchaser.

Conclusion

[39] This is a wide ranging application for very extensive particular discovery in the context of a relatively complex pleading. In order to justify the making of the orders sought, the plaintiff was obliged, in my view, to analyse the pleadings and to demonstrate to the Court that the discovery sought was relevant to one or more of the live issues in the case. Mr Telle chose to adopt a relatively broad brush approach, both in his written synopsis and in oral argument. While in a less complex context that may have been appropriate, it did not assist here. I am not persuaded that the plaintiff has made out a case for the further discovery sought.

[40] I reach that conclusion in the light of Mr Denton’s indication that the defendant will amend its statement of defence by admitting that, from early 2006 onward, the defendant was incurring substantial losses in its masonry business. There will be an order directing the defendant to make an amendment in these terms.

Confidentiality and redaction

[41] These issues were barely touched upon by Mr Telle during the course of argument. Confidentiality issues were not addressed at all. The redaction issue was mentioned only briefly.

[42] The plaintiff seeks orders directing the defendant to restore redacted material from documents already discovered. It is not possible to deal with such an application “in the round”. Some material may qualify for redaction; other portions may not.

[43] The application is adjourned for further argument if necessary, insofar as it is concerned with confidentiality and redaction matters. More broadly, the application for particular discovery is dismissed.

Costs

[44] Costs are reserved. Counsel may file memoranda if they are unable to agree. It should be noted that the defendant’s offer to amend its pleading in respect of losses in 2006 has played no small part in the outcome of the present application. In other words, it may have been necessary to make a confined order for further particular discovery, but for the proposed amendment. That circumstance will no doubt be taken into account by counsel in their approach to costs.

Next mention

[45] The proceeding is set down for further mention in the Commercial List at

9.30 am on Friday 8 April 2011.

C J Allan J

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[1] Compagnie Financiere et Commerciale du Pacifique v Peruvian Guano (1882) 11 QBD 55 (CA) at _[53].

[2] _{Bell v University of Auckland [1969] NZLR 1029 (SC) at 1034.}

[3] AMP Society v Architectural Windows Ltd [1986] 2 NZLR 190 (HC) at 202.

[4] New Zealand Rail Ltd v Port Marlborough New Zealand Ltd [1993] 2 NZLR 641 (CA) at 644.