Greymouth Holdings Ltd v Jet Trustees Limited [2012] NZHC 2620 (9 October 2012)

Last Updated: 30 October 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-005309 [2012] NZHC 2620

BETWEEN GREYMOUTH HOLDINGS LTD First Plaintiff

AND R M P DUNPHY Second Plaintiff

AND P H AND J A MASFEN Third Plaintiffs

AND JET TRUSTEES LIMITED First Defendant

AND J G STURGESS Second Defendant

AND JOHN STURGESS & ASSOCIATES LIMITED

Third Defendant

AND GREYMOUTH PETROLEUM HOLDINGS LIMITED

Fourth Defendant and Cross-Claimant

CIV-2011-404-005442

BETWEEN J G STURGESS First Plaintiff

AND JET TRUSTEES LIMITED Second Plaintiff

AND R M P DUNPHY First Defendant

AND GREYMOUTH HOLDINGS LIMITED Second Defendant

AND RICHARD SHANE DUNPHY AND WENDY DUNPHY

_{Third Defendants}

GREYMOUTH HOLDINGS LTD V JET TRUSTEES LIMITED HC AK CIV-2011-404-005309 [9 October

2012]

AND JUGEN KADEL Fourth Defendant

AND TOWER HILL INVESTORS LLP Fifth Defendant

AND GERMANDA HOLDINGS LIMITED Sixth Defendant

AND PETER HANBURY MASFEN AND JOANNA ALISON MASFEN

Seventh Defendants

AND GREYMOUTH PETROLEUM HOLDINGS LIMITED

Eighth Defendant

Hearing: 8 October 2012

Appearances: J A Farmer QC, M D O'Brien and S M Consedine for plaintiffs and fourth defendant in 5309 proceeding and first, second, seventh and eighth defendants in 5442 proceeding

P G Skelton, M A Corlett and R D Butler for first, second and third defendants in 5309 proceeding and plaintiffs in 5442 proceeding

J F Anderson for third to sixth defendants in 5442 proceeding

Judgment: 9 October 2012

JUDGMENT OF GILBERT J

_{[on application to amend statement of claim]}

This judgment was delivered by me on 9 October 2012 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date:

Counsel: J A Farmer, Auckland: [e-mail]

M D O’Brien, Wellington: [e-mail]

S M Consedine, Wellington: [e-mail]

P G Skelton, Auckland: [e-mail]

M A Corlett, Auckland: [e-mail]

R D Butler, Auckland: [e-mail]

[1] These proceedings are currently scheduled to commence next Monday, 15 October 2012. The estimated time required for trial is seven weeks. Scheduled for hearing yesterday were a number of last minute applications by the parties to address modifications to their pleadings, further discovery, and trial directions. I was advised at the outset of the hearing that all outstanding issues had been resolved other than some of the amendments that the 5309 plaintiffs wish to make to their claim.

[2] The 5309 plaintiffs claim that the proposed amendments are comparatively minor, will come as no surprise to the Sturgess interests, and need to be made to ensure that the real controversy between the parties is determined. The Sturgess interests claim that the amendments are significant and that they are unable to respond to them adequately in the short time now available before the trial commences. They claim that they will be seriously prejudiced if the amendments are permitted at such a late stage.

[3] The proceedings arise out of a dispute between the three shareholding groups in the Greymouth group of companies which are involved in oil and gas exploration and production. The group 1 interests (the Dunphy interests) and the group 3 interests (the Masfen interests) together hold approximately 86 percent of the shares in the parent company, Greymouth Petroleum Holdings Limited. They are in dispute with the group 2 interests (the Sturgess interests) which hold the remaining shares.

[4] Pursuant to a shareholder agreement, each shareholding group is entitled to appoint a director. The directors are Mark Dunphy, appointed by group 1, John Sturgess appointed by group 2 and Peter Masfen appointed by group 3. Mr Dunphy was appointed executive chairman and Mr Sturgess the chief operating officer under management contracts entered into at the same time as the shareholder agreement.

[5] The shareholder agreement provided that all decisions of the Board must be unanimous. All matters relating to the management of the parent company are to be decided by the Board, except as delegated to Mr Dunphy as executive chairman or

Mr Sturgess as chief operating officer. Shareholder resolutions also have to be unanimous. The consequence of these arrangements is that each director or shareholder group can veto any board or shareholder resolution.

[6] On 4 February 2011, Mr Dunphy, with the support of Mr Masfen, purported to suspend Mr Sturgess’ management contract. The reasons for this suspension were set out in a letter from Bell Gully dated 11 February 2011:

They [Mr Dunphy and Mr Masfen] are concerned that there has been a pattern of unacceptable conduct by JSAL [John Sturgess and Associates Limited] and JS [Mr Sturgess], including refusal to report to the Executive Chairman and the Board, a failure to properly discharge the requisite functions and services, a failure to advance the interests and reputation of the Company, a failure to follow directions and a failure to comply with policies and procedures.

There have also been incidents of unacceptable behaviour towards staff members.

JS himself has frequently complained of overwork, advising the Company for example that he was regularly working 14 hour days, six (or more) days a week without taking any significant leave. The Company’s response to the issue was to suggest a better allocation of responsibilities, to establish the positions of General Manager Taranaki (approved in February 2010) and General Manager Exploration (approved in June 2010) and to encourage JS to secure appropriate appointees. JS nevertheless failed to do that and eventually MD [Mark Dunphy] assumed responsibility for it and made the appointments. He also appointed a General Manager with responsibility, amongst other things, for compliance and reporting.

The other response was to request (repeatedly) that JS take some leave. This was all ignored.

[7] Mr Sturgess disputed the validity of his suspension. The parties were unable to resolve their dispute. The 5309 plaintiffs filed their claim in late August 2011 seeking an order requiring the Sturgess interests to sell their shares. They made wide-ranging complaints of reporting failures and obstruction, negligence and mismanagement of group operations, unauthorised project and capital expenditure, improper and inappropriate recruitment of personnel, related party dealings without authorisation, failure to provide data and computers, and failure to support proposed resolutions for the ordinary conduct of the group.

[8] The negligence and mismanagement allegations include complaints relating to drilling operations in 2010 and 2011 at various sites including Clarencia in Chile and Radnor and Waimanu in New Zealand as follows:

Clarencia – Chile

JS negligently directed that the Clarencia-1A well be completed by setting cement over key producing zones in quantities that requires re-entry with a drilling unit to revisit those zones.

Consequentially, critically important hydrocarbon zones are unable to be tested or fracture stimulated without further drilling unit intervention at substantial cost.[1]

Radnor 1B – Radnor permit – NZ

JS negligently decided to fracture stimulate the Radnor 1B well located in the Group’s Radnor permit area in Taranaki and negligently conducted the operation, ignoring specialist expert advice provided to him both prior to and during the operation.

As a result, Greymouth Group incurred costs in the sum of $1,023,964 for which there was no corresponding benefit.

It may also have suffered damage to the Radnor 1B well bore, the replacement cost of which would be in excess of $10 million, for which it reserves its rights.[2]

Waimanu 1 – Waimanu permit – NZ

Following a still unquantified gas discovery in the Waimanu 1 well, JS negligently failed to have the well cased/cemented properly, resulting in a partial well collapse causing the entire loss of that section of the well (which had cost $14 million to drill).

As a result, Greymouth Group has wasted that expenditure and will be required to incur in excess of $10 million to re-drill that section of the well if it wishes to pursue the hydrocarbons identified in the well.[3]

[9] The Sturgess interests later issued the 5442 proceedings seeking relief for allegedly unlawful suspension of the management contract; breach of the shareholder agreement; a change of control requiring sale; deadlock requiring sale;

_{and oppressive, unfairly discriminatory or unfairly prejudicial conduct.}

[10] The 5309 plaintiffs applied for a priority fixture commencing on

8 October 2012. This application was granted on 10 February 2012 despite opposition from the Sturgess interests who were concerned that this would leave insufficient time to prepare.[4] Both proceedings are scheduled to be heard together.

[11] An amended statement of claim was subsequently filed on 11 April 2012. There were no changes to the negligence and mismanagement complaints referred to above.

[12] Consent orders were made on 9 August 2012 for the contemporaneous exchange of evidence in both proceedings on 4 September 2012 and reply briefs on

2 October 2012. The 5309 plaintiffs were to prepare the agreed bundle of documents on 5 October with the trial to begin on 15 October 2012, one week later than originally scheduled.

[13] The initial exchange of evidence took place on 12 September 2012. I understand that the exchange of reply evidence was completed yesterday. Counsel advise that the trial bundle has not yet been prepared and cannot be completed in time for the trial to commence next Monday. The trial cannot sensibly commence without the bundle. Counsel therefore seek a postponement of the commencement of trial until Tuesday, 23 October 2012, immediately after Labour Weekend.

[14] The 5309 plaintiffs now apply for leave to make the following contested amendments to their claim:

(a) To add an allegation that Mr Sturgess and JSAL:

dealt with Company personnel (employed or contracted) in an uncooperative, discourteous, improper, actionable and/or threatening manner.

(b) To amend their allegation relating to the Clarencia 1A well as follows:

JS negligently and without Board approval failed to remove cement in the production casing up to and covering key producing zones while a drilling unit was on site.

...

Greymouth Group subsequently mobilised a drilling rig to the site to conduct such remedial work to allow such fracture stimulations and testing, at a cost of US$1,048,350.

(c) To amend their allegation relating to the Radnor 1B well as follows:

JS negligently and without Board approval completed and decided to fracture stimulate the Radnor 1B well located in the Group’s Radnor permit area in Taranaki and negligently conducted the operation, ignoring specialist expert advice provided to him both prior to and during the operation.

...

JS negligently ran substandard liner pipe, such that the Radnor 1B well bore cannot be properly utilised as intended, which requires or may require the well to be replaced, the cost of which would be in excess of $5.5 million.

(d) To amend their allegation relating to the Waimanu 1 well as follows:

Following a still unquantified gas discovery in the Waimanu 1 well, JS negligently failed to address a difficulty experienced when running the well liner, ran substandard liner pipe, failed to cement the liner, and (without Board approval) chose to complete the well, resulting in a partial well collapse causing the entire loss of that section of the well.

[15] Amendments to pleadings are often permitted in the interests of justice, even at a late stage, if they are necessary to ensure that the real controversy between the parties is determined. However, the party seeking to amend must show that the amendments will not result in an injustice to the other parties or cause significant delay.[5]

Should the 5309 plaintiffs be permitted to add the personnel claim?

[16] Mr Farmer QC, for the 5309 plaintiffs, acknowledged that the claim relating to inappropriate treatment of personnel was omitted through oversight. However, he said that the issue had always been “on the table” as part of the grounds of suspension. He referred to the letter of 11 February 2011, the relevant extract from which is quoted in [4] above. He also drew attention to a letter from Mr Dunphy to Mr Sturgess dated 18 May 2011 making substantially the same complaint.

[17] In his affidavit sworn on 11 October 2011 in support of the 5309 plaintiffs’ application to bring proceedings in the name of Greymouth Petroleum Holdings Limited, Mr Dunphy claimed that Mr Sturgess had been unprofessional in his treatment of personnel and contractors. He referred in particular to Mr Bulte and Mr McCormick, both of whom he said had resigned in the first half of 2010 following a “complete deterioration” of relations with Mr Sturgess. Mr Farmer pointed out that Mr Sturgess had responded to these allegations in his affidavit sworn on 11 November 2011. Mr Sturgess claimed that Mr Bulte had resigned because Mr Dunphy failed to meet with him over an outstanding bonus payment and Mr McCormick resigned soon after as a result of the same matter.

[18] I have not seen the briefs of evidence. However, I am advised that this topic is covered in the evidence of four witnesses: Mr Harambour, a contractor who worked with Mr Sturgess; Mr Willett, the CFO; Mr Walker, who held a senior management position; and Mr Boxall. In all, I am advised that the evidence from these witnesses on this topic runs to some seven pages.

[19] Mr Corlett, for the Sturgess interests, claims that it would take four to five days of work for one member of the trial team to inspect relevant documents and prepare Mr Sturgess’ response to this allegation. He says that this work could not commence until comprehensive discovery was given of all emails between the relevant personnel and Mr Dunphy and any relevant personnel files.

[20] I am not persuaded that the task is as onerous as Mr Corlett contends. The

5309 plaintiffs have already provided discovery. If there is any contemporaneous material supporting their allegations, this will already have been discovered. The Sturgess interests are entitled to proceed on the basis that there are no relevant documents relating to this issue, beyond those already discovered.

[21] I consider that this amendment will not create material prejudice for the Sturgess interests. The complaint is not new. Mr Sturgess has already considered it and responded to it in an affidavit. Any difficulties the Sturgess interests may face in dealing with this issue can be accommodated by making appropriate directions during the course of the trial.

[22] I consider that the interests of justice require that this amendment be permitted. It has always formed part of the alleged justification for the suspension and needs to be addressed to ensure that the real controversy between the parties is determined. I consider that it can be accommodated without any prejudice or injustice to the Sturgess interests.

Should the 5309 plaintiffs be permitted to amend their claim relating to the

Clarencia well?

[23] Mr O’Brien dealt with the application to amend the claims in relation to the wells. He argued that the proposed amendment relating to the Clarencia well is not a material change and would not unreasonably prejudice the Sturgess interests. I am unable to accept this submission. The proposed new allegation is fundamentally different from the existing. Whereas the current allegation is that Mr Sturgess directed that the well be completed by setting cement over key producing zones requiring re-entry with a drilling unit, the proposed new allegation is that he failed to remove cement in the production casing while the drilling unit was on site. The new negligence allegation is different and gives rise to a different loss. The amount proposed to be claimed is US$1,048,350.

[24] In my view, the Sturgess interests do not have adequate time to deal with this new claim at such short notice. All elements of it are different. Even if the trial does not commence until 23 October 2012, there is insufficient time left for them to investigate the claim, obtain any required discovery, and prepare any evidence, including expert evidence that might be required to meet it.

[25] It is no answer that the Sturgess interests have had the 5309 plaintiffs’ evidence on this issue since 12 September 2012. They have appropriately confined their attention to the evidence relating to the pleaded allegations and have chosen not to consider or respond to anything else. They were entitled to adopt that course.

[26] I consider that it would be unjust to require the Sturgess interests to meet this new claim at such a late stage. Accordingly, the 5309 plaintiffs’ application to make this amendment to their claim must be declined.

Should the 5309 plaintiffs be permitted to amend their claim relating to the

Radnor well?

[27] The proposed amendment to this aspect of the claim is also significant. The current claim is focused on an allegation that Mr Sturgess negligently decided to fracture stimulate the well and negligently conducted the operation. The proposed amendment is to add an allegation that he also negligently completed the well and ran substandard liner pipe with the result that the well cannot be utilised as intended and may have to be replaced at a cost exceeding $5.5 million.

[28] This is a completely new claim, never signalled before. I accept Mr Corlett’s submission that the Sturgess interests would be seriously prejudiced if they were required to deal with it in the very limited time left available to them before the trial commences. In these circumstances, I am satisfied that the interests of justice require that the plaintiffs’ application for leave to make this amendment be declined.

Should the 5309 plaintiffs be permitted to amend their claim relating to the

Waimanu well?

[29] This proposed amendment must also be declined for the same reasons. The proposed amendment is not minor; it is quite fundamental. The existing allegation is that Mr Sturgess negligently failed to have the well cased/cemented properly. The proposed amendment is to drop that allegation and replace it with an allegation that he negligently failed to address a difficulty experienced when running the well liner, ran substandard liner pipe, and failed to cement the liner. All elements of the claim change (obligation, breach, causation and loss). The amount proposed to be claimed is not insubstantial, being in excess of $2.5 million. In my view, it is unrealistic to expect that the Sturgess interests can respond to this claim adequately in the time now available. I consider that they would suffer serious prejudice if this amendment was permitted at such a late stage. The application to make this amendment must also be declined.

Result

[30] The application by the 5309 plaintiffs to amend their claim is granted save in respect of the proposed amendments to [46] to [52] (relating to Clarencia and Radnor) and [55] and [56] (relating to Waimanu) of the draft second amended statement of claim dated 28 September 2012.

[31] The trial will commence on Tuesday, 23 October 2012.

[32] By consent, leave is granted to the third to sixth defendants in the 5442 proceeding to call a witness who resides in London by video link.

[33] I was not addressed on the issue of costs. If any party seeks costs on the applications listed for hearing yesterday, they should do so by memorandum to be filed and served by 4.00 pm, Monday 15 October 2012. Any memorandum in

_{response should be filed and served by 4.00 pm on Friday, 19 October 2012.}

M A Gilbert J

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[1] _{[46] & [47] Statement of Claim, 29 August 2011.}
[2] _{[49] to [51] Statement of Claim, 29 August 2011.}

[3] [54] & [55] Statement of Claim, 29 August 2011.
[4] Minute of Rodney Hansen J, 10 February 2012
[5] Elders Pastoral Limited v Marr [1987] NZCA 18; (1987) 2 PRNZ 383 (CA).