Westpac New Zealand Ltd v Adams [2013] NZHC 3112 (25 November 2013)

Last Updated: 7 March 2014

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2011-409-000412 [2013] NZHC 3112

BETWEEN WESTPAC NEW ZEALAND LTD Plaintiff

AND LINDSAY HUMPHREY WILLIAM ADAMS and JUDITH CAROL ADAMS First Defendants

AND ROGER ARCHIBALD ADAMS Second Defendant

AND HAMISH GUY ENSOR

First Third Party and Second Counterclaim

Defendant

AND BROOK LAW Second Third Party

AND ANDREW JOHN GRENFELL and

WILLIAM GUY BLACK

Third Third Parties/Third Counterclaim

Defendant

Hearing: 5 November 2013

Appearances: E E Thiele for Plaintiff/First Counterclaim Defendant

(attendance excused)

C J R Baird and C M Hanafin for First

Defendants/Counterclaimants

R J Hopkins and J Ling for Second Counterclaim

Defendant/First Third Party

I J Law for Second Third Party

H K Harkess and J E Tomlinson for Third Third Parties

Judgment: 25 November 2013

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

_{as to security for costs}

WESTPAC NEW ZEALAND LTD v ADAMS [2013] NZHC 3112 [25 November 2013]

Introduction

[1] The first defendants (the Adams) experienced financial disaster through a vineyard development. The vineyard banker sues them in this proceeding on their guarantee. References from this point in the judgment to “defendants” are a reference to the first defendants (the plaintiff already having obtained judgment against the second defendant).

[2] The Adams bring a counterclaim against Westpac together with three third party claims in relation to the sale of their farm property at Seddon (the property) and the subsequent investment in a vineyard operation (Edzell Vineyards Ltd – “Edzell”).

[3] The third parties apply for orders as to security for costs.

[4] The Adams accept that they would be unable to pay costs if unsuccessful in this proceeding and that the threshold test for security is therefore established. The key issues raised by the Adams in opposition are –

(a) The Adams say they would be unable to proceed with the third party claims if security is ordered.

(b) The Adams assert that their impecuniosity was a consequence of the acts and omissions of the third parties as pleaded.

(c) The Adams assert that the third party claims have strong prospects of success.

(d) The Adams say, alternatively, that in the event security is to be ordered it should be for a substantially lower sum than sought.

Background to the proceeding

[5] I held a hearing of this application in conjunction with the hearing of another interlocutory application for orders as to discovery by non-parties. I issued the

judgment in relation to the non-party discovery contemporaneously with this judgment.¹

[6] In the non-party judgment I have set out in some detail the background to the litigation and the precise manner in which the various claims and counterclaims have been pleaded.²

[7] I adopt that more detailed background as if it were set out fully in this judgment.

[8] For the purposes of the discussion that follows a summary will suffice.

[9] The Adams sold their farm property to Edzell which was to be the investment vehicle for a vineyard development and operation.

[10] The 100 ordinary shares in Edzell were held by the Adams jointly as to 45 shares and by the other four sets of shareholders in varying parcels of 10 or 15 shares.

First third party

[11] Westpac made a loan offer which was accepted and a group of investors (including the Adams and Mr Ensor) became the shareholders of Edzell and began to develop the vineyard.

[12] The first third party (Mr Ensor) was employed by the plaintiff (Westpac) as an “Agri-business Manager and Equity Partnership Specialist”. The Adams allege they approached Mr Ensor in relation to a proposal to develop a vineyard on their property. The Adams had an initial proposal prepared by KPMG. The Adams assert that they intended to be conservative in their approach but that Mr Ensor proposed a different model for attracting equity investors which was geared more highly, with

_{greater bank borrowing. In the course of his involvement, Mr Ensor decided himself}

¹ _{Westpac New Zealand Ltd v Adams [2013] NZHC 3113.}

² At [6] – [16] (Background) and at [7] – [16] (Pleadings).

to become an equity investor in the property. At a point he ceased to be involved on the Westpac side and another Westpac officer took over that role.

Second third party

[13] The Adams’s case against Mr Ensor is that he owed them both duties of care and fiduciary duties, which he breached. The Adams sue the second third party, Mr Brook, as the solicitor who acted for them personally in relation to the incorporation of Edzell, the sale of their property to Edzell, and their personal guarantees to Westpac. The Adams allege that they retained a lawyer, Mr Brook, of the firm Brook Law to advise them personally on the shareholders’ agreement of the Edzell shareholders.

[14] Another law firm, Goodman Tavendale Reid, acted upon the incorporation of Edzell and subsequently acted for Edzell. Goodman Tavendale Reid prepared the various documents including the shareholders’ agreement. The Adams allege that Mr Brook breached his duty of care (pleaded in both contract and negligence) by failing to advise the Adams of five areas of risk arising from the proposed venture and the shareholders’ agreement including:

(a) Edzell’s high borrowings;

(b) the security held by Westpac over Edzell and its assets;

(c) the personal guarantees provided by the Adams to Westpac;

(d) that the Adams, despite being the major shareholders in Edzell bearing substantial risk personally, had no great control over Edzell than any single minor shareholder; and

(e) any single minor shareholder effectively had a right of veto over any

Edzell decision at any time.

Third third party

[15] The vineyard development was completed but Edzell began to experience significant difficulties by 2009 as grape prices dropped. Edzell defaulted on its loan obligations in September 2010 and Westpac that month appointed as receivers the third third parties (the receivers).

[16] The receivers sold the property, including the vineyard operation. The new owner Ingrid Estates General Partner Ltd (Ingrid) includes as shareholders some of the former Edzell shareholders together with the former Edzell vineyard manager. At the time of the sale to the new owners, Westpac received from the Adams’s co- guarantors (including Mr Ensor) a sum of $843,000.00 in settlement of those parties’ guaranteed obligations.

[17] The Adams invoke s 18 (3)(d) Receiverships Act 1993 as imposing upon the receivers a duty to exercise their powers with reasonable regard to the interests of the Adams as sureties, subject also to the receivers acting in good faith and in the interests of the appointer.

[18] The Adams allege that the receivers, knowing that the Adams were interested in purchasing the property from the receivers and that the offers received for the property were below the amount necessary to extinguish Edzell’s debt to Westpac, breached their duty to the Adams in proceeding as they did with a sale to the Ingrid interests.

[19] The Adams claim against all third parties damages of $1,050,000 which represents their alleged loss of investment in Edzell. Other relief, including an inquiry into any other damages and contribution and/or indemnity is also sought.

Security for Costs under the High Court Rules

[20] Rule 5.45 High Court Rules deals with orders for security of costs.

Relevantly it provides –

5.45 Order for security of costs

(1) Subclause (2) applies if a Judge is satisfied, on the application of a defendant,—

(a) ...

(b) that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in 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 is made to give security for costs as directed for a sum that the Judge considers sufficient—

(i) by paying that sum into court; or

(ii) by giving, to the satisfaction of the Judge or the

Registrar, security for that sum; and

(b) may stay the proceeding until the sum is paid or the security given.

The “threshold” requirement

[21] It is accepted by the defendants in this case that the threshold requirement –

as to inability to pay costs – is established.

The nature of the Court’s discretion

[22] Under r 5.45(2) the Judge is empowered to make an order giving security for costs if the Judge thinks it is just in all the circumstances.

[23] The breadth of the discretion involved was made clear by the Court of Appeal in A S McLachlan Ltd v MEL Network Ltd.³ In delivering the judgment of the Court

³ A S McLachlan Ltd v MEL Network Ltd [2002] NZCA 215; (2002) 16 PRNZ 747 (CA).

Gault P said:⁴

Rule 60(1)(b) High Court Rules provides that where the Court is satisfied, on the application of a defendant, that there is reason to believe that the plaintiff will be unable to pay costs if unsuccessful, “the Court may, if it thinks fit in all the circumstances, order the giving of security for costs”. Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing “principles” from the facts of previous cases.

While collections of authorities such as that in the judgment of Master Williams in Nikau Holdings Ltd v BNZ (1992) 5 PRNZ 430, can be of assistance, they cannot substitute 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. That creates a risk that a factor accorded weight in a particular case will be given disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.

[24] Mr Baird noted that the current formulation of the rule (r 5.45(2) providing that the Judge may make an order if the Judge thinks it is “just” differs from the former rule (r 60(1)(b)) which provided that the Court might make the order “if it thinks fit”. Mr Baird submitted by reference to dictionary definitions that there may be a difference between the scope of the two words (“just” and “fit”) in that a just order will be fair, reasonable and appropriate whereas a fit order need only be appropriate.

[25] In the way in which the rules have been applied I do not consider anything turns on the difference in dictionary definitions. The Court today, under r 5.45, must consider whether it is just in all the circumstances to make an order of security. The test previously was stated in terms of “fit”. But it is clear from examination of cases such A S McLachlan Ltd v MEL Network Ltd, and the cases which have since applied that approach, that the particular outcome in each case has always been in accordance with what the Court considers just (consistently stated in the High Court

_{Rules to be one of the three objectives of the Rules).}⁵

⁴ _{At [13] – [14].}

⁵ See High Court Rules, r 1.2.

Considerations relevant to the exercise of the discretion

[26] In A S McLachlan Ltd v MEL Network Ltd the Court of Appeal made the following observations in relation to the balancing exercise involved when a Court considers the merits of a plaintiff’s claims and a plaintiff’s access to justice:⁶

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 lightly to be denied.

Of course, the interests of defendants must also be weighed. They must be protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.

[27] The Court of Appeal accordingly recognised, in light of the importance accorded to access to justice, that a Judge should not normally make an order for costs which has the effect of precluding the plaintiff from proceeding unless the plaintiff’s claim has little chance of success. That this approach endures is evident in the judgment of the Court of Appeal in Ambrose v Pickard.⁷ William Young P set out the central paragraphs of the judgment in A S McLachlan Ltd v MEL Network Ltd as “the relevant principles relating to security for costs”.⁸ His Honour then briefly

assessed the merits of the case,⁹ concluding that it would be premature to reject out

of hand the evidence of an intended expert witness or to conclude that the plaintiff’s case was necessarily dependent on the evidence of that witness. His Honour then summarised:¹⁰

In short, we do not see this case as being fairly within the class of cases contemplated in [15] of McLachlan.

[28] From the context I take His Honour’s reference to [15] of McLachlan to

mean that the Court could not consider the plaintiff’s claim could be categorised as having “little chance of success”.

⁶ _{A S McLachlan Ltd v MEL Network Ltd, above n 3, at [15] – [16].}

⁷ _{Ambrose v Pickard [2009] NZCA 502.}

⁸ _{At [31].}

⁹ _{At [33] – [36].}

¹⁰ At [37].

[29] The Court in Ambrose v Pickard then went on to consider whether an order for security would prevent the plaintiff ’s case from going to trial, upholding the finding of McKenzie J in the High Court that a substantial order for security would prevent the case from going to trial.¹¹ Accordingly the Court found that:¹²

On an orthodox application of the McLachlan principles, our conclusion as to the strength of the case and impact of an order for security indicate that no further security should be required. It is, however, necessary to address the conduct of the case to date by Miss Pickard.

[30] The Court considered evidence as to Miss Pickard’s conduct, finding that Miss Pickard’s conduct was not such as to cut across the normal application of the security for costs principles.

[31] The analysis of merits by the Court of Appeal in Ambrose v Pickard illustrates the reality that a Judge, on security for costs applications, will frequently proceed on the basis of an impression of the merits. Such an approach is in keeping with that of the Court previously in McLachlan. Gault P in that decision concluded the merit assessment in this way:¹³

On the causes of action presently pleaded, we agree with both Williams and Potter JJ that it is not possible to form any firm view of the merits of the claims. We can however, as they did, form impressions on the basis of the material presently before us. We find ourselves similarly unconvinced that the claims are strong. Certainly they cannot be regarded as baseless or totally lacking in merit...

Impecuniosity resulting from a defendant’s actions

[32] The Court of Appeal in McLachlan recognised that, where it is established that a plaintiff’s impecuniosity is causally linked to the alleged conduct for which remedies are claimed in the proceeding, it may be just that the Court either refuses to make an order for security or reduces the amount of the security that might otherwise

have been ordered.¹⁴ The assessment of the causation of impecuniosity, as with the

_{assessment of the merits of the plaintiff’s claim, may be difficult in the context of a}

¹¹ _{At [39].}

¹² _{At [40].}

¹³ _{A S McLachlan Ltd v MEL Network Ltd, above n 3, at [25].}

¹⁴ At [17].

security for costs application. The Court may need to proceed on the basis of impression (albeit requiring some degree of evidence rather than mere assertion of causation): Meates v Taylor.¹⁵

Other considerations

[33] The task of the Court is to consider all the circumstances of the case. This will bring into play different considerations in different cases. Counsel for both the defendants and the third parties recognised the judgment of Kós J in Highgate on Broadway Ltd v Devine¹⁶ as including a helpful survey of considerations which may be relevant in particular cases. As the Court of Appeal’s decision in McLachlan indicates, such check lists cannot be determinative of either the considerations arising in particular cases or the relative weight to be attached to any consideration, but may be useful as something of a check list for counsel and the Judge.¹⁷

The amount of security

[34] If the Judge decides to order security, the amount of security is discretionary.¹⁸

[35] In relation to the Court’s general approach I accept as accurate the

observation of the editors of McGechan on Procedure who comment:¹⁹

Insofar as past awards of security are a legitimate guide, they generally represent some discount on the likely award of costs calculated under Schedule 3.

The three applications in this case – overview

[36] The three sets of third parties in this proceeding were separately represented at the hearing. Counsel for each strongly urged me to conclude that the defendants’ claim against the relevant third party is without substantial merit. Orders for security

_{of between $70,000 and $97,000 were sought. It was submitted in each case that}

¹⁵ Meates v Taylor (1992) 5 PRNZ 524. See also the discussion in McGechan on Procedure at [HR

_5.45.03(3)].

¹⁶ _{Highgate on Broadway Ltd v Devine [2012] NZHC 2288.}

¹⁷ _{Scrapbook Alley Ltd v Chow [2012] NZHC 2395 at [32] where Kós J himself adopted such a list.}

¹⁸ _{A S McLachlan Ltd v MEL Network Ltd, above n 3.}

¹⁹ McGechan on Procedure, at [HR 5.45.07].

such security should be ordered notwithstanding any prospect that the defendants may by the effect of such orders be precluded from pursuing their third party claims. Relied on by the parties were numerous affidavits filed either specifically in relation to the present applications or filed earlier in relation to previous interlocutory matters (including a summary judgment application) and adopted in relation to the present application.

[37] Having had the benefit of counsel’s submissions and having reviewed the substantial body of affidavit and documentary evidence, I am unsurprisingly left in the position that there can be no clear conclusion as to the defendants’ prospects of success or failure on their third party claims. I consider it to be of some significance, that notwithstanding the strong submissions of counsel for the various third parties, that the third parties have applied neither for strike out nor summary judgment on the third party claims. This is not a case where the Court can say that the defendants have little chance of success on their claims. I will now explain why I have come to that view in relation to each third party claim.

The third party claim against Mr Ensor

[38] I begin with the claim that Mr Ensor gave negligent advice. Mr Ensor held himself out as an “Agribusiness Manager and Equity Partnership Specialist”. He gave the Adams advice as to structuring Edzell with higher leverage than suggested by KPMG in that firm’s business plan. The Adams’s case is that they made it clear that they wished to remain conservative investors. They say what Mr Ensor encouraged them to adopt was a far more aggressive approach, particularly to borrowing. Reverses were subsequently suffered in the grape growing industry. It is the Adams’s case that the operation was unable to be sustained by reason of a poor structuring advice at the start.

[39] On the face of it, this is a sustainable claim. It is not a complete answer to a claim based on breach of a duty of care in negligence for Mr Ensor to refer to the fact that he was an employee at Westpac throughout.

[40] The Adams alternatively plead that Mr Ensor breached a fiduciary duty. The fiduciary duty is said to have arisen because Mr Ensor was providing investment and

financial advice in a situation where the defendants were entitled to expect that he would not act in a manner that was contrary to the defendants’ best interest. The Adams’s case is that when Mr Ensor decided to seek for himself a stake in the venture he departed from requirements of absolute loyalty and good faith and breached the fiduciary duties he owed to the Adams. The breach is pleaded in a number of ways including that Mr Ensor had limited resources to personally invest with the implication that he favoured higher borrowing.

[41] By turning from adviser to personal investor in the way he did, Mr Ensor clearly exposed himself to a claim precisely of the nature now brought. The allegations of fiduciary duty and breach of that duty have, on the papers, a realistic prospect of success.

[42] The Adams say that as a result of the failure of Edzell, they have lost the

$1,050,000 they invested in Edzell. They say that that loss was caused by Edzell incurring substantially higher interest costs than it otherwise would have on the KPMG proposal with the consequential liquidity problems which occurred when grape prices fell. There will clearly be significant factual issues as to causation and loss of the trial but there is a reasonable basis and logic to the damages aspect of the claim.

The third party claim against Mr Brook

[43] It is common ground that Mr Brook had acted for the plaintiffs as their solicitor on a number of occasions and in relation to a number of matters from 2003 onwards.

[44] On the pleadings there is a significant difference between the parties as to the scope of instructions given by the Adams to Mr Brook in relation to Edzell and the vineyard venture. The parties agree that Mr Brook was engaged by the Adams to provide legal services for the incorporation of Edzell and to act for them in their capacity as vendors of the vineyard property in the sale to Edzell. Mr Brook accepts that he was engaged to provide legal advice to Mrs Adams in relation to her personal guarantee of Edzell’s borrowings. On what appears to be the allegation of central importance the parties differ – the Adams allege that Mr Brook was engaged to act

for them in advising as to the terms of the Edzell shareholders’ agreement as finalised and entered into about 28 March 2006, whereas Mr Brook admits only that he was to provide legal advice to Mrs Adams in relation to one amendment made to the shareholders’ agreement.

[45] There is thus a dispute as to the scope of the duty of care which undoubtedly existed. The arguments which will be fought out at trial were to some extent reflected in the primary authorities which Mr Baird and Mr Law respectively invoked at the hearing.

[46] Mr Baird submitted that it was erroneous for Mr Brook to suggest that his retainer was somehow limited to specific instructions with no obligation to provide more general advice. Mr Baird referred to the judgment of the Court of Appeal in Gilbert v Shanahan²⁰ (delivered by Tipping J) in which his Honour observed:

Solicitor’s duties are governed by the scope of their retainer, but it would be unreasonable and artificial to define that scope by reference only to the client’s express instructions. Matters which fairly and reasonably arise in the course of carrying out those instructions must be regarded as coming within the scope of the retainer. It was within the scope of Ms de Bernardo’s retainer to act for Mr Gilbert personally in the transaction, to familiarise herself with any preliminary agreement there might be, to identify her client’s legal position and to advise him accordingly.

[47] Mr Law, on the other hand, invoked the observations of the Privy Council in

Clark Boyce v Mouat in which Lord Jauncey, delivering the judgment stated:²¹

Their Lordships are accordingly satisfied that Mrs Mouat required of Mr Boyce no more than that he should carry out the necessary conveyancing on her behalf and explained to her the legal implications of the transaction. ...

When a client in full command of his faculties and apparently aware of what he is doing seeks the assistance of a solicitor in the carrying out of a particular transaction, that solicitor is under no duty whether before or after accepting instructions to go beyond those instructions by proffering unsought advice on the wisdom of the transaction. To hold otherwise could impose intolerable burdens on solicitors.

[48] The observations in the two judgments are of course compatible. The Court of Appeal heard Gilbert v Shanahan some four years after Clark Boyce v Mouat was

²⁰ _{Gilbert v Shanahan [1998] 3 NZLR 528 at 537.}

²¹ Clark Boyce v Mouat [1993] 3 NZLR 641 at 647.

determined. The observations in Gilbert v Shanahan indicate that the definition of the precise duty owed will be a matter of mixed fact and law in each case, depending on all the circumstances including the relationship between the particular solicitor and clients and the nature and extent of the matters to be considered and transacted by the solicitor. As Gilbert v Shanahan indicates, the instruction to advise on a particular matter need not be express.

[49] The importance of particular provisions in the Shareholders’ Agreement was explained by Mr Baird by reference to advice which the Adams subsequently received about their limited powers under the Shareholders’ Agreement from another solicitor. The Adams’s case is that had they negotiated a 51 percent shareholding in Edzell, they would have had greater ability to inject further capital into the venture (without the consent of minority shareholders). Their damages claim is based on the proposition that with appropriate advice at the time of the incorporation of Edzell they could have negotiated 51 percent shareholding which would have allowed them to later avoid the losses they sustained.

[50] Mr Brook provided expert evidence from Murray Lazelle as to the reasons for failure of the vineyard venture and as to whether the Shareholders’ Agreement prevented the Adams from saving Edzell. Mr Lazelle refers to the evidence which he has reviewed, the existence of factors both specific to the vineyard and generic to the viticulture industry between 2005 and 2010 which led to the failure of Edzell before concluding:

... I cannot see how the Adams could have avoided in 2010 the need to put in more equity, find more funding or face the requirement to meet their existing obligations.

[51] Mr Lazelle concludes that neither the absence of a General Security Agreement nor the term of the Shareholders’ Agreement prevented the Adams from taking steps (such as putting in additional funding) so as to save Edzell.

[52] An expert retained by the Adams, David Petterson, filed an affidavit in response to that of Mr Lazelle. Mr Petterson opines that Mr Lazelle’s evidence purports to undertake a high level analysis of some financial outcomes of the failed vineyard project (which Mr Petterson considers to be incomplete). Mr Petterson

disagrees with Mr Lazelle’s conclusion that a different structure to the shareholding arrangements (such as the taking of a general security by the Adams) would not have affected the financial collapse of Edzell. Mr Petterson emphasises the extent to which elements of the dispute between the Adams and Mr Brook will be subject to factual determinations to be reached by the trial Court. He comments that he is not in a position at this stage to attribute and fully assess the quantum of loss until he has undertaken a complete analysis based on review of all the relevant evidence. He states however on a “first principles approach” that it is conceivable that, had stated counterfactuals occurred, the Adams would not have lost their original investments or they would still have had an interest in the property.

[53] I accept, as Mr Petterson suggests, that it is not possible to accurately assess the prospects of the Adams’s claim against Mr Brook in terms of a damages liability (or in terms of the scope of the duty of care which is said to have been breached). My impression is that the Adams may experience difficulty in establishing both the scope of Mr Brooks’s duty as pleaded and the causation of the Adams’s loss but that there is a realistic prospect of success on those aspects.

[54] Mr Brook pleads a limitation defence. Mr Law notes that the claim in contract will be prima facie barred because the third party claim was not filed for more than six years after the date of alleged breach of contract. That said, the Adams’s claim is also pleaded in tort. For Mr Brook, Mr Law asserts that the tort claim is also barred by s 4 Limitation Act 1950 as the damage allegedly suffered by the Adams occurred prior to 30 March 2006, more than six years before the third party claim was issued. Mr Law submitted that any relevant damage sustained by the Adams was in the form of a damaged asset (namely an unsatisfactory

Shareholders’ Agreement), of the kind involved in Thom v Davys Burton.²²

[55] In Thom v Davys Burton, Mr Thom was unable to enforce a pre-nuptial agreement because the agreement was not certified as required under the Matrimonial Property Act 1976.²³ Mr Law submitted that the legally unenforceable

_{agreement in Thom v Davys Burton is directly analogous to the allegedly insufficient}

²² _{Thom v Davys Burton [2008] NZSC 65.}

²³ At [1].

Shareholders’ Agreement in this case. He says that no contingencies existed to effectively defer the point at which a limitation period would commence. For his part, Mr Baird submitted that circumstances surrounding the Shareholders’ Agreement do not amount to a situation of immediate damage as in Thom v Davys Burton but rather one in which the Adams’s damage is properly analysed as having arisen through later contingencies.

[56] Although Mr Law for Mr Brook asserts that there is a complete defence by reason of the limitation period, that has not been pursued as the basis of a strike out application. While I recognise the scope for conceptual arguments as to whether the present case involves actual or contingent damage for limitation purposes, I do not regard the limitation argument for Mr Brook as so clear-cut as would justify a strike out of the claim. There is a reasonable prospect that the limitation defence will not prevail.

The third party claim against the receivers, Mr Grenfell and Mr Black

[57] The Adams invoke the duty owed to them as sureties under s 18

Receiverships Act.²⁴

[58] Mrs Adams has deposed to events which they will contend at trial are relevant to measuring whether the receivers discharged their duty of care to the Adams’s guarantors. Mrs Adams deposes that the receivers led the Adams to believe that the receivers would be testing the market (for sale of the vineyard) during October and November 2010 but would be continuing to fund the vineyard through to the April 2011 harvest in order to try to maximise the value for sale. Mrs Adams puts the October marketing campaign, which was in fact undertaken, in that context. She deposes that unbeknown to the Adams, in contrary to what the receivers had led the Adams to believe they would do, the receivers entered into a binding agreement in early 2011 (for the sale to the company that has become known as Ingrid). The receivers sold the property for $6,250,000 but with a clause entitling the receivers to accept offers from others on 10 working days notice to the purchaser. Mrs Adams’s

_{evidence is that had the Adams been informed of the Ingrid purchase price, they}

²⁴ Above at [17].

would have made an offer to purchase on terms comparable or, if necessary, better to those by which the property was sold to Ingrid.

[59] The Adams relied upon evidence obtained again from Mr Petterson in relation to the third party claim against the receivers. (Mr Petterson deposes within his forensic accounting specialisation to have been appointed as a receiver on many occasions during his professional career and to have also had a particular emphasis on insolvency appraisals and administrations under the Companies Act 1993 and the Receiverships Act.)

[60] Mr Petterson provided his opinion as to the administration of the sale process by the receivers in this case, with special reference to s 18 Receiverships Act. Relevantly, Mr Petterson deposed:

16. ...I am of the view that because the receivers (a) knew about the interest of the Adams in purchasing the property from the receivers and (b) knew that the other offers received for the property were below the amount necessary to extinguish Edzell’s debt to the bank and remove the Adams exposure under their guarantees to the bank, then the receivers had a duty under section 18 of the Act to both the appointer (Westpac) and the sureties (the Adams) to:

16.1 Inform Westpac of the Adams’ interest in acquiring the

assets of Edzell from the receivers; and

16.2 Contact the Adams to seriously explore their level of interest and their ability to make an offer to purchase the assets of Edzell that would have met or exceeded the terms of the Starborough offer.

17. From a review of the above emails which are Exhibit DRP1, it appears that notwithstanding the fact that the receivers were aware of the interest of the Adams in purchasing the assets of Edzell from them;

17.1 this interest was not explored with the Adams by the receivers; and

17.2 may have been ignored altogether (as is alleged by the pleading in paragraph 6 the Adams’ First Amended Statement of Reply to the Receivers’ Statement of Defence),

when the receivers (a) advised the bank of the offer from the ultimate purchasers of the Edzell assets, (being Starborough comprising the shareholders of Edzell other than Judith and Lindsay Adams and Roger Adams) and (b) proceeded to enter into the

Starborough agreement for sale and purchase on the terms that they did.

18. If this was the case, then I have serious doubts that the receivers did discharge all of their duties in terms of section 18 of the Act.

19. In the alternative, if the receivers did advise the charge holder (Westpac) of the interest of the Adams in purchasing the property from the receivers and Westpac;

19.1 chose not to explore (either direct or through the receivers) that interest with the Adams before accepting the Starborough offer; and

19.2 instead proceeded to accept what may have been a lower offer than what the Adams may have made if contacted by the bank or the receivers before the Starborough offer was accepted,

then the claim against the Adams by the plaintiff may fail due to the choices that the plaintiff made at time of agreeing to the sale to Starborough negotiated by the receivers.

[61] Ms Harkess, for the receivers, attacked a number of the assumptions within Mr Petterson’s evidence, submitting that key aspects of Mrs Adams’ evidence are inherently implausible or otherwise in an inadequate basis for Mr Petterson’s conclusions.

[62] For instance, Ms Harkess submitted that Mrs Adams’s evidence that the receivers told her that there would be a sale after the 2011 harvest is inherently implausible for a number of reasons. I consider that while the evidence is clearly open to testing at trial, it cannot be discounted, given Mrs Adams’s affidavit.

[63] Ms Harkess submitted that there could have been no failure in the receivers’ discharge of their duty of care through not disclosing the price offered by the Ingrid interest as the tender process was confidential and the Adams in any event had the opportunity to submit an offer. Again, whether on the facts those matters are ultimately either established on the evidence or found sufficient to have met the receivers’ obligations under s 18 Receiverships Act is very much a trial issue.

[64] Having regard to Mrs Adams’s evidence and that of Mr Petterson, I cannot accept Ms Harkess’ submission that there cannot arguably be a breach of s 18

Receiverships Act.

[65] On the evidence filed, if accepted by the trial Judge, there is a realistic possibility that the Adams could succeed in their claim against the receivers.

Conclusion in relation to the merits of the third party claims

[66] This is not a case in which any of the third party claims can be assessed as having little prospect of success.

[67] Consistently with the approach endorsed by the Court of Appeal in McLachlan, I therefore consider that it would be inappropriate to order security for costs if the Adams are by the terms of any such order to be prevented from pursuing their third party claims. Such an outcome would constitute the denial of the Adams’s basic right to access to justice which has been consistently recognised through cases

from McLachlan to the present.²⁵ In this case, the Court is dealing with the claims of

defendants who are willy-nilly locked in to the defence of the Westpac claim. In my judgment this reinforces the importance of access to justice in this case. Mr and Mrs Adams face a claim by Westpac on their guarantee for more than $1 million. Mrs Adams has deposed that if Westpac obtains judgment the Adams will not be able to meet the liability and bankruptcy would be inevitable unless the Adams through success on third party claims recover sufficient to discharge any Westpac liability.

[68] The proceedings, which commenced with the summary judgment claim, have clearly involved significant legal costs for the Adams. The Adams also have significant needs of expert evidence – such already having arisen in relation to interlocutory matters including this application and to come at trial. Mrs Adams has deposed that, with the commitments to their defence and to this proceeding as a whole, the Adams do not have any additional funds from which to meet security for costs. Because of that, if there is an order for security in the sums sought the Adams say there will inevitably be a stay of their third party claims.

[69] The third parties adduced no evidence to cast doubt on Mrs Adams’ evidence

as to the impact of security in the amounts sought by the third parties. In a sense, counsel for the third parties embraced that evidence as indicating that this was a case

²⁵ For example see Highgate on Broadway Ltd v Devine, above n 16, at [23].

of impecuniosity which would usually call for an award of costs. Counsel for the third parties consistently put the emphasis of their submissions on the proposition that each third party claim was without merit, so as to overcome the Court’s concerns as to access to justice.

[70] On the basis of Mrs Adams’s evidence, and my assessment of the merits, I am satisfied that there would be unacceptable consequences in relation to access to justice if security were ordered in the sums sought by the third parties.

Other considerations

[71] Counsel made submissions on a number of other considerations to which the Court will in appropriate cases have regard. I have carefully considered those matters but do not find any of them, on either side, significant so as to alter the conclusions I have reached above on what emerged as the central issues on these applications.

[72] For the Adams, Mr Baird submitted that their position is reinforced by a reasonable probability that the Adams’s impecuniosity was caused by the third parties’ actions. That argument has not weighed with me in this case because of a lack of relevant evidence from the Adams. What is clear is that the Adams sold their farm property for $3 million and invested $1,050,000 into Edzell. It is that latter sum which the Adams claim as the main element of their damage. If that is the loss that third parties are found to have caused, it cannot be said that the third parties have caused the present impecuniosity of the Adams. It appears reasonably possible, if not probable, on the figures that the Adams would have received other money on account of the equity of the property they sold and that decisions and actions of the Adams in relation to that remaining equity may be what has led to their current impecuniosity. In any event, the Adams needed to lay a proper evidential foundation for this particular allegation and they have not done so.

[73] Mr Baird submitted also that the Court should take into account, as militating against an order for security, oppressive conduct on the part of Mr Ensor. Mr Baird referred to the judgment of Kós J in Highgate on Broadway Ltd v Devine in which his Honour recognises one consideration “the whole spectrum of each party’s

conduct in relation to the litigation and its subject matter”.²⁶ In relation to the facts, Mr Baird noted that the Adams’s case against Mr Ensor is that it was Mr Ensor’s advice which drastically changed the conservative financial model which the Adams would otherwise have adopted. He says that that ultimately led to a situation where Mr Ensor remains a beneficial owner of the vineyard while the Adams face a substantial guarantee claim. By its nature, there is something of a circularity in the Adams’s invoking Mr Ensor’s conduct as a factor against the grant of security. The oppressive conduct would have weighed with me had Mr Ensor’s approach after Westpac sold the property and litigation ensued been obstructive or otherwise oppressive. There is no suggestion of oppression in the way Mr Ensor is conducting his defence to the third party claim. I do not consider it appropriate in relation to the events which are said to give rise to the cause of action to treat any allegedly oppressive element in Mr Ensor’s conduct at that time as significant in the security for costs application.

The exposure of the third parties to wasted costs

[74] Counsel for the third parties have emphasised the balancing of interests which the Court must undertake. As Ms Harkess put it, the usual consequences of a litigant exercising his or her right to justice is to pay costs in the event the litigant fails at trial.

[75] This proceeding has been allocated a trial. Counsel have estimated a five week trial with approximately 40 witnesses to be called. The attendances in relation to preparation and trial will be time-consuming and expensive.

[76] If the defendants fail in relation to both their defence and their third party claims it is clear that with scale costs and expert witnesses the awards which each third party might receive would be in the order of at least $90,000. Counsel for the third parties have realistically assumed that the Court is likely to provide a certificate for second counsel having regard to the nature of the issues and the length of trial. Counsel have, in my view conservatively, estimated that expert costs may be at least

_$10,000.

²⁶ At [24].

[77] But for my assessment of the merits and my application of the McLachlan approach to the importance of access to justice, the potential for the third parties to be out of pocket to the extent that would occur in this case would have weighed very heavily in favour of a substantial award of security. I appreciate – as did Sir William Young in the Court of Appeal’s decision in Ambrose v Pickard²⁷ – that such consequential risks for the third parties are unwelcome and unfortunate, but will necessarily occur from time to time because of the overarching importance attaching to the right to access to justice.

The amount of any security

[78] I am satisfied for the reasons I have set out that security should not be granted in this case in the sums sought by the third parties.

[79] That leaves a need to determine whether orders for lesser amounts would have the same affect of effectively denying the Adams the right to pursue their third party claims.

[80] Mr Baird responsibly made submissions as to what orders the Court should make if (contrary to Mr Baird’s submission) the Court found some security for costs should be provided. Mr Baird submitted that “any award should only be a modest fraction of what is being sought”. He submitted that in that event the order should be for staged security with three tranches.

[81] Mr Baird emphasised that his submission should not be taken as a concession that the Adams would be able to provide security in any sum. He emphasised that the thrust of Mrs Adams’s evidence is that the Adams cannot afford to provide security.

[82] I have careful regard to what Mrs Adam has actually said. I therefore set out the passage in her June 2013 affidavit which most directly deals with this issue.

²⁷ Above, n 7.

There Mrs Adams states:

... I confirm that Lindsay and I currently have limited financial resources to fund our defence in this proceeding and the prosecution of our claims against the plaintiff, Mr Ensor, Mr Brook and the Receivers which we have made in the proceedings. What funds we do have are committed to pay our lawyers (and various expert witnesses) in relation to our defence of the plaintiff’s claims and the pursuit of our claims against the plaintiff and other parties to this proceeding, including Mr Ensor, through to trial.

Consequently, we currently have no additional funds available to pay security for costs in relation to our claims against Mr Ensor.

(At that point Mrs Adams was replying only to Mr Ensor’s application. Now that there are three applications, her evidence in relation to Mr Ensor must equally be taken as applying to all three third parties).

[83] In terms of justice, I must have regard to the individual justice for each third party. The extent of the evidence in this case and the length of the consequential trial are in part a product of the Adams’s decision to pursue three third party claims. That is the Adams’s right, but it also involves an election on their part not to focus on their defence and counterclaim to the Westpac proceeding.

[84] Those decisions of the Adams carried with them implications for the cost of defending the Westpac proceeding and of prosecuting their counterclaims and third party claims. The requirement to meet those costs is what Mrs Adams indicates is exhausting their “limited financial resources”.

[85] In my judgment, it is just that the Adams are required to marshal their limited resources to provide a modest level of security for the costs of each third party. The level I have in mind does not lend itself to several tranches of payment but it is reasonable to ameliorate the financial pressure upon the Adams by ordering security through two tranches.

[86] Because there are three applications for security, I necessarily must have regard to the total which will be required in relation to the three third parties as well as to the sum for the individual third parties. There is no logical reason to draw a

distinction in the amounts set for each third party and no counsel suggested there should be differentiation.

[87] All counsel accepted that the appropriate order on this interlocutory application is that costs should follow the event. I must also in reaching a decision as to the amount that it is just that the defendants provide by way of security, take into account, the fact that the defendants will be paying to the three third parties the costs of this application in any event.

[88] I also take into account the fact that as a result of the judgment delivered today in relation to non-party discovery,²⁸ the Adams, while obtaining orders for non-party discovery against Ingrid, will be required to pay the solicitor/client costs incurred in obtaining the Ingrid documents.

[89] I have come to the conclusion that it would be just that the defendants provide a sum of $20,000 to each third party. I have in mind that an element of that

$20,000 (up to one-half) might relate to the costs of expert evidence for each third party and that the balance should represent a very modest portion of anticipated legal costs.

[90] As preparation for trial is imminent, a first tranche should be payable early in the new year with the second tranche payable on the service of the plaintiff’s briefs of evidence (when other parties will be faced with preparation of their own evidence).

Costs

[91] As I have recorded, counsel accepted that on applications such as the present costs and disbursements will appropriately follow the event.

²⁸ Westpac New Zealand Ltd v Adams [2013] NZHC 3113.

Orders

[92] I order –

(a) The first defendants are to give security for costs to each of the three sets of third parties by paying a total of $20,000 into Court or by giving, to the satisfaction of the Court, security for those sums;

(b) The security for each third party shall be paid or provided in two tranches, the first tranche due by 31 January 2014 and the second tranche due on the day the plaintiff’s briefs of evidence are served on the third parties;

(c) The claim against any third party (and if also characterised, as a counterclaim defendant, that counterclaim defendant) shall become stayed if any tranche of payment as above ordered is not paid or provided on the due date to that third party; and

(d) The first defendants are to pay to each third party the costs of the relevant security application and of this order on a Scale 2B and B basis together with disbursements to be fixed by the Registrar, the Court certifying for the reasonable costs of travel of counsel but there being no certificate for second counsel.

Associate Judge Osborne

Solicitors:

Anthony Harper, Auckland for Plaintiff/First Counterclaim Defendant (attendance excused)

Lowndes Jordan, Auckland for First Defendants/Counterclaimants

Counsel: C J R Baird, Barrister, Auckland

Goodman Tavendale Reid, Christchurch for Second Counterclaim Defendant/First Third Party

DLA Phillips Fox, Auckland for Second Third Party

McElroys, Auckland for Third Third Parties