Aquaheat New Zealand Limited v Hi Seat Limited (in liquidation and receivership) [2014] NZHC 1173 (30 May 2014)

	Home \| Databases \| WorldLII \| Search \| Feedback High Court of New Zealand Decisions

BETWEEN	AQUAHEAT NEW ZEALAND LIMITED Plaintiff
AND	HI SEAT LIMITED (in Liquidation and Receivership) and LIA LIMITED (in Liquidation and Receivership) First Defendant
AND	ANDREW JOHN GRENFELL Second Defendant

Hearing:	26 March 2014
Appearances:	B A Ross for the Plaintiff / Respondent J Tomlinson for the Second Defendant / Applicant
_Judgment:	_{30 May 2014}

This judgment was delivered by me on 30 May 2014 at 10.00 a.m. pursuant to Rule 11.5 of the High Court Rules.

AQUAHEAT NEW ZEALAND LIMITED v HI SEAT LIMITED (in Liquidation and Receivership) and LIA LIMITED (in Liquidation and Receivership) [2014] NZHC 1173 [30 May 2014]

[1] Mr Grenfell, a defendant to this proceeding, makes application for orders against Aquaheat New Zealand Limited (Aquaheat), the plaintiff. The orders he seeks are orders for particular discovery and orders setting aside claims to privilege.¹

Mr Grenfell also applies for leave to bring his application because the application has been made outside the time allowed in timetable directions and after the close of pleadings date.

[3] Aquaheat claims compensation from Mr Grenfell for losses it has suffered on an agreement for sale and purchase (the agreement) pursuant to which it acquired the assets owned by the first defendants, Hi Seat Limited and LIA Limited.

[4] The amount of the compensation that Aquaheat claims is the Adjustment Amount that Hi Seat and LIA were required to pay under the agreement to take into account such things as potential collections of book debts and movements in working capital items up to the date of settlement. The Adjustment Amount was in fact $1.79 million. The amount that Hi Seat and LIA set aside in an escrow account for the purpose of satisfying the Adjustment Amount was, as required by the agreement, only $250,000. As they were unable to pay the short-fall they have been placed into liquidation. Aquaheat is looking to Mr Grenfell to rectify their default because of the role that they contend he played in the negotiations leading up to the execution of the agreement.

(Horizon), made an offer to buy the assets of Hi Seat and LIA². They concluded on

²Horizon incorporated Aquaheat on 3 August 2012 for the purpose of buying the assets.

a) Hi Seat and LIA were wholly owned subsidiaries of a company called Hastie Holdings (NZ) Limited, which was in receivership pursuant to a general security agreement in favour of ANZ Fiduciary Services Property Ltd.

[7] On 8 August, the day of settlement, Mr Grenfell signed special resolutions approving the transaction, as receiver and agent for and on behalf of Hastie Holdings.

[8] The sale settled on 31 August 2012. On 7 September Mr Grenfell was appointed one of two receivers and managers of Hi Seat and LIA.

[9] On 24 and 25 September Aquaheat advised Mr Grenfell and his co-receiver that the Adjustment Amount was in fact $1.79 million and that payment was required. (This was the net debt owing after a credit for an over-estimate of apportionable outgoings was taken into account). The escrow amount of $250,000 was paid to Aquaheat with the difference owing as an unsecured claim. There were no excess assets to pay unsecured creditors.

[11] Bell Gully acted as legal adviser to Horizon, over the course of the negotiations and in connection with the agreement for sale and purchase. Horizon also retained PricewaterhouseCoopers (PwC), which had responsibility for undertaking financial due diligence for the purpose of the transaction.

[12] In its statement of claim Aquaheat seeks a declaration that Mr Grenfell breached s 136 Companies Act 1993 by agreeing to Hi Seat and LIA entering into the agreement. Aquaheat’s claim is essentially that Mr Grenfell played a major part in the negotiations and that his actions show he was effectively a director of the two

_{vendor companies within the meaning of that term under s 126 Companies
Act 1993;}

that he breached s 136 in his capacity as director; and that an order is justified under s 301(1)(c) directing him to compensate Aquaheat in its capacity as a creditor of the vendor companies.

[13] The statement of claim pleads that Mr Grenfell breached s 136 in that he allowed the vendors to enter into the agreement and incur all of the obligations contained in it relating to the Adjustment of the Purchase Price, when there were not reasonable grounds for him to believe that the vendor companies would be able to meet the obligations.

[14] Mr Grenfell denies that he acted in the capacity of a director of the vendor companies under s 126 or that he breached duties as a director under s 136. He pleads two affirmative defences. Relevantly, the first is essentially that if he has any liability to Aquaheat, any damages recoverable or relief sought should be reduced to such extent as the Court thinks just and equitable having regard to:

a) Aquaheat’s share in the responsibility for the claimed damage – Aquaheat’s own independent financial and legal advisors being fully aware before the agreement was signed that it could be an unsecured creditor in the event that the vendor companies were placed into receivership; that the escrow amount was insufficient, and that it needed to be comfortable with the level of the escrow amount in the event that its entitlement to be paid exceeded the amount to be held.

b) The nature of the transaction – that the parties were commercial entities negotiating at arm’s length with full financial and legal advice, and that throughout the period of due diligence the purchaser had full and unfettered access to four years of monthly historical balance sheet information showing working capital movements, trial balance financial information for June 2012, and all other documents in the due diligence data room, and to the vendor’s management personnel.

c) The fact that the purchaser and its advisers were fully aware that historical working capital fluctuations had previously reached up to

[15] The application is for discovery of certain communications, and for an order setting aside claims to privilege made in respect of the communications. The communications are any made in the period 11 July and 8 August 2012, between:

a) PwC and Aquaheat, Horizon and/or Bell Gully; and b) Bell Gully and Aquaheat, Horizon and/or PwC,

relating to the fluctuation of the working capital levels of Hi Seat and LIA; the calculation or quantum of the Adjustment Amount; the sufficiency (or otherwise) of the proposed Adjustment Escrow Amount and payments by Hi Seat and LIA to Aquaheat in excess of the Adjustment Escrow Amount (as those terms are used in the statement of claim dated 22 February 2013).

[16] The application also seeks discovery of any internal or other documents, such as file notes, evidencing such communications.

[17] The scope of the application was modified at the hearing. Counsel for Mr Grenfell clarified that the communications in issue are communications, the substance of which is about the escrow amount for inclusion in the agreement.

[18] Counsel said he anticipates such communications must exist and were likely to have been made between:

a) PwC and Aquaheat⁴– counsel submits that Aquaheat cannot have privilege for these as they are not communications between its parent company and its legal adviser, Bell Gully.

b) PwC and Bell Gully – the submission is that Aquaheat cannot have privilege for these for the same reason, unless PwC is an “authorised representative”. The term is not applicable to PwC, but even should the contrary be the case, Aquaheat has waived privilege.

⁴It is accepted by both sides that any privilege held by Horizon would apply to Aquaheat.

c) Bell Gully and Aquaheat – counsel accepts Aquaheat prima facie has privilege for such communications, but submits that Aquaheat has waived privilege.

[19] The relevance of such communications, counsel submits, is to the following issues in the proceeding:

a) Whether, if Mr Grenfell was a director (as that term is used in s 126) and in that capacity agreed to Hi Seat and AIL entering the agreement, he had reasonable grounds at the time to believe that they would be able to perform their contractual obligations in respect of any adjustments they could be required to make to the purchase price.

b) Whether, if Mr Grenfell is liable for losses Aquaheat suffered as a result of the vendors’ inability to pay the full amount of the adjusted purchase price, Aquaheat contributed to its own losses by acting on the advice of its own financial advisor, PwC.

[20] Counsel for Aquaheat produced for my inspection a folder of correspondence which she said may be technically or marginally relevant. She submitted that there is little in fact that records the PwC ever advised on the escrow amount and that any documents that bear on that issue are confined to emails over a few days. She submitted that though this may seem strange events were moving quickly and the concept of an escrow amount came up in the last stages of the negotiations between the parties’ legal advisers.

[21] Apart from the limited concession as to relevance, counsel for Aquaheat indicated that its position remains that production should not be ordered because Aquaheat has privilege in the emails, and that there has been no waiver of privilege, contrary to Mr Grenfell’s contention.⁵

[22] It was agreed by counsel for both sides that I should inspect the emails to satisfy myself as to whether Aquaheat’s claim to privilege in respect of emails dealing with the escrow amount is properly made.

⁵In respect of a small number of documents in the bundle Aquaheat’s claim for confidentiality was the subject of challenge. Counsel advise however that the parties have sorted out issues of confidentiality.

[23] I have inspected all of the documents in the bundle provided to me. It is clear that those that relate to the escrow issue (or possibly relate to that issue) are confined to the first week in August and comprise emails made between Bell Gully, PwC and Horizon. In this judgment I deal only with these particular emails.⁶

[25] Counsel for Aquaheat submits that the application for particular discovery has been made too late. It is, she submits, an unnecessary distraction when the parties are preparing for trial. She points out that Mr Grenfell was directed to make the application in late November 2013. He did not do so until February of this year.

[26] Mr Grenfell has explained why his application was late and claims that this is not a case where he has sat idly on his hands. He understood another party was pursuing particular discovery. He did not anticipate that the claim against that party would be discontinued.

[27] Though not wholly convinced by the explanation, I am satisfied that there is no real prejudice to Aquaheat by allowing leave. Any disadvantage caused by the distraction that Aquaheat complains of can be dealt with fairly by an award of costs.

[28] I turn then to the application for particular discovery. I begin with the governing principles.

[29] Rule 8.19 of the High Court Rules relevantly provides the Court may make an order for particular discovery after the proceeding has commenced where:

[I]t appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered ...

⁶One of the emails (named Document HRZ.03.14362) has been provided by Aquaheat (with a portion redacted) to Mr Grenfell by way of informal discovery. The privilege claimed for the redacted portion is challenged.

[30] As conveniently noted recently by Kós J in Robert v Foxton Equities Ltd, the following general principles may be taken from decisions of this Court in ANZ National Bank Ltd v Tower Insurance Ltd and Southland Building Society v Barlow Justice Ltd:⁷

(a) A document should be discovered if it is relevant to matters which will actually be in issue before the Court.

(c) On an application for particular discovery under r 8.19, there must be prima facie evidence that the document exists and is in the party’s control (although the applicant need not prove that the document actually exists).

(d) The applicant need no longer establish “necessity” for an order (in contrast to former r 300). However, the supposed regulatory relaxation may not be substantial: the order will still only be made in relation to documents that “should have been discovered”.

[31] There is no dispute that the few emails in the bundle given to me that relate to the escrow amount will be relevant to matters in issue in the proceeding (if marginally). Strictly speaking they should be identified in a further affidavit, but counsel for Mr Grenfell only insists on inspection, and only then if privilege has been claimed improperly. On that basis I propose as a matter of discretion not to order the filing of a further affidavit. I will order production of such documents as I find are not privileged (if any).

[32] On a challenge to a claim to privilege the Court must determine whether to allow the claim to privilege, or to set the claim aside.

(1) If a party challenges a claim to privilege or confidentiality made in an affidavit of documents, the party may apply to the court for an order

⁷Robert v Foxton Equities [2014] NZHC 726, citing ANZ National Bank Ltd v Tower Finance Ltd (2009) 15 ANZ Insurances Cases 61-816 (HC) at [18]-[24] and Southland Building Society v Barlow Justice Ltd [2013] NZHC 1125 at [12]- [14].

(2) In considering the application, a Judge may require the document under review to be produced to the Judge and may inspect it for the purpose of deciding the validity of the claim.

(a) set aside the claim to privilege or confidentiality; or (b) modify the claim to privilege or confidentiality; or (c) dismiss the application; or

(d) make any other order with respect to the document under review that the Judge thinks just.

[34] It is common ground that there are two essential issues for determination in

[35] On the first issue, Aquaheat says the emails are privileged under s 54, and claims the privilege extends to communications with PwC, on the basis that PwC was the “authorised representative” of Horizon in accordance with s 51(4).⁸

[36] Section 54 relates to privilege for communications with legal advisers. It relevantly provides:

(1) A person who obtains professional legal services from a legal adviser has a privilege in respect of any communication between the person and the legal adviser if the communication was—

[37] The purpose of legal advice privilege is well settled and not in dispute. It is to “enable the free exchange of information between solicitor and client for the purposes of obtaining and providing legal advice”.⁹

[38] Under s 51(4), s 54 is extended to protect communications between a legal advisers and “an authorised representative” of the legal advisers’ client (and vice versa):

(4) A reference in this subpart to a communication made or received by a person ... includes a reference to a communication made or received ... by an authorised representative of that person on that person’s behalf.

[39] The appropriate test for determining who is and who is not an authorised representative for the purposes of legal advice privilege was considered by this Court in Brandlines Ltd v Central Forklift Group Ltd.¹⁰In respect of the general approach to be applied Associate Judge Gendall (as he then was) reviewed the authorities and stated the following:¹¹

[I] it is clear from the New Zealand authorities cited to me that there are two requirements that must be fulfilled in this country: that the third party acted as an agent in communicating with the client’s solicitor; and that the communication was for the purpose of obtaining or providing legal advice. It may well be that these two questions are interrelated to some extent. Nevertheless, they raise separate issues and should be considered as such.

[40] The case related to proceedings by the owner and tenant of a warehouse premises that suffered damage from a fire allegedly caused by a forklift battery left charging overnight. A number of documents were prepared by assessors, investigators and experts following the fire and communicated to the owner and tenant’s legal advisors. The question was whether those communications were privileged. Each communication required assessment. His Honour concluded that

⁹Brandlines Ltd v Central Forklift Group Ltd HC Wellington CIV-2008-485-2803, CIV-2009-

most of the lessee’s and about half of the owner’s communications were not protected by legal advice privilege, because the “principal purpose” was to enable the plaintiffs and their insurers to determine the cause of the fire.¹²

[41] I take from this that in acting as an agent it is not sufficient that a subsidiary reason for a communication was for obtaining or providing legal advice; it must be the dominant (or principal) purpose for the communication. This approach is consistent with that taken for litigation privilege under s 56 of the Act.

[42] In Brandlines the Court also considered that a third party will act as an agent of the client when the third party is authorised to assume and in fact assumes the role of the client in communicating the information to the solicitor. The third party must be “the man on the spot”, as the client’s “alter ego”, and must in fact act on its behalf.¹³It is not necessary for the agent to have capacity to instruct and/or receive legal advice from the solicitors in question on the clients’ behalf.¹⁴In addition, the relevant inquiry is not confined to the question of whether the third party was acting as a mere intermediary.¹⁵

[43] More recently, the approach in Brandlines and the issue of third party involvement in the giving or receiving of legal advice was considered by Kós J in Robert v Foxton Equities Ltd.¹⁶The Judge reviewed a number of authorities that emphasise the importance of the third parties being agents of the client seeking advice before privilege could attach.¹⁷He went on to state:

[40] Given that privilege is now codified in the Evidence Act 2006, it is important to focus on the words of the statute. They support the view that to be an agent for the purposes of privilege, a person must be given authority to communicate with the solicitor to obtain legal advice, and actually do so.

Brandlines, especially given the later comment in Foxton Equities that:¹⁸

[a] third party to whom privilege attaches must be operating under an agency agreement that encompasses them obtaining professional legal services.

[45] In my opinion, to the extent that Foxton Equities departs from the approach taken in Brandlines, the formulation in Brandlines is to be preferred. However, that is not to say that the definition of “authorised representative” is to be determined without consideration of the statutory context. As the Law Commission appositely notes,¹⁹the requirement to identify the third party in question as an agent of the client is in direct contrast to litigation privilege, which protects any communication between the lawyer or client and third parties where the “dominant purpose” is “preparing for a proceeding of an apprehended proceeding”.²⁰

[46] The distinction between legal advice and litigation privilege reflects the Court of Appeal’s comment in Simunovich Fisheries Ltd v Television New Zealand Ltd that legal advice privilege “should be as narrow as its principle necessitates”.²¹

The reference to “authorised representatives” in s 51(4) is a limited expansion of the privilege provided in s 54 and should be interpreted in light of the Court of Appeal’s comment in Simunovich Fisheries and the statutory context in which legal privilege is situated.

[47] Following the principles above, in order for Aquaheat to have a privilege in any of the communications dealing with escrow amount PwC must have made or received the communication as an authorised representative of Aquaheat on Aquaheat’s behalf.

[48] Both parties to the application agree broadly on the correct approach, but they disagree as to the particular test to be applied when determining whether PWC was acting as an agent of Horizon in its limited communications with Bell Gully over the amount to the escrow.

a) Horizon had to rely on PwC to speak for it to Bell Gully. Because of the nature of the particular communications it could not speak for itself; and

²¹Simunovich Fisheries Ltd v Television New Zealand Ltd [2008] NZCA 350 at [165].

b) the nature of the communications shows that PwC was not simply carrying out financial due diligence or providing financial advice, but that it was acting as Horizon’s agent to provide such information as Bell Gully needed to provide legal advice on the agreement.

[50] Counsel for Aquaheat also relies on a wider proposition, stemming from the way the due diligence process was managed. She argues, in effect, that where such a process is managed or co-ordinated by the client’s legal adviser, it would be unworkable if some communications between those “inside the tent” were privileged and some were not.

[51] Counsel relies on Brandlines and the authorities cited in Brandlines. She submits the test is whether the third party is the “medium of communication”²²or “man on the spot” for the client in respect to the legal advisor. In doing so she impliedly suggests however that the requirement that the third party be the “alter ego” of the client is too high.

... if the third party has been appointed by the client, or by the solicitor on the client's explicit instructions, specifically to provide information to the solicitor on behalf of the client in relation to a particular matter then communications between the third party and the solicitor for the purpose of enabling the solicitor to give legal advice to the client are protected by the solicitor client privilege. If the third party (the accountants in this case) are not specifically appointed, either directly by the client or indirectly by the solicitor on behalf of the client and on the client's express instructions, to provide information and advice on the particular matter on which the client seeks legal advice from the solicitor, the accountants are not the client's agents for the purpose of giving the information and advice to the solicitor and their internal documents and their communications with the solicitor are not privileged.

[53] Counsel argues that since clients like Aquaheat must of necessity rely on experts to explain to their lawyers the intricacies of the situation at hand, the expert must be held to speak as the agent or representative of the client for the purposes of that communication.²⁴Further, she submits, policy reasons support a finding of privilege in such cases because it accords with the purpose of legal advice privilege

²²Re Highgrade Traders Ltd [1984] BCLC 151 (CA), cited in Brandlines Ltd v Central Forklift

²⁴Counsel relies on the discussion by Smith J in Long Tractor Inc v Canada (Deputy Attorney

and makes room for the central role of professional advisers like PwC in large, commercially sensitive transactions.

[54] In summary counsel’s submission is that the correct approach is that contained in Kupe and in Re Highgrade Traders, and in any event looking at the situation contextually that this is clearly a situation where privilege should apply. PwC’s broad formal role was in fact the role of an authorised representative and should be held to fulfill the relevant tests.

[55] Counsel for Mr Grenfell takes a relatively straightforward approach. He submits that following Brandlines the question is whether PwC engaged in communications with Bell Gully as an agent for Aquaheat for the purpose of obtaining or providing legal advice and that PwC was not an agent for Aquaheat because PwC simply acted as a professional advisor to Aquaheat and was not appointed as agent to act on its behalf. There is nothing, he contends, to suggest PwC was the “alter ego” or “the man on the spot” for its client. It was an independent adviser for Aquaheat on financial matters and did not stand in its shoes in its communications with Bell Gully.

[56] On this basis, counsel for Mr Grenfell submits, privilege cannot attach to PwC’s exchanges with Bell Gully because PwC’s communications were for the purpose of making recommendations about a future course of conduct (whether to proceed with the purchase as a commercially sound proposition), and not about or with a view to obtaining legal advice on the terms of purchase. PwC was not acting as agent in the required sense.

[57] There is little in the way of documentary evidence that suggests that PwC was in fact Horizon’s authorised agent for any purpose other than the letter of engagement that PwC sent to Horizon on 11 July 2012. Counsel for Aquaheat did not refer to any such documentation.

[58] The letter relates to Horizon’s appointment of PwC to assist with its due diligence investigation in connection with the proposed acquisition. It states the services to be provided are for the preparation of an “engaged procedures report on the business and financial affairs of the Targets”. I do not consider that PwC’s appointment for that purpose makes it an authorised representative of Horizon for

the purpose described in s 54. Its contractual function is to provide financial advice to Horizon about the assets that Horizon was considering for acquisition.

[59] The letter does contemplate the future possibility that PwC might be provided with draft agreements. It advises Horizon that if requested “expressly for our comment”, PwC will comment in the light of the knowledge gained in preparing the report “on matters that it considers may be significant to your discussions with your legal advisers relating to the substance of any accounting provisions or accounting warranties”, but it cautions that “except where specifically requested in writing we will not extend our procedures for this purpose”. It adds that PwC will only provide such comment where Horizon consults with it first and “the terms on which it would (or would not) undertake the work” are agreed. I was not referred to any documentation that shows that terms for such work were agreed.

[60] I can only conclude on this basis that PwC was acting (mainly if not exclusively) as a professional adviser to Horizon for the purpose of conducting financial due diligence and that there can be no all-encompassing claim, as counsel for Aquaheat appears to suggest, for privilege for all communications involving PwC and others operating “inside the tent” for the purpose of undertaking due diligence in the period leading up to the execution of the agreement for sale and purchase.

[61] In this respect I reject Aquaheat’s submission that PwC’s “broad formal role” as a key party assisting with the due diligence and progression of the purchase means that legal advice privilege attaches to their communications. To find otherwise may well be desirable but would extend legal advice privilege beyond that contemplated by Parliament in enacting s 54 and would cut against the comment of the Court of Appeal in Simunovich Fisheries that legal advice privilege “should be as

[62] However, despite that finding, the general nature of PwC’s role as financial adviser undertaking due diligence does not rule out the possibility that PwC was authorised (indeed, required by Aquaheat) to step into a more specific role of “information provider” to Bell Gully for the purpose of the legal advice that Bell Gully was providing on specific issues in connection with the agreement for sale and purchase. Though agency in the necessary sense would be beyond argument if there were an agreement that is express, such agreement is a question of fact and

_{may be demonstrated where circumstances exist that give rise to the
irresistible}

inference that necessary authorisation has been conferred. This is the issue to which

[63] The bundle I have been asked to review contains a small number of emails relating to the issue of the Adjustment Amount and the issue of an escrow sum. These emails, made in the first week of August, are principally between Bell Gully, PwC and Horizon. There are two of significance dated 7 August (one of which has been partially disclosed). Both were made and sent by Bell Gully to PwC and Horizon. They make clear on their face that they were made in the course of and for the purpose of Bell Gully giving legal advice to its client on the agreement. It is clear that Bell Gully’s purpose in communicating with PwC was to enable it to give advice to Horizon on a key term of the agreement under negotiation between the parties’ respective legal advisers (how to safeguard the client’s position with respect to the escrow amount). It can be inferred that PwC, the entity engaged by Horizon to provide it with financial advice in relation to the proposed transaction, was authorised by Horizon to give the information to Bell Gully on its behalf for that purpose. Materially, the email is one of a small set of emails between these parties in which the party that is the legal adviser is marshalling those “inside the tent” (being the legal advisers themselves, the client and the client’s other professional advisers) to provide the information it needed to complete the agreement for sale and purchase. This was obviously with the client’s authority and consent.

[64] In summary, it is too wide to say that PwC was the “agent” of Aquaheat for all legal purposes. However, it was its authorised representative for a very narrow and specific legal purpose. The communications themselves are evidence that PwC was actually functioning in this capacity for this specific purpose. On this basis the communications were made to an agent of Horizon, and so I find that PwC was acting as an authorised representative of Horizon for the purposes of the communications. In that respect the communications between PwC and Horizon are privileged. Though the bundle does not show there were emails in response it would follow that any such emails would also attract privilege.

[65] In reaching this view I am also satisfied that the second element of the test in Brandlines is met. It is clear that Bell Gully’s communication to PwC was for the (dominant) purpose of legal advice. There was no other reason why Bell Gully would request such information but for providing its legal services to Horizon (specifically the provisions of the agreement for sale and purchase dealing with the escrow amount).

[66] Having reached the view that the communications are privileged, I turn to the issue of waiver.

[67] Section 65 of the Evidence Act 2006 provides that a person who has a privilege in respect of a communication will waive that privilege if he or she acts so as to put the privileged communication in issue in a proceeding. Section 65 relevantly states:

(2) A person who has a privilege waives the privilege if that person, or anyone with the authority of that person, voluntarily produces or discloses, or consents to the production or disclosure of, any significant part of the privileged communication, information, opinion, or document in circumstances that are inconsistent with a claim of confidentiality.

b. institutes a civil proceeding against a person who is in possession of the privileged communication, information, opinion, or document the effect of which is to put the privileged matter in issue in the proceeding.

[68] In AstraZeneca Ltd v Commerce Commission the Court considered the circumstances in which privilege will be waived.²⁶It stated the following:

The mere relevance of a privileged communication to an issue in the case provides no basis for waiver. Even a party's asserted reliance upon a privileged communication is generally insufficient. Waiver occurs where a party both asserts reliance upon the privileged communication and also seeks to inject the substance of the communication in evidence. At that point an abuse of the privilege exists. The claimant cannot have the benefit of reliance upon the substance of the advice and still seek to shield that advice from disclosure to the other side. To permit this would give rise to unfairness in the required sense, in that the party's conduct would be offensive to the trial process.

²⁶AstraZeneca Ltd v Commerce Commission [2008] NZHC 521; (2008) 12 TCLR 116 (HC) at [39].

[69] The crux of the matter, therefore, is whether the substance of the “escrow communications” have been put into play by Aquaheat while it continues to rely on their privileged status.

[70] Counsel for Mr Grenfell submits that privilege has been waived. Counsel’s submissions rely on an affidavit of Mr Anand affirmed on 5 November 2012 and made in support of an application by Aquaheat in this proceeding for interim relief. The affidavit states that Horizon originally proposed that an amount of $1 million be set aside against the calculation of the final Adjustment Amount, but that this proposal was discarded in favour of the vendors’ proposal for an escrow fund of

$250,000. Counsel for Mr Grenfell submits that of particular relevance is Mr Anand’s claim that Aquaheat agreed to the lesser amount in reliance on representations made by the vendors, whose own advisers in turn relied on the vendors. He points to the following statement in the affidavit:

Based on the information provided by Minter Ellison I understood that HNZ and AIL and their advisers were comfortable that the $250,000 escrow ought to be sufficient to cover the anticipated adjustment to the purchase price.

On the basis of those representations and in the absence of up to date financial data from HNZ and AIL to the end of July 2012 being available, Horizon and Aquaheat agreed to set the adjustment escrow amount at

[71] The statement needs to be read together with an email that Mr Anand annexed to his affidavit, which counsel for Mr Grenfell also relies upon. The email is dated 7 August 2012²⁸and it is made by Bell Gully to Horizon and PwC. It advises the recipients of the vendors’ position on the escrow amount and states:

[72] Counsel characterises the email as a request seeking the views of the client and PwC on the adequacy of the escrow amount. Counsel submits that:

a) The email contrasts with the statement in the affidavit. The statement claims reliance on representations by the vendors rather than on advice from Aquaheat’s own professional independent advisors.

²⁷_{The statement is consistent with allegations in the
statement of claim based on breach of s 136.}

[73] Counsel submits that it is apparent that Horizon received advice from PwC / Bell Gully (as to the adequacy of the proposed escrow amount) and that it did so in circumstances where Aquaheat asserts it relied only on representations by Mr Grenfell and his advisers (rather than on advice from its own professional independent advisers). Counsel contends that such reliance is inconsistent with the maintenance of privilege in that advice from Bell Gully / PwC. He submits further that the inconsistency is sufficient to meet the unfairness threshold in AstraZeneca, and that it is misleading and constitutes an abuse of privilege.

[74] Additionally, counsel submits that Aquaheat has waived privilege in the redacted paragraph of the email by voluntarily producing a significant part of the email in circumstances that are inconsistent with a claim of confidentiality. The majority of the email has been disclosed except for one paragraph, and it should be discovered in its entirety. Privilege has been waived in respect of an entire document which has been deliberately discovered but redacted.

[75] In response Aquaheat submits that Mr Anand’s belief as to the advice was based on information provided by Minter Ellison. Privileged material is not referred to in the affidavit. Even if it was, Mr Anand did not rely on that information nor does the statement inject the substance of the advice into the proceeding.

[76] I consider it clear that Mr Anand’s statement makes reference to privileged material. It clearly states Mr Anand’s belief that the advisers were comfortable with the $250,000 escrow amount. Further, contrary to Aquaheat’s submission I do not consider it relevant whether Mr Anand relied on the information specifically; the question is whether the party involved (in this case, Aquaheat) relied upon the privileged communication, not Mr Anand. The issue is whether the statement effectively injects the substance of the advice into the proceeding in a manner that is unfair to the other party.

[77] I consider that it did. Counsel for Mr Grenfell made reference to the Court of Appeal’s decision in Ophthalmological Soc of NZ Inc v Commerce Commission [2003] 2 NZLR 145, in which the Court stated:²⁹

²⁹Ophthalmological Soc of NZ Inc v Commerce Commission [2003] 2 NZLR 145, (2003) 16

It is the court’s objective judgment as to the consistency of the conduct with maintaining the privilege which must be assessed in all the circumstances. That requires close analysis of the particular context: what is the issue in relation to the privilege; how does the evidence relate to that issue and is there inconsistency that could lead to injustice if the privilege is upheld. The weight to be given to fairness in the Court’s exercise of judgment will differ according to the circumstances including the character of the privilege it is said has been waived.

[78] To the extent to which Aquaheat has relied on the affidavit of Mr Anand, it would be inconsistent for it to claim privilege in respect to the advice that Mr Anand makes reference to. He makes limited reference only to the email in question, but use of the affidavit injects the substance of the email into play. It would be unfair for Aquaheat to continue to claim privilege in respect to the email while it relies on Mr Anand’s statement.

[79] On this basis I consider that Aquaheat/Horizon has waived their privilege in respect to the email of 7 August.

[80] I also consider that the waiver is not confined to that email. If the substance of that email has been put into play, the same must also apply to another in the bundle in which Bell Gully makes a request for similar information to PwC and Horizon (again on 7 August 2012). It also applies to communications made directly in response to the requests in both emails.

[81] The application is allowed to the extent that privilege is set aside in respect of two emails contained in the bundle and any communications made in response to requests made in those emails (or internal records of such responses). The emails are dated 7 August 2012 and were made from Bell Gully to PwC and Horizon; they are the documents numbered HRN.03.14362 and HRN.04.1591 in the bundle.

[82] I leave it to counsel for the parties to arrange disclosure of the documents. Leave is reserved should directions be required.

[83] Costs are reserved. If the parties cannot agree on costs, memoranda may be filed and served within 5 working days of the date of this judgment.

High Court of New Zealand Decisions

Aquaheat New Zealand Limited v Hi Seat Limited (in liquidation and receivership) [2014] NZHC 1173 (30 May 2014)