McLellan v Springvale Central Water Co Ltd [2014] NZHC 1677 (17 July 2014)

Last Updated: 29 July 2014

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

CIV-2013-412-000468 [2014] NZHC 1677

BETWEEN	SHAUN McLELLAN Plaintiff
AND	SPRINGVALE CENTRAL WATER CO LTD Defendant

Hearing:	2 July 2014
Appearances:	J E Bayley for Applicant/Defendant D J More for Respondent/Plaintiff
Judgment:	17 July 2014

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

_{as to security for costs}

Introduction

[1] The defendant (Springvale) seeks security for costs.

[2] The security sought is payment of an additional sum of $52,810. When this application was first filed, at a time when there was a summary judgment application before the Court, the plaintiff (Mr McLellan) provided by agreement a first tranche of security of $5,284. This application was then adjourned.

[3] Mr McLellan’s summary judgment application was subsequently abandoned with the result that timetable directions have now been made through to trial. Hence Springvale’s renewed application for a second tranche of security.

[4] Mr McLellan accepts that he will be unable to pay Springvale’s costs if he is

unsuccessful in his proceeding. The threshold requirement under r 5.45(1)(b) is therefore established.

McLELLAN v SPRINGVALE CENTRAL WATER CO LTD [2014] NZHC 1677 [17 July 2014]

[5] Mr More, for Mr McLellan, did not challenge the reasonableness of the

Springvale assessment of likely 2B costs and expert witness fees ($37,810 and

$15,000 respectively). It would remain for the Court, if the Court finds it just to award some additional security, to determine whether the full $52,810 or only some part of it should be awarded.

[6] Mr McLellan’s opposition to the awarding of any further security is upon the basis that the Court should conclude under r 5.45(2) that it is not just in all the circumstances to award any security. That is for three reasons, namely:

(a) Mr McLellan has a good cause of action against Springvale; and

(b) Mr McLellan’s impecuniosity has been caused by the Springvale’s

conduct in relation to the contract; and

(c) It would be contrary to the interests of justice for Mr McLellan to be required to provide further security for costs and for the proceeding to be stayed until security was provided.

The Court’s general approach to consideration of security

[7] In A S McLachlan Ltd v MEL Network Ltd,¹ the Court of Appeal emphasised the discretionary nature of this jurisdiction and observed that it is not to be fettered by constructing “principles” from the facts of previous cases. There is no check-list of so-called principles.

[8] It is appropriate in this case, given the two central issues raised by Mr

McLellan, to focus first on the merits of his claim and secondly on the cause of his impecuniosity.

¹ A S McLachlan Ltd v MEL Network Ltd [2002] NZCA 215; (2002) 16 PRNZ 747 (CA).

Mr McLellan’s claim

The nature of the claim

[9] Mr McLellan brings his claim as assignee of the cause of action. The cause of action was assigned by Highland Springs No 2 Ltd (Highland) of which Mr McLellan is the sole shareholder and director.

[10] Mr McLellan sues Springvale in relation to what he says were Springvale’s failures to deal with water in accordance with a contract between Highland and Springvale. (In this judgment I refer to “Springvale” as including also Ridges RD Ltd – Ridges was the party which actually entered into the contract with Highland but Ridges later amalgamated with Springvale, becoming Springvale under Part 13 of the Companies Act 1993).

[11] In 2008, Highland had obtained resource consent to subdivide its land into lifestyle blocks. Highland needed a water supply for each block. Springvale owned adjacent land. Springvale and Highland reached an agreement whereby:

(a) Highland was to grant Springvale an easement over its land to convey water; and

(b) Springvale was to allocate to Highland from its resource consent the right to take water.

[12] The parties agreed that their agreement should become subject to a consent order in proceedings which had previously been issued. Consent orders were made on 29 June 2011 incorporating the terms of the agreement.

A duty to supply water

[13] Mr McLellan says that his damages claim arises because Highland’s land was sold at mortgagee sale on 24 April 2012 before Springvale had met its commitment to supply water to Highland’s land. Mr McLellan’s case is that Springvale’s failure to supply the water meant Highland had been unable to sell its land and the mortgagee sale was unable to be avoided.

[14] In evidence initially filed in this proceeding, Graeme Reid, a director of Springvale, asserted that Springvale had met its obligation because it had “allocated” water. He rejected Mr McLellan’s proposition that Springvale also under the consent order had a duty to supply water.

[15] In his submissions for the abandoned summary judgment hearing, Mr Bayley recognised a “confusion” which had been caused by the evidence of Reid. Mr Bayley accepted that the consent orders undoubtedly contemplated the physical supply of water.

A duty as to the timing of the water supply

[16] Mr Bayley identified the issue as being one of timing. Following the withdrawal of the summary judgment application, the issue of timing has remained a central issue and is now so again in relation to this security for costs application.

[17] In this summary context, I can form only an impression of the relative strengths and merits of the competing contentions. I therefore briefly summarise what has been covered by extensive affidavits filed particularly by Messrs Reid and McLellan.

[18] The consent order was made on 29 June 2011, some nine months before the mortgagee sale of Highland’s land. Mr Reid, in his evidence for Springvale, deposed that the physical works necessary to achieve supply to the Highland properties were completed in May 2012 (that is in the month following the mortgagee sale of Highland’s land which occurred on 24 April 2012).

[19] Under the consent order, Springvale was to allocate to Highland’s lots the right to take water “at the direction of” the Highland companies or the registered proprietors for the time being of the Highland land. The consent order specified the annual water charge payable by the Highland companies.

[20] The consent order was silent as to the timing of the required allocation other

than it was to be “at the direction” of the Highland companies.

[21] By the time counsel filed their submissions for the summary judgment hearing, Mr Reid’s initial, surprising suggestion that the requirements for allotment of water under the consent order did not require the actual supply of water had fallen away. As Mr Bayley then identified, the central issue taken by Springvale was as to the timing of the requirement of supply.

[22] Mr Bayley’s case for Springvale is that the surrounding circumstances indicated that the consent order was not intended to require the immediate physical supply of water. He submitted that there was no breach of the consent order because Springvale had taken all reasonable steps following the making of the consent order to implement supply.

[23] It is clear both from Mr Bayley’s submission and from the evidence provided by Mr Reid to support that submission that Springvale’s case will rely to a significant degree upon surrounding circumstances as an aid to interpretation. In all, Mr Reid has provided four affidavits which variously contain evidence of those surrounding circumstances. This in itself highlights the difficulty for a Court in an interlocutory context in being asked to determine the merits of one particular party’s contention as to the correct construction of provisions in a contract or consent order. Having carefully read all Mr Reid’s evidence I do not find any evidence which clearly establishes the particular construction for which Springvale contends.

[24] I briefly deal with the “circumstances” relied upon by Springvale:

Correlation between Highland’s grant of the easement and Springvale’s

allocation of water

(a) Mr Bayley submitted that steps towards physical supply of the water could not be expected before the registration of the easement. This was on the basis that it would have been unreasonable to expect Springvale to incur the cost of getting its water supply to Highland before the easement had been registered. While this proposition may be arguable, it is no more than that. There is a strong argument to the effect that Springvale through the consent order had certainty in relation to the easement because there was a Court order requiring the

registration of the easement, which could be carried into effect by further intervention of the Court if necessary.

Amount of work required of Springvale

(b) Although it was common ground that Springvale had earlier installed a water supply system, Mr Reid deposed that an immediate physical supply to the Highland land was not feasible. He refers to the installation of a pad and substantial water tank, new communication equipment and further work on pumping and control mechanisms. He also refers to matters on which liaison and cooperation between the parties would be required in relation to such matters as the location of equipment and land. I found the precise time said to be required for each of these matters in Mr Reid’s view was difficult to ascertain in

his affidavit evidence. It is clear (for instance in his first affidavit)²

that when Mr Reid speaks of an immediate physical supply never being feasible, his view is partly predicated upon an assumption that Springvale was not required to start work on the physical supply until Highland registered the required easements on 14 September 2011 (which occurred two-and-a-half months after the consent order, dated

29 June 2011). The thrust of the Springvale evidence appears to be that Springvale had to provide the water within a reasonable period after the easements were registered. Even assuming the latter part of that proposition to be correct, there will still be a need for a trial Court to determine from the surrounding circumstances what was a reasonable period. On general impression, the concept that it might be reasonable for Springvale to take eight months to provide water after registration of easements and 10 months after the consent order would seem surprising, even if (in the context of interlocutory

_{evidence) it remains arguable.}

² At paragraphs [15]–[16] of the affidavit.

Cooperation between parties

(c) Mr Bayley, in his submissions, sought to draw out of Mr Reid’s evidence the conclusion that a failure of cooperation by Mr McLellan had caused any delay. Contemporary correspondence has been produced which does not lend itself to conclusive views as to responsibility for delay. By November 2011, Mr McLellan was pressing hard for progress. There were clearly tensions between the parties in which each was suggesting a lack of cooperation by the other. An email of Mr Reid dated 2 December 2011 indicates that it was only on that day that he instructed his water engineer to commence work on re-commissioning the existing water scheme. (At that point, Mr Reid recorded that he saw no problems with Springvale’s ability to provide water by 31 January “as per the Court Order”). Mr Reid’s email made it clear that progress would depend on when Springvale knew of any changes that Highland wanted. As tensions between the parties increased, and Mr McLellan invited Mr Reid to consider going back to Court for interpretation of the consent order, Mr Reid sent a brief response on 1 February 2012 in which he stated:

The Court Order does not state a time. Ridges RD Ltd continues to work towards fulfilling its obligations.

It will be for a trial Court to determine whether, as suggested by Springvale, Highland effectively caused the delay itself. I cannot reach such conclusion on the evidence. There is the potential for a conclusion that Mr Reid considered to some extent he was entitled to make progress in his own time, without any time constraint in terms of the Court order.

Damage flowing from Springvale’s breach?

[25] The mortgagee sold the Highland land, without a completed water supply, for

$360,000 plus GST. The sale occurred in April 2012 with settlement in May 2012.

[26] It is Mr McLellan’s case that, had Springvale complied with its obligation to supply water to Highland in terms of the Court order, Highland would have been able to sell the sections “with a total profit of $850,000”. In the event, there was a remaining debt to the mortgagee after sale of the Highland land which resulted in a judgment (including against Mr McLellan by way of guarantee) in the sum of

$414,022.30.

[27] The plaintiff’s figure of a total profit or realisation of $850,000 from the sale

of the developed block was supported by a registered valuer’s report of February

2013. As well as referring to a realisation of $850,000, that report suggests that had Highland completed the development with lots ready for sale, there would have been a profitable outcome after deduction of associated costs.

[28] While the extent of any profitable outcome would be relevant in determining whether Springvale’s conduct caused Mr McLellan’s impecuniosity, it is not the key question in relation to whether Springvale's breach of obligations caused damage. On the evidence of Mr McLellan, supported by the registered valuation, Mr McLellan clearly has a case for asserting that significant damage will have flowed from any established breach of Springvale’s obligations. The fact that the property was sold without water supply at mortgagee sale indicates a likelihood of damage, which is reinforced by the registered valuation.

Overall assessment of the merits

[29] The impression I draw from the material as to obligations, breach and damages is that Mr McLellan’s case has recognisable merit and a reasonable prospect of success.

Cause of Mr McLellan’s impecuniosity

[30] Mr McLellan opposes any order of security for costs on the additional ground

that his impecuniosity is the result of Springvale’s actions.

[31] I adopt the approach of Kós J in Highgate on Broadway Ltd v Devine³ where his Honour observed that this factor involves a consideration of linkage rather than any further examination of the merits.

[32] What then is the linkage between Springvale’s failure to deliver a water supply before the mortgagee sale and Mr McLellan’s impecuniosity? Mr McLellan’s evidence is that it was the failure of Springvale to provide water to Highland’s land which made it impossible for Highland to complete the subdivision and sell the sections at a profit. There is in that a logical linkage but a finding of actual linkage will be fact-dependent.

[33] For Springvale, Mr Bayley pointed to the uncontradicted evidence that the mortgagee had made demand on Highland and issued Property Law Act notices as early as August 2011. The mortgagee had advised at that time that it was taking steps to conduct a mortgagee sale. Mr Bayley notes that such evidence indicates that even in August 2011, Highland was insolvent in the sense of being unable to service its key debt. Mr Bayley submits that the cause of the sale which flowed was Highland’s financial problems and not any breach of the consent order by Springvale.

[34] Mr McLellan, in his evidence, sought to meet the Springvale argument in relation to his impecuniosity by asserting that the mortgagee had been happy to have the mortgage run on and to fund subdivision costs. Mr McLellan deposed that the mortgagee took action under the mortgage only after he (Mr McLellan) advised the mortgagee that the water had not been allocated and that without the water, Highland’s sale of its land would render insufficient funds to clear the mortgage.

[35] Mr Bayley submitted that Mr McLellan’s evidence should be rejected as untenable. He noted that it contained unsubstantiated hearsay as to the position of the mortgagee and that Mr McLellan had not exhibited any contemporary correspondence from the mortgagee to confirm what Mr McLellan was saying. Mr

_{Bayley submitted that there was an inherent implausibility in the suggestion that a}

³ Highgate on Broadway Ltd v Devine [2012] NZHC 2288 [2013] NZAR 1017 at [23](a).

financier would lend additional funding for subdivision when, as at 3 August 2011, the mortgage debt was already over $650,000.

[36] I find that Mr McLellan’s evidence as to a linkage between Springvale’s breach and his impecuniosity is weak at best. Given the unattributed hearsay as to the mortgagee’s position in relation to further lending, it would be pure speculation on the evidence as it stands to find a link between Mr McLellan’s impecuniosity and Springvale’s breach.

This proceeding as an afterthought to stave off bankruptcy?

[37] Mr Bayley, for Springvale, invited the Court to take account of what Mr Bayley submitted must be Mr McLellan’s motive in commencing this proceeding. That motive, submits Mr Bayley, is to stave off bankruptcy at the suit of Mr McLellan’s mortgagee, which is now a judgment creditor for $414,022.30. The mortgagee served a bankruptcy notice in relation to that debt in February 2013. It was only then that Mr McLellan obtained a registered valuer’s report as to the valuation of Highland’s land. When the mortgagee subsequently served a bankruptcy application on Mr McLellan in May 2013, Highland then entered into the assignment of its cause of action to Mr McLellan. On this basis, Mr Bayley submits that a claim against Springvale for damages was never realistically contemplated but came about only as an afterthought by Mr McLellan in an attempt to stave off a bankruptcy proceeding.

[38] It seems obvious that Mr McLellan, who has become a judgment debtor by reason of his guarantee of Highland’s debt, desires to utilise (through an assignment) any claim of Highland in order to put some deal to his mortgagee, as a means of avoiding bankruptcy. Self-evidently, the timing of particular steps came about following bankruptcy steps taken by the mortgagee. But there is nothing to justify the Court inferring, as Mr Bayley invites, that Mr McLellan’s claim against Springvale is not being pursued for the genuine purpose of obtaining a damages award. Developments occurred in relatively short order through 2013 culminating in Mr McLellan’s commencement of this proceeding in October 2013.

[39] In his written synopsis, Mr Bayley had developed a brief submission to the effect that Highland’s assignment of its cause of action to Mr McLellan may have been void in that Mr McLellan had no genuine commercial interest in the enforcement of the claim. Mr Bayley chose not to develop that submission proposition further in his oral submissions, an implicit concession which I regard as appropriate. Mr McLellan, as a guarantor of Highland’s debt who had thereby become a judgment debtor, clearly had a genuine commercial interest in the enforcement of any claim against Springvale.

Access to justice

[40] I adopt the observation of Kós J in Highgate on Broadway⁴as to the relevance of access to justice:

Security for costs is relatively exceptional. Where it is likely to result in the denial of access to justice, it is entirely exceptional. But in some situations to allow litigation to proceed without the checks and protection of security will be oppressive to the interests of other parties, particularly where the litigation is unjustified or unmeritorious, over-complicated or unnecessarily protracted.

(Citations omitted)

[41] Mr McLellan’s legitimate interest in having access to justice in this case is a powerful factor which must inform the exercise in my discretion. While the legislation contemplates that an order for substantial security may, in effect, prevent a plaintiff from pursuing a claim, the Court of Appeal has emphasised:⁵

... an order having that effect [of preventing the plaintiff from pursuing the claim] 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.

[42] For the reasons I have given, Mr McLellan has a real prospect of success in this litigation and there is no basis on which I can conclude that he is other than

_{genuine in bringing the claim.}

⁴ At [22](e). See also the recognition by the Supreme Court of the Principle of Access to Justice in a first instance Court in Reekie v Attorney-General [2014] NZSC 63 per William Young J at [4].

⁵ A S McLachlan, above n 1, at [15].

The real benefit of this litigation

[43] The Court may take into account in the exercise of its discretion the fact that a plaintiff is nominal in the sense that it is representing the interests of others who will thus be spared exposure to costs.⁶

[44] There is no suggestion of Mr McLellan’s being a nominal plaintiff in this case. But his interest in its outcome is unusual. He accepts he is impecunious. He has not settled his judgment debt to the mortgagee in a sum in excess of $400,000. It is to be inferred that the mortgagee’s steps to have Mr McLellan adjudicated bankrupt are on hold pending the outcome of this litigation. The mortgagee will be obviously interested in any fruits of this litigation whether by way of charging order or otherwise. Mr More has assured me from the bar that there is no third party funding involved in this litigation. But, that said, there is another party in the form of the mortgagee which by reason of its judgment will have a right to a very significant portion of, if not the whole, recovery of any success for the plaintiff.

[45] Mr McLellan has disclosed that the first tranche of security (agreed by the parties in a sum of $5,284), was met through payments from Mr McLellan’s relations. Mr McLellan has stated in relation to this hearing that there is no more funding available from that source. He has not disclosed what arrangements, if any, he has with his mortgagee in relation to any success he enjoys in this proceeding. With the mortgagee apparently standing by while Mr McLellan pursues this claim, there is some possibility (I do not put it higher than that) that Mr McLellan might be able to obtain some further borrowing or assistance to deal with any ordered security. The Court, in assessing the justice of any security order it makes, cannot ignore the fact that in this case a substantial benefit of any recovery by Mr McLellan is likely to flow to the mortgagee.

Injustice to Springvale?

[46] Mr Reid has deposed that Springvale has limited assets and that it will have to borrow to fund its defence in this proceeding. I accept that the limited financial

⁶ Highgate on Broadway Ltd, above n 3, at [22](a).

means of a defendant is relevant to the assessment of whether security should be granted.⁷

[47] Mr Reid, in his evidence, states that Springvale serves a “communal” purpose for various landowners in the area. As a consequence, it is not just the company as such but landowners who rely upon the scheme for their farming and other operations who will be affected by any losses Springvale sustains in relation to the costs of the litigation. On Mr McLellan’s own evidence, it is inevitable that, if Springvale is successful in defending this proceeding, any award of costs or disbursements will be hollow for Springvale (and indirectly for those who fund its operations).

Standing back

[48] I weigh the various considerations to which I have referred.

[49] The scale costs and disbursements of $52,810 as calculated (reasonably) by Mr Bayley will almost certainly be unrecoverable by Springvale if its defence succeeds.

[50] On the other hand, I regard Mr McLellan’s claim as one genuinely brought

with a real prospect of success. Access to justice considerations arise.

[51] I am satisfied in the circumstances that it would not be appropriate to award security at a level approaching what might be considered the normal award, such as a sum representing approximately 66 per cent of anticipated costs and disbursements. On the other hand, the defendant is reasonably entitled to some level of security so that it is not entirely without recovery (apart from the $5,284 already secured) in the event it is successful.

[52] I consider that it is just in all the circumstances that a sum of $10,000 (representing a little less than 20 per cent of Mr Bayley’s calculation) be set as a

_{security sum.}

⁷ Du Claire v Palmer HC Wellington, CIV-2009-485-2638, 29 October 2010, per MacKenzie J at

[25].

[53] It is appropriate that the sum be paid in two tranches. A just approach is that

$3,000 be paid in the near future and that a further $7,000 be paid on the close of pleadings date (at which point the defendant will be faced with preparing its briefs of evidence).

Costs

[54] Counsel accepted that the costs of this application should follow the event. As Mr Bayley’s calculation of scale costs and disbursements did not include the costs of this application, I view it as appropriate that the plaintiff pay costs and disbursements on the basis of an application supported by affidavit evidence and a single hearing.

Orders

[55] I order:

(a) The plaintiff shall pay security for costs of this litigation in an additional sum of $10,000 (“the security”);

(b) The security is to be paid to the Registrar of the High Court at

Dunedin in cleared funds in two tranches:

(i) The first tranche of $3,000 by 8 August 2014; and

(ii) The second tranche of $7,000 10 working days after the close of pleadings date,

with the Registrar forthwith upon the receipt of each tranche depositing the payment into an interest-bearing account;

(c) In the event that the plaintiff does not make payment of the security tranche on the specified date, the plaintiff’s proceeding is stayed.

(d) The plaintiff is to pay in any event the defendant’s costs of this

application in the sum of $6,368 together with disbursements of

$500.00.

Associate Judge Osborne

Solicitors:

Rhodes & Co, Christchurch

I J Cockroft, Alexandra

Counsel: D J More, Dunedin