LHL Leasing Solutions Limited v Pinto Limited [2014] NZHC 2397 (30 September 2014)

Last Updated: 14 October 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-005240 [2014] NZHC 2397

BETWEEN	LHL LEASING SOLUTIONS LIMITED Plaintiff
AND	PINTO LIMITED Defendant

Hearing:	30 September 2014
Appearances:	D P Robinson for Defendant/Applicant G P Denholm for Plaintiff/Respondent
Judgment:	30 September 2014

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

_{as to security for costs}

Introduction – an application for security for costs

[1] The defendant (Pinto) seeks security for costs in this proceeding against the plaintiff (LHL).

[2] LHL sues for rental payments under an equipment lease and for return of the leased equipment which Pinto had for the main part placed with Pinto’s customers. The term of the lease was five years from November 2005. The money claimed is approximately $280,000.00 together with interest. The equipment is said to be worth

$70,000.00.

[3] Pinto denies breaches of the lease. It asserts defences based on the limitation period and on estoppel. It counterclaims for what it asserts were failures of LHL to meet its lease obligations, particularly in relation to LHL’s obligation to maintain the

_equipment.

LHL LEASING SOLUTIONS LIMITED v PINTO LIMITED [2014] NZHC 2397 [30 September 2014]

[4] LHL does not put in dispute that it is likely, if unsuccessful in its claims, to be unable to pay Pinto’s costs.

What is in issue

[5] LHL’s opposition asserts that security should not be ordered because of Pinto’s denial of LHL’s right to the return of its equipment and to payment of rental. LHL says that those are the cause of LHL’s impecuniosity and inability to provide security. To justify that conclusion Mr Denholm advances the following propositions by reference to LHL’s evidence:

(a) LHL has genuine claims based on the lease contract;

(b) the appropriate forum for any conclusion as to key facts is at a trial on the full hearing of evidence;

(c) LHL’s financial circumstances flow from a shortfall in Pinto’s rental

payments and Pinto’s non-return of the equipment.

[6] Mr Denholm accepted that in relation to an impecunious plaintiff security is “the norm” and should be dispensed with only in exceptional circumstances. He pointed nevertheless to the highly discretionary nature of security. I refer to A S McLachlan v MEL Network Ltd.¹ Mr Denholm submitted that the following considerations were particularly relevant in this case:

(a) LHL’s genuineness.

(b) LHL’s belief that its impecuniosity has been caused by Pinto’s

breaches.

(c) The inappropriateness of the Court drawing anything other than an impression of merits at this point.

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

(d) The Court’s reluctance to deny a plaintiff access to justice through the order of a substantial sum of security if that prevents presentation of a claim.

The security jurisdiction

The High Court Rules

[7] Rule 5.45 empowers me to order the giving of security for costs where there is reason to believe that a plaintiff will be unable to pay the defendant’s costs if the plaintiff does not succeed in the proceeding.²

The principles

[8] The general approach to the discretion (as contained in r 60) was described by the Court of Appeal in A S McLachlan v MEL Network Ltd in these terms:³

[13] 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.

[14] While collections of authorities such as that in the judgment of Master Williams in Nikau Holdings Ltd v Bank of New Zealand (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 check list 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.

[15] 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.

² _{Rules 5.45(1)(b) and Rule 5.45 (2).}

³ A S McLachlan v MEL Network Ltd, above n 1, at [13] – [15].

The approach taken by counsel

[9] In the penultimate conclusion in his written synopsis, Mr Denholm stated:

The plaintiff submits that it is inappropriate to make findings of fact on important issues which strike at the basis of the contract between the plaintiff and the defendant in an interlocutory application.

[10] Prior to that conclusion Mr Denholm had over eight pages explored the evidence as to the terms of the contract between the parties and the alleged breaches. He understandably sought to rebut the gist of Mr Robinson’s submissions for Pinto who submitted that Pinto has a very strong if not overwhelming case. Mr Denholm therefore developed submissions which invite the Court to draw conclusions as to the respective merits of the case.

[11] Mr Robinson focussed in his submissions on four issues. I now turn to examine the competing positions.

The issues in this litigation

[12] Mr Robinson for Pinto focussed his submissions on the issues down to four areas of contention. I will examine each of those in turn.

The GST claim

[13] First, LHL claims payment of GST on rental payments of $9,059.64.

[14] The contract has a reasonably complex background as a result of the lease equipment having been first sold by a company related to Pinto to LHL with a lease- back arrangement. It is common ground that Pinto comes into this proceeding through becoming a party by novation to a later contract called the “Master Lease Agreement”. It was initially entered into by a company bearing a similar name to LHL. Under the Master Lease Agreement the predecessor company to Pinto had agreed to pay a rental (for the equipment which is the subject of this proceeding) at the rate of $9,059.94, “including GST”. Pinto acquired that obligation through a Deed of Novation dated 9 August 2006.

[15] To the extent that the LHL claim includes a claim to GST on top of the

$9059.94 figure, the plaintiff’s claim is weak. It effectively ignores the express terms of the Master Lease Agreement which is the operative contract. There is no documentary evidence to justify a conclusion that some arrangement other than that expressed in the contract was intended to apply to GST.

The “swap-out” deal

[16] Secondly, there was what the parties referred to as a “swap-out” deal.

[17] Under the lease, LHL had to maintain the equipment leased to Pinto. It arranged to do so through a written service contract which it entered into with one Harold Leaupepe trading as LHL Food & Beverage Technology. By early 2007 (just over one year into the term of the lease) issues had arisen as the need to replace some of the equipment which was not fit for purpose. On 15 January 2007 Mr Leaupepe wrote to the principals of Pinto, copying his letter to Lindsay Raki the principal of LHL. He said –

I have met with Lindsay Raki at LHL Leasing Solutions concerning the replacement of equipment not fit for purpose for new equipment.

It has been agreed by LHL Leasing Solutions and LHL Food & Beverage Technology Source that this responsibility be assigned to LHL F & B. We currently have lawyers drawing up the agreement and should be signed off by both parties next week when the documents are ready.

We will have to meet this week, if possible, to go through what equipment needs to be up graded?

I look forward to your response.

[18] The evidence is that Mr Raki did nothing to contradict that email until a year later. In the meantime, Mr Leaupepe and those at Pinto subsequently in 2009 negotiated and documented a swap-out deal by which some original equipment was replaced.

[19] Mr Robinson submits that, regardless of the extent of Mr Leaupepe’s actual authority to negotiate a swap-out deal, by the email he sent to Pinto and copied to Mr Raki, he had ostensible authority to enter into such an arrangement and to bind LHL to that arrangement.

[20] It transpires that matters between Mr Leaupepe and Mr Raki became dysfunctional in the course of 2007. In early 2008 LHL disavowed any entitlement on the part of Mr Leaupepe to have negotiated a swap out deal. On 15 January 2008

Mr Raki wrote to Pinto asserting the swap-out deal which he had apparently come to learn of only in the recent past had “nothing to do with the original agreement”. He went on to state:

Harold is not to dispose, sell, trade etc any of the assets without my permission, which he has never requested.

[21] The last comment is difficult to reconcile with the express provisions of Mr Leaupepe’s email as copied to Mr Raki a year earlier. Mr Raki does not refer to that earlier email or explain the suggestion that there had been no discussion. I view the defendant’s defence on the basis of Mr Leaupepe’s ostensible authority to negotiate a swap-out deal as very strong. Accordingly the plaintiff ’s case as to an entitlement to enforce the lease agreement as it originally stood in disregard of the swap-out deal is very weak.

LHL’s duty to maintain the equipment

[22] Thirdly, there was LHL’s duty to maintain the equipment “in first class condition”.

[23] There is evidence from Pinto that as the term of the lease proceeded equipment had to be cannibalised in order to repair other equipment and that the available equipment had reduced by the termination of the lease. This is relied on by Pinto as a breach of LHL’s duty to maintain the equipment. Pinto asserts a right to a reduction of rent. There is evidence from Pinto as to the significant problems with equipment. There is also the circumstantial evidence of the deterioration of the relationship between Mr Raki and Mr Leaupepe. It appears that at a point in 2008, LHL stopped paying Mr Leaupepe for his services to LHL despite the existence of the service contract which had been entered into in 2006 (with a parallel term of five years).

[24] The evidence points to Pinto having a strong case in relation to breaches of servicing obligations the responsibility for which, in terms of the contract between LHL and Pinto fall on LHL (rather than on LHL’s servicing agent).

The return of goods

[25] Fourthly, the Master Lease Agreement (as novated) provided for the return of equipment by Pinto to LHL on the expiry of the lease. It is common ground that not all leased equipment has been returned to LHL. LHL sues for the return of the equipment. As the Statement of Claim stands it alleges that Pinto has retained in its possession the relevant equipment. An order is sought for the return of the equipment or alternatively $70,000.00 as the depreciated value of the equipment.

[26] In the course of his submissions, in response to a question from the Bench, Mr Denholm accepted that as Mr Raki’s evidence on this application would require amendment of the statement of claim. That is because the central basis of Mr Raki’s evidence against Pinto on this point is not that Pinto has retained the equipment itself but rather that it has failed to return LHL equipment which had been placed with other customers. It was accepted by both parties to the lease that the equipment would be placed with and used by Pinto’s customers.

[27] At the termination of the lease there was correspondence from LHL’s solicitors which clearly indicates that LHL had made a decision itself to recover the equipment directly from those other parties. Approximately six months later there is further correspondence which indicates that because of difficulties that LHL had encountered with those parties (some of those parties apparently denying LHL’s ownership), LHL was now looking to Pinto to recover the goods instead.

[28] There are two aspects to the claim as at present drafted which make it weak. Firstly, there is Mr Denholm’s concession that as the claim is pleaded it does not allege the factual basis on which Mr Raki puts matters. Secondly, there is a legal difficulty through LHL’s decision to collect the equipment itself. LHL had the right (by clause 26) to waive any rights under the Master Lease Agreement. Its communicated decision to seek recovery directly from other parties is likely to constitute a waiver of the right now asserted. Once waived the right had gone. It

could not be resurrected six months later by LHL. The right LHL now has as owner is as against parties who hold the equipment.

[29] Accordingly, as the claim stands at present I view the equipment claim as weak.

[30] My overall impression is that LHL’s prospects of success in the proceeding as a whole are extremely modest.

Balancing of the considerations in this case

Genuineness of the claim

[31] I begin with the concept of genuineness which Mr Denholm has put at the forefront of his submissions. Mr Denholm invites me to place emphasis on the genuineness of LHL’s pursuit of its claim.

[32] I do not view the genuine aspirations of Mr Lindsay Raki as director of LHL as of particular importance in the decision as to security as it would for instance be on an application for a stay pending appeal. To the extent that I can take genuineness into account it appears to me it falls most appropriately to be considered under the heading of access to justice. I will return to that concept.

Impecuniosity resulting from a defendant’s actions

[33] It is just to consider whether the defendant’s actions which are the subject of this proceeding have caused the plaintiff impecuniosity although that cannot be a decisive factor, particularly when the plaintiff’s case is demonstrably weak.⁴

[34] In considering a plaintiff’s claim of this kind the Court must avoid the

circularity of treating the argument as established by dint of the joint facts that the plaintiff is impecunious and that the defendant has not paid the damages claimed.⁵

4. Bell-Booth Group Ltd v Attorney-General & BCNZ (1986) 1 PRNZ 457 (HC) and Attorney- General v Transport Control Systems (NZ) Ltd [1982] 2 NZLR 19.

⁵ Birnie Capital Property Partnership Ltd v Birnie HC Auckland CIV-2010-404-3000, 29 October

2010.

[35] Here it appears that LHL’s sole activity was the owning and leasing of particular equipment. It appears to have had no other business and not to have retained any earnings, although the evidence is that it received some $250,000.00 of rental from Pinto over the period that the lease ran. In a sense LHL exposed itself to an almost certain outcome of impecuniosity should its income decline and its depreciating assets cease to be saleable. There is no evidence that LHL prepared for either of those eventualities. Consequently when issues arose between LHL and Pinto as to the extent of Pinto’s payments and as to the whereabouts of LHL’s equipment, LHL was apparently left without funds to sustain a payment of security.

[36] If LHL ultimately succeeds against Pinto its present financial predicament may be said to have been contributed to by Pinto but in significant measure it arises because of the way LHL operated in the first place.

[37] In any event, I can attach but modest weight to any causation of damage

given the weakness of the plaintiff’s case.

Access to justice

[38] LHL’s right to access to justice is a consideration in the balancing exercise. The observations of the Court of Appeal in A S McLachlan v MEL Network Ltd⁶ emphasise that the courts’ concern for a genuine plaintiff who may be denied access to justice as the result of not meeting a security order. For that reason I have given consideration to access to justice, although the consideration is severely weakened by my assessment that LHL has such modest prospects of success.

[39] Significantly LHL does not assert in its grounds of opposition that the imposition of security will prevent its claim going to trial. Nor did Mr Raki assert such in his 56 paragraph affidavit. He made only two direct references to LHL’s financial position, one being –

I confirm that the plaintiff currently has no income,

_{and the other being –}

⁶ Above n 1, at [8].

I confirm that the plaintiff only owns the assets comprising the equipment in the power of the defendant’s customers and the plaintiff has put these assets forward in security for costs.

[40] Despite Mr Raki’s evidence as to LHL’s lack of income and assets, LHL has managed to bring this proceeding. I have no reason to assume that it is not in a position to maintain this proceeding through to trial or that it cannot provide a measure of security. Mr Denholm provided me with further information from the bar which reinforces that conclusion. Mr Denholm indicated that:

(a) Mr Raki personally had no means;

(b) Mrs Raki who had been in business for some years owns her businesses;

(c) there is a family trust which owns property; and

(d) sums could be available for Mr Raki from Mrs Raki and/or the trust if security for costs were awarded.

[41] I do not find there to be a real issue of access to justice in this case.

Overall balancing

[42] On balance and by a very clear margin I come to the conclusion that it just in all the circumstances to order the plaintiff provide security for the defendant’s costs.

The appropriate order of security

Amount

[43] Mr Robinson submits that an appropriate figure for security would be

$45,000.00 by reference to a 2B calculation of costs of $48,950 and disbursements of $5,100.00. Pinto’s deponent (its director, Hamish Sutherland) exhibited the relevant calculations based on a three day trial and preparatory attendances, all of which appeared realistic and were not challenged by Mr Denholm. I conclude that a

just sum by way of security will be $43,000.00 which is approximately 80 per cent of the total estimate.

Payment in tranches

[44] This proceeding has yet to reach discovery or other interlocutory attendances. It is appropriate having regard to LHL’s position to order payment in two tranches to give it additional time to resource the second tranche. On Pinto’s calculations it is likely that approximately 40 per cent of the total cost of litigation will be incurred in the context of the trial. An appropriate division is that the first tranche be 60 per cent of the sum to be secured and the second 40 per cent, with payments to be (first) shortly and (second) at the close of pleadings.

Stay

[45] The Court may under r 5.45(3)(b) High Court Rules stay a proceeding until security is paid. It is appropriate that there be such an order. Pinto has its counter- claim but has offered through Mr Robinson that in the event the plaintiff’s claim comes to be stayed it would be appropriate that there be a parallel order staying the defendant’s claim. The reality, as Mr Robinson recognised, is that on the available evidence any judgment on the defendant’s counter-claim is likely to be hollow.

Costs

[46] The costs and disbursements of this application must follow the event. Counsel agree that any award should be on a 2B basis.

Orders

[47] I order –

(a) The plaintiff is to give security for the costs of this proceeding to the defendant by paying a total of $43,000.00 into Court or by giving to the satisfaction of the Court security for those sums, such security not to include any of the equipment included in the equipment lease, the subject of this proceeding.

(b) The security shall be paid in two tranches, the first tranche of

$25,800.00 due by 31 October 2014 and the second tranche of

$17,200.00 due on the close of pleadings date.

(c) The claim against the defendant shall become stayed if any tranche as above ordered is not paid or provided on the due date.

(d) In the event the plaintiff’s claim is stayed the defendant’s counter- claim will be simultaneously stayed but with leave to the defendant if it chooses to do so to apply to have that aspect on the stay rescinded and its counter-claim timetabled to a trial.

(e) The plaintiff is to pay the defendant’s costs of this application and this order on a 2B basis, together with disbursements to be fixed by the Registrar, the Court certifying for the reasonable costs of travel and accommodation of counsel.

Case management

[48] This case is already the subject of directions as to a further case management conference in November. I make no further case management directions save that counsel are to confer promptly in the event that the first tranche of security is not provided by 31 October 2014 and are to file a memorandum as to whether the case management conference allocated should be vacated on the basis of the stay or the conference should nevertheless proceed for further direction of the Court.

Associate Judge Osborne

Solicitors:

Gallaway Cook Allan, Dunedin

Foy & Halse, Auckland