Water Guard NZ Limited v Cynortic Water Systems Limited [2015] NZHC 2717 (4 November 2015)

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BETWEEN	WATER GUARD NZ LIMITED Plaintiff
AND	CYNORTIC WATER SYSTEMS LIMITED First Defendant MARK JAMES SULLIVAN and SUSAN MARY SULLIVAN Second Defendants CYNORTIC LIMITED Third Defendant REINER GEORGE BRAGULLA Fourth Defendant CYNORTIC INTERNATIONAL LIMITED _{Fifth Defendant}

This judgment was delivered by me on Wednesday, 4 November 2015 at 11 am pursuant to r 11.5 of the High Court Rules.

WATER GUARD NZ LTD v CYNORTIC WATER SYSTEMS LTD [2015] NZHC 2717 [4 November 2015]

[281] Sullivan Ltd (Cynortic Water Systems Ltd) and the Sullivans have admitted that they should account to the plaintiff for the loss of any profits as a result of any sales undertaken by them in New Zealand. The sum in question is very small, as there were only a few sales over a short period. Sullivan Ltd consents to an account of profits for sales by it and has nominated a sum it will pay. Any remaining issues as to quantum in that regard can be dealt with at the damages hearing.

[282] However, save for this admission, no claim has been made out against Sullivan Ltd or the Sullivans. I refuse to grant a declaration that the first defendant (Sullivan Ltd) has no interest in the EDA. The claims for inducement to breach contract, conspiracy and the Fair Trading Act claims against Sullivan Ltd and Mr and Mrs Sullivan fail.

[2] The plaintiff seeks costs against the first and second defendants on a 2B basis together with disbursements. In stark contrast, the first and second defendants seek costs from the plaintiff on a 2B basis uplifted by 50 per cent (which as it happens would be close to indemnity costs). They also seek disbursements.

[3] In the proceeding before me the substantive issues were the plaintiff ’s claim against Cynortic Water Systems Ltd and the Sullivans as first and second defendants for various declarations relating to the exclusive distribution agreement (the EDA), and claims for inducement of breach of contract and unlawful conspiracy. The plaintiff obtained declaratory orders which were not ultimately opposed by the first and second defendants, and it has a notional entitlement to a very small amount of damages for what the first and second defendants accepted at the hearing was wrongful behaviour on their part in trying to sell some Water Guard units themselves

[4] There were certain broad dynamics in the case which made it unusual. The Sullivans and their company, the first defendant, purchased a business which supplied water systems to Mr Morgan’s company, the plaintiff. In a late change of direction the Sullivans’ company did not purchase the supplier’s core business, which was the subject of the EDA between the original supplier Cynortic Ltd and the original distributor, Midgen Enterprises Ltd. The change was effected by a document called “the addendum” which had the effect of the Sullivans’ company not acquiring the supply rights under the agreement which remained with the original supplier Cynortic Ltd, and thereby losing their ability to directly enforce the agreement against the plaintiff.

[5] Nevertheless, the Sullivans did through their company acquire the intellectual property and the effective manufacturing rights for the Water Guard units. They have through this proceeding oscillated between positions where they have treated themselves as a party to the EDA and not a party to the EDA. However, I have found that they did not have any long term agenda to damage Mr Morgan or the plaintiff.

[6] The plaintiff failed in its endeavour to obtain a declaration, which for tactical purposes it sought, declaring that the Sullivans had no interest in the EDA. It also failed entirely in its tort causes of action. In the end the only relief it obtained was that consented to or not opposed by the defendants.

[7] Under r 14.2(a) of the High Court Rules a party who fails in a proceeding should pay costs to the party who succeeds. The modern approach to the allocation of costs is reflected in the statement of the Court of Appeal in Packing In Ltd (in liquidation) v Chilcott where it was stated:³

Success or failure in this context is better assessed by a realistic appraisal of the end result rather than by focusing on who initiated what step, and the extent to which that step succeeded or failed.

[8] On its face the first and second defendants are entitled to costs as the parties that were largely successful. It is true as Mr Fisher has pointed out, that the position

³Packing In Ltd (in liquidation) v Chilcott [2003] NZCA 124; (2003) 16 PRNZ 869 (CA) at [6].

of the first and second defendants to the declarations made by consent did not become clear until towards the end of the hearing. However, little time was spent arguing about the terms of the declarations that were ultimately consented to, and the evidence was much the same as it would have been if the declarations were consented to from the outset.

[9] In my view, following the general rule that costs follow the event, the first and second defendants are entitled to costs from the plaintiff and I propose making an order on that basis.

[10] There would be some reason to consider an order for increased costs. I found

[11] However, I am not prepared to order any increased costs for two reasons. First, the Sullivans did at one point attempt to appoint other distributors in New Zealand and their actions compelled the plaintiff to issue proceedings and seek, ultimately by consent, interim injunctive orders. They then purported to terminate the EDA by letter dated 10 December 2014 forcing the plaintiff to successfully seek an interim injunction. Second, there is something in Mr Fisher’s point that the first and second defendants did not make their position clear as to the substantive issues relating to the EDA until late in the piece.

[12] Turning to the plaintiff ’s claim for costs, it fails as the plaintiff was largely unsuccessful in the trial against the Sullivan interests. While the plaintiff must pay the first and second defendants’ costs on scale for the trial, that is not the case for the interim injunctions. The first and second defendants were in the wrong in taking positions (from which they later resiled) contrary to the interests of the plaintiff, forcing the plaintiff to bring those applications. They should not get costs on the interim injunctions. However, Mr Morgan’s unreasonable and bullying behavior was such that I consider in my discretion that the Sullivans should not have to pay the plaintiff’s costs.

[13] As to the first injunction, the defendants admitted from the outset that their action in selling units was wrong and they immediately undertook to stop that

activity. The plaintiff continued with the injunction, and Fogarty J in a telephone conference minute dated 1 July 2014 warned that the plaintiff was at risk of indemnity costs by attempting to pursue the matter further in these circumstances. He noted he had formed the impression that the first and second defendants had been consistently trying to assure the plaintiff that they had no intention of exercising any power (which they did not think they had) to appoint further distributors. The matter was in the end resolved by the making of orders along the lines of the undertakings offered by the defendants at the outset.

[14] In respect of the second injunction, the root cause of the defendant’s behaviour was Mr Morgan’s unconstructive and bullying behavior. Moreover, there is no evidence Morgan Ltd ever actually purchased Water Guard systems from Cynortic Ltd, which was a condition imposed as part of the grant of the injunctive relief. My view following the trial was that the plaintiff was plainly in breach of the EDA, and having heard Mr Morgan give evidence, that he did not intend to ever

place any orders for units or parts.⁴The plaintiff cannot obtain costs for obtaining

the second injunction when it did not comply with the conditions of the injunction or the conditions of the EDA.

[15] Thus, in respect of the interim injunction applications there was fault on both sides, and the costs and reasonable disbursements relating to those specific applications will lie where they fall.

[16] There is also an issue relating to an application for leave to file a counterclaim. The first and second defendants were in essence unsuccessful on their application to file an amended counterclaim, but were successful in the trial. The Sullivans will not get costs on the application to amend.

[17] The plaintiff sought further and better discovery. It does seem as if the first and second defendants’ initial list of documents was incomplete. However, it is my assessment that the plaintiff acted prematurely in applying to obtain an order. The correspondence shows that there was no attempt between counsel to discuss the

_{particular discovery issues and to resolve them. Ultimately as could be
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issues were resolved by consent. The plaintiff should have had discussions with the defendants, as required by rr 8.2 and 8.11(1) of the High Court Rules.

[18] Therefore in my assessment it is fair that costs will lie where they fall in relation to the further discovery.

[19] The end result is that the plaintiff will pay the first and second defendants’ costs and disbursements on a 2B basis. Excluded from this are all costs relating to the interim injunction applications, the application to amend the counterclaim, and for further and better discovery. Those costs will lie where they fall.

[20] I am unable to approve or apportion the specific items listed in the memoranda summarising costs filed by counsel, as it is not clear from the notations whether and if so how they related to the interim injunction and discovery applications. I will have to leave that to counsel.

[21] I hope that the parties will now agree on the exact quantum of costs. Leave is reserved to apply further.

Hearing:	On the papers
_Judgment:	_{4 November 2015}

High Court of New Zealand Decisions

Water Guard NZ Limited v Cynortic Water Systems Limited [2015] NZHC 2717 (4 November 2015)