Rollex Group (2010) Ltd and Another v Chaffers Group Ltd

• Jurisdiction: New Zealand
• Judge: The Hon Justice Kós
• Judgment Date: 13 June 2012
• Neutral Citation: [2012] NZHC 1332
• Docket Number: CIV 2011-485-166
• Court: High Court
• Date: 13 June 2012

Between

Rollex Group (2010) Limited and Robert John Laurie

Plaintiffs

and

Chaffers Group Limited

First Defendant

and

Jared William Thompson

Second Defendant

and

Gavin Ronald Snowsill

Third Defendant

and

Glenn Charles Tulloch

Fourth Defendant

and

Chaffers Finance Limited

Fifth Defendant

[2012] NZHC 1332

CIV 2011-485-166

IN THE HIGH COURT OF NEW ZEALAND

WELLINGTON REGISTRY

Application for declaration that emails between defendants and their solicitor were privileged — defendants' business was sold to plaintiffs — due diligence condition was part of sale — computer equipment included in sale — plaintiffs found relevant emails on those computers — emails discussed earnings levels for next financial year — plaintiffs alleged emails were evidence of misrepresentation by defendants — accepted sent for purpose of obtaining legal advice — whether emails prepared for dishonest purpose, so that privilege had to be disallowed under s67 Evidence Act 2006 (“EA”) (powers of Judge to disallow privilege) — whether privilege had been waived under s65 EA (waiver).

Counsel:

I R Millard QC for Plaintiffs

N I Burley for First and Fourth Defendants

JUDGMENT OF The Hon Justice Kós

Introduction

1 Emails between some of the defendants and their solicitor have somehow come into the possession of the plaintiffs. May the plaintiffs produce these emails in evidence at trial?

2 In the ordinary course such communications would be protected from production by legal adviser privilege. That was formerly known as “solicitor-client privilege”. The plaintiffs accept that the emails are, on the face of things, privileged. But they say that privilege in three emails has been lost, for two reasons. First, because there is a prima facie case that they were prepared for a dishonest purpose. Secondly, because any privilege has been waived by the defendants.

Background

3 In October 2009 the New Zealand business of Chaffers Group Ltd, the first defendant, was put up for sale. It was formerly called Rollex Group Ltd, and in this judgment I will call it “Rollex/Chaffers”. It sold supermarket and industrial packaging equipment and materials. It had sole New Zealand distribution rights for certain lines of butchery and delicatessen equipment, including film wrapping machines. It also supplied film. It had also started to sell an electronic shelf price labelling system to supermarkets.

4 Mr Tulloch, the fourth defendant, was sole director of, and majority shareholder in, Rollex/Chaffers. Mr Thompson, the second defendant, was its managing director. Mr Snowsill, the third defendant, was the technical director. Messrs Thompson and Snowsill were minority shareholders in Rollex/Chaffers.

5 Prospective purchasers were given an information memorandum. It was prepared by Rollex/Chaffers' broker in October 2009. The memorandum sets out Rollex/Chaffers' 2009 EBITDA (earnings before interest, tax, depreciation and abnormal items) as $937,502. The asking price of the business was said to be three times that figure, $2.81 million, plus stock. EBITDA for the first five months of the current financial year was said to be $430,047. Projected EBITDA for the 2010 year was given as $956,967.

6 The memorandum also said that Rollex/Chaffers had sold five Atmopacks. This was a new poultry packaging method. Foodstuffs Wellington was said to want to phase in packaging of all fresh chicken using Atmopacks. The memorandum said this would hugely increase the amount of film supplied by Rollex/Chaffers' business. It could add $400,000 to the bottom line annually. If Foodstuffs Auckland and South Island came aboard too, that could add another $1,000,000 per annum. However, this was “by no means a certainty”.

7 On 24 November 2009 a conditional agreement for sale and purchase of the business was entered. The vendor was Rollex/Chaffers. The purchaser was the plaintiff, Mr Laurie, “or nominee”. He nominated the other plaintiff, Rollex Group (2010) Ltd, which I will call “Rollex 2010”. The price agreed was $3.63 million (plus GST). Assets sold included all “computer equipment, software and laptop computers” owned by the vendor, and its “business records”. There was a 10-year restraint of trade clause binding the vendor and its directors. Mr Tulloch alone was arguably affected by this, but the agreement expressly exempted Messrs Thompson and Snowsill. This on the basis that “at this stage the intention is for both … to continue working in the business under the new ownership structure”. It was agreed separately that Mr Thompson be general manager, and Mr Snowsill technical manager.

8 The agreement was conditional on due diligence. That took place. The agreement was then varied in January 2010. The due diligence condition was confirmed, the sum payable for goodwill was reduced by $880,000, and the estimated value of stock was increased by $450,000. Settlement occurred on 29 January 2010.

9 After settlement Mr Thompson and Mr Snowsill resigned. On 15 March 2010 they incorporated NZ Electronic Shelf Labelling Ltd. That company was then granted exclusive New Zealand sales rights in the supermarket shelf labelling system that Rollex/Chaffers had been selling. 1

The claim

10 The plaintiffs plead eight causes of action. They seek “an order that the sale be cancelled”, repayment of the purchase price and damages. It is not clear from the pleading whether the plaintiffs have actually cancelled the agreement under the

Contractual Remedies Act 1979. Cancellation is a unilateral party action, rather than a judicial action. A Court can of course confirm the validity of a prior cancellation

11 The principal cause of action against the first and fourth defendants is fraud. It is alleged that Rollex 2010 was induced to enter the agreement, and to confirm it as unconditional, by misrepresentations. It is alleged that EBITDA figures in the information memorandum were wrong when contrasted with internal documents of Rollex/Chaffers: EBITDA for 2009 is said to be $1.29 million less, EBITDA projected for 2010 $629,074 less, and EBITDA for the 5 months to 31 August 2009 $515,251 less than stated. It is also alleged that there had been no sales of Atmopack in the current financial year, only four sales in the previous years and that serious problems Ingham (a purchaser of the Atmopack system) were having with it were not disclosed.

12 Other claims are advanced for breach of contract against Rollex/Chaffers, for deceit (against Messrs Thompson and Snowsill) and for alleged breach of the Fair Trading Act 1986 (against all defendants).

The defence

13 The defendants deny misrepresentation and deception of any kind. They say Mr Laurie is an experienced businessman. They say that the information memorandum contains disclaimers on which they may rely. They say that Mr Laurie undertook due diligence in accordance with the condition. And they say that as a result of that due diligence exercise the purchase price was negotiated down by the plaintiffs by over $400,000. That is all I need to say at this juncture about the defence.

The present application

14 The present application concerns a number of emails listed in part 1 of the plaintiffs' list of documents. They were sent between Mr Tulloch, Mr Thompson and a solicitor, Mr Barrett. Mr Barrett is a partner in the Wellington firm Johnston Lawrence. He was acting for the vendor and first defendant, Rollex/Chaffers, documenting the sale agreement. He was also acting for Messrs Tulloch, Thompson and Snowsill – shareholders in Rollex/Chaffers – in drafting a shareholders' agreement to deal with their affairs after sale of the New Zealand business.

15 It is accepted by the plaintiffs that they were sent for the purpose of obtaining legal advice. It is accepted, also, that the emails were privileged at the time they were transmitted. 2 It was not the plaintiffs' privilege, so the documents are not listed in the privileged section of their affidavit of discovered documents. (The question of whose privilege it in fact was is discussed later in this judgment). 3 The plaintiffs wish to use the documents at trial. They say the emails evidence misrepresentation by Rollex/Chaffers and its director and majority shareholder, Mr Tulloch.

16 Rollex/Chaffers and Mr Tulloch apply therefore for orders prohibiting disclosure and any use of those emails in the proceeding.

17 The plaintiffs oppose only in relation to three of the emails listed. Orders may therefore be made in relation to the remaining documents listed in the application.

18 The plaintiffs oppose on the basis that privilege in the three remaining emails should be disallowed. They say the emails:

… evidence fraud and/or were compiled or prepared for a dishonest purpose or to enable or to aid the first defendant to commit or plan to commit what it ought reasonably have known was an offence, namely a deliberate misrepresentation of the expected profit of the business in the 2009/2010 year in order to induce a purchase at a higher than appropriate goodwill figure such misrepresentation being a breach of the Fair Trading Act and Crimes Act.

The notice of opposition expressly cites s 67 of the Evidence Act 2006.

19 It does not cite s 65. Nonetheless it advances as a ground of opposition that the emails “are in [the plaintiffs'] possession”. When the matter was first called before me on 23 April 2012 I asked Mr Ian Millard QC, who appeared for the plaintiffs, whether he also opposed on the basis of waiver (s 65). After some

consideration he said that he did. Mr Nicholas Burley, who appeared for the defendants, contended that the notice of opposition did not advance that ground. He opposed any expansion of it. I ruled that waiver might also be considered. But I allowed further time for waiver-related submissions and evidence to be filed. In particular I wished to understand exactly how the plaintiffs had come by the emails. The hearing...