ACD Tridon v Tridon Australia

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5738/01 ACD TRIDON INC V TRIDON AUSTRALIA PTY LTD & ORS JUDGMENT 1 HIS HONOUR: There are two notices of motion before the Court. The first, filed on 6 February 2004, is an application by the four defendants (TAPL, Mr and Mrs Lennox, and TNZL) to which the plaintiff (ACDT) is the respondent, seeking a determination that ACDT's call for TAPL to produce some reports called "the Watson Reports" constitutes a breach of an undertaking by ACDT. The application is brought under Part 72 rule 9, or alternatively under liberty to apply granted by my orders made on 18 October 2002), and in any event under the Court's inherent jurisdiction to control its process and to prevent any abuse process. The call for production was made in the course of a directions hearing before the Hon AJ Rogers QC, referee in this proceeding, on 30 January 2004. The undertaking said to have been breached is an undertaking by ACDT to this Court noted in paragraph 3(a) of the orders made by the Court on 7 November 2002. 2 The second application is ACDT's notice of motion filed on 11 February 2004. Paragraph 1 of that application seeks, in the event that the defendants are successful in their application, an order varying ACDT's undertaking by permitting it to apply for discovery and inspection of any documents that would otherwise be discoverable in the referee proceeding. The application for that relief is not presently before me for decision. What is before me now is paragraph 2 of ACDT's application, in which it seeks an order adding some categories of discovery in the reference proceeding before Mr Rogers QC. The categories of discovery include the Watson Reports; documents responding to those reports, which were tendered or read in the Federal Court; written submissions in the Federal Court dealing with the Watson Reports; and other documents commenting on the Watson Reports. I shall refer to the documents other than the Watson Reports themselves as "the associated documents". There is evidence before me that disclosure of the associated documents would be tantamount to disclosure of the content of the Watson Reports. The hearing before me proceeded on the basis that if the defendants failed in their application, it would follow as a matter of course that the Court would make the orders in paragraph 2 of ACDT's application. 3 The defendants' application focuses, in terms, on their contention that ACDT has breached its undertaking to the Court by calling for production of the Watson Reports and the associated documents. However, at the hearing of the applications both sides recognised that it was necessary and appropriate for the Court to consider, in addition to the question of construction of the undertaking, whether there are any discretionary reasons for keeping the documents confidential from ACDT, and they directed submissions to that issue. Therefore the principal issues for decision are: · whether the Watson Reports are discoverable by ACDT in the reference proceeding before Mr Rogers QC, on normal principles applicable to the discovery of documents in litigation; · if so, whether, on its proper construction, ACDT's undertaking given to the Court on 7 November 2002 prevents it from insisting upon its entitlement to discovery; · if not, whether there is any discretionary reason for exonerating TAPL from producing the Watson Reports. Facts 4 I shall give only a brief account, by way of background, of the dispute between the parties, relying on my fuller description in ACD Tridon Inc v Tridon Australia Pty Ltd [2002] NSWSC 896. 5 TAPL was incorporated in New South Wales. TNZL is a subsidiary of TAPL. TAPL is, in effect, a joint venture vehicle for the purpose of conducting a wholesale supply business for motor vehicle accessories and hardware products in a geographical area encompassing Australia and New Zealand. The venturers are ACDT, a Canadian company, and Mr and Mrs Lennox. Their business relationship is governed by a shareholders' agreement and a distribution agreement, made in 1988. The directors of TAPL are Mr and Mrs Lennox and Mr Arkin, the latter having been appointed on the nomination of ACDT under the terms of the shareholders' agreement. The shareholders of TAPL are Mr Lennox (and his associates) holding about 67% of the shares and (at least until January 2002) ACDT holding about 33%. 6 The commercial relationship of the venturers has turned sour. In 1999 ACDT was affected by an amalgamation under Ontario law with an entity in the Tomkins Group of Canada, some subsidiaries of which are direct competitors of TAPL and TNZL. In 2000 ACDT purported to vary the terms of the distribution agreement by withdrawing products over which TAPL and TNZL held exclusive distribution rights in the Australasian area. In November 2001 ACDT commenced the present proceeding in this Court, seeking orders for access to TAPL's financial records. It wishes to have Mr Max Donnelly, an accountant, examine and report on the financial records of TAPL. 7 Mr Lennox has formed the view that ACDT now wants to destroy TAPL and TNZL, so as to promote the interest of the Tomkins subsidiaries that compete with those companies. In January 2002 Mr Lennox purported to acquire ACDT's shares in TAPL by compulsory acquisition, relying on provisions of the shareholders' agreement, which permit such an acquisition upon the happening of certain corporate events including a reduction of capital. His position is that the amalgamation involved a reduction of ACDT's capital. ACDT contests the validity of that acquisition. Accordingly it has amended its claims in the proceeding to raise additional issues, including whether its shares in TAPL were lawfully acquired by Mr Lennox under the terms of the shareholders' agreement, whether TAPL should be wound up, whether ACDT is entitled to terminate the distributorship agreement in the event that a liquidator is appointed to TAPL, and whether Mr Arkin may or should be removed as a director of TAPL. The proceeding has been referred to Mr Rogers QC under Par 72 of the Supreme Court rules, as a result of orders I made on 18 October 2002, for reasons given in ACD Tridon Inc v Tridon Australia Pty Ltd [2002] NSWSC 896. 8 In October 2002 ACDT made an application in the proceeding, to restrain Mr Lennox and TAPL from removing Mr Arkin as a director of TAPL. After I had commenced to hear that application, the parties reached an accommodation reflected in orders and undertakings made on 7 November 2002. By paragraph 2 of my orders, I noted the undertaking to the Court by Mr Lennox not to take steps to remove Mr Arkin as a director of TAPL until resolution of the proceeding or further order, subject to paragraph 5. My orders proceeded: "3. The Court notes that ACDT undertakes to the Court: (a) That it will not seek to obtain directly or indirectly, any information, report or other document concerning the affairs of TAPL or its subsidiaries from Arkin or the solicitors, counsel and accountant retained by him in the Federal Court Proceedings. (b) It will not cause or permit Arkin to give instructions to the solicitors or Counsel retained by ACDT in these proceedings.

4. The Court notes that subject to paragraph 6 below, that Arkin undertakes to the Court: (c) not to communicate, reveal, disclose, provide, or in any other way whatsoever transmit any information concerning the affairs of TAPL or its subsidiaries (including oral information or information contained in any document (whether electronic or otherwise)) to any person other than: (i) himself; and subject to the persons referred to below giving similar undertakings; (ii) any nominated accountant and the staff of such accountant (other than an accountant retained or contemplated to be retained) by or on behalf of ACDT in the course of the disputes the subject of these proceedings or the arbitration before the Hon Mr John Clarke QC, and specifically including Donnelly): (iii) his personal legal representatives; where such persons are not engaged and are not to be engaged by or on behalf of ACDT - in these proceedings. (iv) A member of the staff of Arkin & Associates (v) A duly authorised officer of a statutory authority with jurisdiction over in respect of TAPL or its subsidiaries (in the course of fulfilment of any duty incumbent upon Arkin as director of TAPL.

(d) not to be party, whether directly or indirectly, to any breach of the undertaking given in 3 above;

(e) that in the course of his undertaking of his role as director TAPL (with the exception only in the course of his role as Application in the Federal Court Proceedings), not to engage, retain, or otherwise communicate or co-operate with any expert or other person retained (or proposed to be retained by ACDT or any person associated with it, whether in the course of these proceedings or otherwise.

(f) that he shall not be involved, directly or indirectly, with instructing ACDT's lawyers (whether in Australia or elsewhere) in these proceedings and shall not provide counsel and/or advice to ACDT or any person associated with it in respect of these proceedings.

5. The above undertakings in paras 2 and 3 apply subject to further or other order of this Court, where the same shall be reserved to his Honour, Mr Justice Austin (or such other Justice of this Court as having carriage of this matter from time to time), and in the course of the same, any documents subject to an application for such order shall be treated as confidential and the papers treated as sealed until or at the further direction of this Court.

6. The undertakings in paragraph 4 apply subject to further or other orders of the Federal Court, where the same shall be reserved to a Justice of that court, and in the course of the same, any documents subject to any application for such orders shall be treated as confidential and the papers treated as sealed until or at the further direction of that Court." 9 I have been taken to the transcript of the hearing on 7 November 2002. It is plain from the transcript that the defendants were concerned during the hearing that Mr Arkin would use information that came to him as a director of TAPL for the purpose of assisting ACDT in the proceeding. Mr Arkin was ACDT's nominee on the board. He had acted for ACDT as its US attorney. He was seeking access to TAPL's financial records in a separate proceeding in the Federal Court, and initially sought to have Mr Donnelly (the accountant nominated by ACDT in the Supreme Court proceeding) inspect the financial records. During the course of argument senior counsel for ACDT suggested that arrangements might be made to "neutralise" or "sterilise" Mr Arkin from ACDT if he were permitted to remain on the TAPL board. 10 While the transcript provides some general background to the making of the consent orders on that day, it cannot be used, in my opinion, as evidence of the common intention of the parties at the time of their agreement to consent to the orders and undertakings. This is because, after the passages in the transcript to which I was referred, there were several adjournments to give the parties the opportunity to take instructions, in circumstances where it is reasonable to infer that negotiations took place and there may have been some shifting of positions in order to reach agreement. Once agreement had been reached, the Court was only informed of the terms of the proposed orders and undertakings, not the content of the negotiations. 11 In about April 2002 Mr Arkin sought access to the financial records of TAPL, claiming that he needed access for his purposes as a director of TAPL, and nominating Mr Donnelly as an accountant to assist him to inspect the records. When TAPL refused to give him access, he commenced a proceeding in the Federal Court of Australia seeking orders under s 290 of the Corporations Act 2001 (Cth). Subsequently Mr Arkin decided that he would accept Mr Watson as the accountant who would assist him, in substitution for Mr Donnelly. 12 At the hearing of the Federal Court proceeding, TAPL unsuccessfully sought a stay until the referee in the Supreme Court proceeding had determined whether the Canadian amalgamation of ACDT had failed and whether Mr Lennox had lawfully acquired ACDT's shares in TAPL: see Arkin v Tridon Australia Pty Ltd (2002) 43 ACSR 610 (Hely J, 24 December 2002). In his reasons for judgment Hely J noted that open offers had been made by the parties in correspondence (some of which is in evidence before me) to establish a regime under which access to TAPL's financial records might be given to Mr Arkin and Mr Watson, but that agreement was not reached. He said a major stumbling block was that Mr Arkin did not accept that a copy of his instructions to Mr Watson, and a copy of Mr Watson's report, would be provided to TAPL, "that being a non-negotiable requirement of TAPL". 13 On 7 February 2003 Hely J made orders for the settlement of the Federal Court proceeding, by consent and without admission. He ordered that Mr Arkin, while he remained a director of TAPL, and his nominee, Mr Watson, be at liberty to inspect such of the financial records of TAPL as they might require. Two of his orders, apparently reflecting TAPL's "non-negotiable requirement", were as follows: "3. In respect of any document that Mr Watson proposes to give to the applicant or his solicitor, Mr Watson is to furnish such document and, in respect of any report, his instructions to the solicitors for the applicant and the respondent simultaneously." "6. The applicant shall not make any application for leave to release or provide Mr Watson's reports to any other person before 14 days after the date upon which such report is furnished to the Respondent's solicitors." 14 Hely J noted the following: "7. The applicant gives to this Court an undertaking in terms of paragraphs 4 and 6 of the undertakings … that he gave to the Supreme Court of New South Wales … on 7 November 2002. 8. ACD Tridon Inc (incorporated in Ontario) gives to this Court an undertaking in terms of paragraphs 3 and 5 … that it gave to the Supreme Court … on 7 November 2002." 15 Mr Watson inspected TAPL's financial records during the period from about March to July 2003. He produced seven reports, the first dated 6 June 2003 and the last two dated 3 October 2003. I assume (there being no evidence to the contrary) that Mr Watson provided his reports to TAPL as well as to Mr Arkin, as required by Order 3 of the Federal Court's orders made on 7 February 2003. 16 The Watson Reports are not in evidence before me. The defendants' solicitor has made an affidavit saying that she has reviewed the Reports and is of the opinion that they contain details of TAPL's financial information that is both commercially sensitive and confidential. In one of the reports, she says, there is a detailed analysis of fees paid to TAPL's lawyers and experts. This is information that ACDT unsuccessfully endeavoured to obtain by way of discovery on 4 November 2003. She says that the Watson Reports refer to sensitive information regarding turnover, profitability, debtors and creditors in a way that would give advantage to any market competitor or hostile interest of TAPL. 17 It is also pertinent to note some observations about them made by Hely J, [2003] FCA 1372, at [12]-[15]. His Honour noted Mr Arkin's contention that the Watson Reports raise serious issues as to breaches of the Corporations Law and their fiduciary duties by Mr and Mrs Lennox, failure by TAPL to keep adequate written financial records as required by s 286 of the Corporations Act, and possible breach by TAPL of some requirements of income tax law. He said that "in large measure, the reports are more in the nature of a running commentary on the progress of the investigation being undertaken by Mr Watson in which potential irregularities are raised and discussed and alleged inadequacies in the information and records available are referred to, rather than in the nature of a final report in which an opinion is definitively expressed in relation to particular issues". He noted that TAPL had filed affidavits from Mr Lennox and from experts criticising the Watson Reports, and had submitted that they contained "mistakes and errors, prejudicial inferences and innuendos". 18 On 28 July 2003 Mr Arkin applied to the Federal Court for an order that he be at liberty to provide the Watson Reports and associated correspondence to TAPL's shareholders, Mr Lennox and ACDT. At the same time TAPL made an application to the Federal Court seeking various orders, but in the end only a declaration that the time for inspection of its financial records had expired or that an expiration date be fixed by the Court. 19 In reasons for judgment delivered on 2 December 2003 ([2003] FCA 1372), Hely J found that the Federal Court had the power to make the orders sought by Mr Arkin, but in the exercise of his discretion he would not do so. He gave two reasons for his discretionary decision. First, he said (at [25]): "Mr Walker SC [appearing for Mr Arkin] accepted in argument that there is a real, close commercial relationship between Mr Arkin and ACDT, but he does not appear for ACDT. By this application, Mr Arkin seeks the authority of this Court to give to ACDT reports which ACDT has undertaken to the Supreme Court that it will not seek to obtain from Mr Arkin. In my view, that provides a powerful discretionary reason why the relief sought by Mr Arkin should not be granted, as it is not appropriate for this Court to made orders at the suit of Mr Arkin which would have the effect of at least circumventing the undertakings given to the Supreme Court by ACDT, even if it does not involve ACDT in a breach of that undertaking." 20 As his second reason, he noted (at [30]) that Mr Arkin bore the onus of establishing that he should be at liberty to release the Watson Reports to ACDT. He continued (at [31]): "… [T]he discharge of that onus at least involves demonstration that Mr Arkin reasonably conceives it to be his duty as a director of TAPL to provide the Watson reports to ACDT notwithstanding that ACDT is seeking to wind up TAPL, and terminate what appears to be a valuable distribution agreement, at least from TAPL's point of view, and even though the issue of ACDT's membership of TAPL is yet to be resolved." 21 He noted (at [32]) that Mr Arkin had not filed an affidavit in support of his application, and concluded (at [33]) that he was not satisfied that Mr Arkin's desire to release the Watson Reports to ACDT was in the pursuit of the interests of TAPL. He declined to make an order on TAPL's application for limiting the period within which further inspection could take place. 22 In the course of his reasons for judgment, Hely J recorded (at [30]) a submission by senior counsel for TAPL that "all the issues raised by the Watson Reports are issues in the Supreme Court proceedings". He also noted (at [15]) a submission made on behalf of TAPL that as the Watson Reports had been provided to TAPL, they were part of its documents, and he said (at [16]): "Mr Watson's reports form part of TAPL's documents because TAPL stipulated as part of the 'settlement' of the original proceedings that copies of those reports should be provided to it." 23 During 2003 there was a process of discovery under way in preparation for a hearing before the referee, scheduled to take place in May 2004. By 6 November 2003, when the referee made orders, some substantial progress had been made towards identifying the categories of discovery implementing the discovery and inspection procedures (although I was informed from the bar table that some issues are still outstanding). At no stage until 17 December 2003 did ACDT seek to have discovery of the Watson Reports. However on that day its solicitors wrote to the defendant's solicitors referring to Hely J's decision of 2 December 2003 and, in particular, his Honour's view that the Watson Reports are TAPL's documents and TAPL's submission that all the issues covered by the reports are raised in the Supreme Court proceeding. The solicitors sought confirmation that the defendants would provide copies of the Reports by way of discovery in the reference proceeding. At a directions hearing before Mr Rogers QC on 30 January 2004, counsel for ACDT called for the Watson Reports. The call was contested. Then TAPL brought its application in this Court. 24 It appears from the evidence that there have not been any communications between ACDT's solicitors, on one hand, and Mr Arkin, Mr Watson or Mr Arkin's solicitors, on the other, relating to the contents of the Watson Reports, although there have been communications between the solicitors regarding the status of the Federal Court proceeding. ACDT's entitlement to discovery and inspection 25 Part 23 of the Supreme Court Rules makes provision for discovery and inspection of documents relevant to a fact in issue. I made directions for a process of discovery in preparation for the hearing before the referee, in my orders dated 18 October 2002, and so it is clear that Part 23 governs the discovery process. Part 23 rule 1(d) says: "A document or matter is to be taken to be relevant to a fact in issue if it could, or contains material which could, rationally affect the assessment of the probability of the existence of that fact (otherwise than by relating solely to the credibility of a witness), regardless of whether the document or matter would be admissible in evidence." 26 As to the interpretation of this definition, the defendants refer to National Australia Bank Ltd v Idoport Pty Ltd [2000] NSWCA 8 (15 February 2000), especially at [3] et seq. There Mason P and Priestley JA stated that the definition was introduced in the 1996 amendments to the Rules with the intention of excluding, as a factor in deciding relevance, the "train of inquiry" idea articulated by Brett LJ in Compagnie Financiers du Pacifique v Peruvian Guano Co (1882) 11 QBD 55 at 63. Even so, the concept that something is relevant to a fact in issue if it could rationally affect the assessment of the probability of the existence of the fact is, obviously enough, a broad one. 27 The defendants first contend that Hely J's description of the Watson Reports demonstrates that they cannot satisfy the criterion of relevance established by rule 1(d). I disagree. The mere fact that the Reports are more a running commentary than a set of final opinions does not itself prevent them from containing material which could rationally affect the assessment of the probability of existence of facts in issue. 28 Next, the defendants contend that, as ACDT has not seen the Watson Reports and does not know their contents, except to the extent revealed in Hely J's judgment of 2 December 2003, it cannot show that the contents of the Reports are relevant to any of the pleaded issues, in terms of the test of relevance contained in rule 1(d). 29 In my opinion on the defendants' contention is adequately answered by referring to the submission of senior counsel for TAPL to Hely J, recorded in his judgment of 2 December 2003 (at [30]), that all the issues raised by the Watson Reports are issues in the Supreme Court proceedings. Senior counsel for the defendants expressly acknowledged to me at the hearing that he had made a submission to Hely J in those terms, and additionally the relevant transcript in the Federal Court is in evidence. That constitutes an admission, binding TAPL, to the effect that the contents of the Watson Reports well satisfy the test of relevance in rule 1(d). Since the same issues arise in this proceeding as between ACDT and the other three defendants, it may be inferred, as against all four defendants, that the Watson Reports are relevant to facts in issue in the proceeding. 30 The defendants also submit, in their written submissions, that the Watson Reports should be excluded from discovery under Part 23 rule 1(c)(iii)(A) and/or (B). Those subparagraphs are parts of the definition of "privileged documents". They refer respectively to a document the contents or production of which may tend to prove that the producing party has committed an offence or is liable to a civil penalty. Part 23 rule 2(1) exempts the producing party from producing a privileged document for inspection. Rule 3(1) authorises the Court to order that a party give discovery of documents or sample documents specified by class. Rule 3(5) provides for the party affected by the order to serve a list of documents and an affidavit stating, in respect of any documents claimed to be privileged documents, the facts relied on as establishing the existence of the privilege (see subparagraph (5)(b)(ii)), and rule 3(6) requires the list to identify any document or group of documents which is claimed to be privileged, specifying the circumstances. Rule 4 empowers the Court to determine any question of privilege and, for that purpose, to inspect any document. 31 The defendants refer to the pleaded case against Mr and Mrs Lennox (now in the Third Further Originating Process), which includes allegations that they as directors improperly used their position to gain advantage for themselves and cause detriment to TAPL contrary to s 182(1)(a) and (b) of the Corporations Act, and failed to exercise their powers and discharge their duties in the best interests of TAPL or for proper purposes (s 184(1)(b), (c) and (d)), and used their position dishonestly with the intention of directly or indirectly gaining advantage for themselves (s 184(2)(a)). Section 182(1) is a civil penalty provision, and contravention of s 184 (1) or (2) is an offence. 32 In my opinion, the applications presently before me do not properly raise the question whether TAPL was entitled to resist the call for production of the Watson Reports when it was made on 30 January 2004, on the ground of privilege, or is entitled to continue to resist production of the Reports on that ground. What should happen is that an application should be made specifically on the ground of privilege, supported by affidavit evidence which does the job contemplated by rule 3(5)(b)(ii) and rule 3(6)(d). It will probably be necessary for the Court to inspect the Watson Reports in order to determine whether they are privileged documents within rule 1(c)(iii). It is not adequate for the defendants simply to refer in written submissions to some parts of ACDT's pleading that invoke statutory offences and civil penalty provisions. I therefore reject the defendants' submission in the context of the present applications. Of course, given my decision on other matters, the defendants may decide that there is no need to make an application based on privilege. 33 The defendants make a similar argument with reference to s 126B of the Evidence Act 1995 (NSW), which permits the Court to direct that evidence not be adduced if it would disclose a protected confidence. Where that is so, the document may be a privileged document for the purposes of discovery, within the definition in Part 23 rule 1(c)(ii)(A). In the context of the present applications, this submission fails just as the submission based on the privilege against self-incrimination and exposure to penalties fails. The defendants' application does not properly raise the privilege issue. 34 Therefore, if there were no basis for denying access because of the terms of its undertaking or other discretionary considerations, ACDT would be entitled to discovery and inspection of the Watson Reports. The construction of ACDT's undertaking of 7 November 2002 35 The question for consideration is whether ACDT's undertaking noted in paragraph 3(a) of this Court's orders of 7 November 2002, on its proper construction, prevent it from calling for production of the Watson Reports. 36 The defendants referred me to four general principles as to statutory construction and the construction of instruments. First, the language used in the instrument should be interpreted broadly and fairly, and as long as it is not impossible to place a reasonable meaning on the language used and to discern the parties' intention, the agreement will be enforced: SVI Systems Pty Ltd v Best & Less Pty Ltd [2001] FCA 272 9 (Einfeld J, 20 March 2001), at [69] and cases there cited. Secondly, there is the principle that the Court should presume that businessmen do not intend to do anything absurd, and, therefore, while a construction of ambiguous words that leads to a very unreasonable result, or that "flouts business commonsense", should be avoided: Tillmanns & Co v SS Knutsford Ltd [1908] 2 KB 385; 402 per Farwell LJ; Schuler (L) AG v Wickman Machine Tool Sales Ltd [1974] AC 235,255-6 per Lord Morris of Borth-y-Gest, 251 per Lord Reid; The Antaios [1985] AC 191,201 per Lord Diplock; GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50 (Finn J, 12 February 2003) at [485]. Thirdly, there is case law to indicate that a purposive rather than a literal approach is the method of construction which now prevails, at any rate in statutory construction: Kingston v Keprose Pty Ltd (1987) 11 NSWLR 404, 423 per McHugh JA (dissenting, though not on this point). Fourthly, I was referred to cases supporting the principle that what cannot be done directly cannot be done indirectly: Container Terminals Australia Ltd v Xeras (1991) 23 NSWLR 214, 217 per Handley JA; Caltex Oil (Australia) Pty Ltd v Best (1990) 170 CLR 516, 523 per Mason CJ, Gaudron and McHugh JJ. In the present case, that principle hardly needs to be invoked, because the inclusion of the words "directly or indirectly" in clause 3(a) makes the application of the principal a matter of express language (cf R v Metal Trades Employers' Association; Ex parte Amalgamated Engineering Union, Australian Section (1951) 82 CLR 201, 261 per Kitto J). 37 To the extent that there may be some ambiguity in the scope of the words "indirectly ... from" in paragraph 3(a), it is appropriate to bear the first three principles in mind, but the Court's primary task is to construe the language of clause according to its natural meaning, in its context. 38 ACDT's undertaking in paragraph 3(a) relates to any information, reports or other documents concerning the affairs of TAPL or its subsidiaries ("the quarantined information"). It is clear that the Watson Reports are quarantined information. The proscribed conduct has three elements: (i) ACDT must not seek to obtain quarantined information, (ii) from a prohibited source (namely Mr Arkin or the solicitors, counsel and accountant retained by him in the Federal Court proceeding), (iii) whether the quarantined information is or came from a prohibited source directly or indirectly . 39 In their written submissions the defendants tended to understate the second element. Thus, they said (submission, paragraph 3.2): "The first inquiry is whether, upon an ordinary literal and grammatical construction of paragraph 3(a) read in the light of the whole document, ACDT, by its call, seeks indirectly to obtain the Watson Reports, and therefore the call is in breach of ACDT's undertaking to this Court." That is a misstatement of the terms of the undertaking. The defendants submitted that the word "indirectly" meant that ACDT could not seek the production of reports that "originated at the instance of" Mr Arkin. That is not the language of the undertaking. 40 In my opinion the word "from" limits the scope of the word "indirectly", so that information is not indirectly from Mr Arkin (or the others mentioned) unless there is some conduct on the part of one of them which amounts to making the information accessible. I would contrast two hypothetical situations, based on examples supplied in argument by counsel for ACDT. First, suppose that unbeknown to Mr Arkin, TAPL engages a private investigator who surreptitiously obtains copies of the Watson Reports from a disgruntled employee of Mr Watson and supplies them to TAPL. The reports have "originated at the instance of" Mr Arkin because he has engaged Mr Watson as his nominee to prepare them, but it can hardly be said that in seeking to obtain the copies of the Reports that have come into TAPL's possession in this fashion, ACDT would be seeking to obtain them directly or indirectly from Mr Arkin or Mr Watson. 41 Secondly, suppose that Mr Arkin makes allegations of breach of duty against Mr and Mrs Lennox at a board meeting of TAPL, and to support his contentions he reads extracts from the Watson Reports into a board minute. Would it be a breach of undertaking for ACDT to demand access to the board minute? Counsel for ACDT submitted that it would not, but I am inclined to think otherwise. The relevant information has become available to TAPL, and indirectly to ACDT if is permitted to inspect the minute, because Mr Arkin has taken steps to provide it to TAPL. It is "indirectly … from" Mr Arkin. 42 However, it is not necessary for me to define the precise metes and bounds of the undertaking in order to answer the question presented to me by the present facts. It seems to me fairly plain that if A by intentional conduct supplies documents to B, and C, knowing that this has occurred, obtains the documents from B, C has indirectly obtained the documents from A. Hely J made an order on 7 February 2003 requiring Mr Watson ("A") to furnish his Reports simultaneously to the solicitors for Mr Arkin and also the solicitors for TAPL ("B"). In accordance with Hely J's order, the Reports came into TAPL's possession because of steps taken by Mr Watson, and it is clear its solicitors' letter of 17 December 2003 that ACDT was aware of their source when it called for their production. In those circumstances, when it called for production of the Reports from TAPL, ACDT sought to obtain them indirectly from Mr Watson, and therefore contravened the undertaking. 43 The facts that Mr Watson provided the documents to TAPL pursuant to an order of the Federal Court, and that the order was made, by consent, as a result of TAPL insisting that it was a non-negotiable requirement, are beside the point. The fact that, thereafter, the reports were in TAPL's possession and control would be relevant to make them discoverable documents were it not for the undertaking, but that fact does not take the matter outside the bounds of the undertaking. There is no basis for implying a limitation on the undertaking, rendering it inapplicable to discoverable documents. Even if there was an express or implied limitation rendering the undertaking inapplicable to defeat ACDT's general right of discovery in the Supreme Court proceeding, such a limitation would not authorise ACDT to demand discovery and inspection of documents brought into existence at the instance of its nominee director Mr Arkin, containing information that would (on the evidence before me) be damaging to TAPL in the litigation, which TAPL had endeavoured to keep from ACDT by the very process of agreeing to the consent orders and undertakings on 7 November 2002. 44 This construction of clause 3(a) is supported by its context, for it is a part of a set of orders in which other contemporaneous and related undertakings are noted. The orders, made by consent, reflect a bargain between the parties, the gist of which is that Mr Lennox would not (subject to further order) use his voting power as majority shareholder in TAPL to remove Mr Arkin as a director, provided that arrangements were put in place to prevent Mr Arkin from transmitting information obtained as director to ACDT to assist it and to damage TAPL in the litigation in this Court. Thus ACDT undertakes not to obtain, directly or indirectly, certain information from Mr Arkin, his lawyers or accountant, and Mr Arkin undertakes not to transmit information about TAPL to anyone except his nominated accountant, the accountant's staff, his personal legal representatives, the staff of his own firm, and any relevant regulator. Although Mr Arkin's undertaking extends to transmitting information to "any person", it is evident from clause 4(b)-(d) that the particular concern is to maintain a separation of Mr Arkin in his position as director of TAPL from ACDT in its position as litigant against TAPL. If clause 3(a) were construed so as not to prevent ACDT from obtaining information (which, according to the evidence, would be useful to ACDT in the litigation and damaging to TAPL) from a third party to whom Mr Arkin or Mr Watson had transmitted it, the balancing of interests reflected in the orders would be undermined. This is especially so when one notes that, although the Watson Reports were not in fact prepared until some months after the undertakings were given, clause 3(a) expressly enjoins ACDT from seeking to obtain directly or indirectly reports from the accountant retained by Mr Arkin in the Federal Court. Discretionary considerations 45 Even if I had not reached the conclusion that ACDT should be denied access to the Watson Reports on the ground of breach of undertaking, it would be necessary to consider whether there is any discretionary reason for denying access. The Court has the power to prevent a party from insisting upon its strict right to discovery and inspection of documents, as an incident of its inherent power to prevent an abuse of its process: Kimberley Mineral Holdings Pty Ltd (in liq) v McEwen (1980) 1 NSWLR 210; Hamilton v Naviede [1995] 2 AC 75,105 per Lord Browne-Wilkinson (by analogy).

46 The application before Hely J on the 2 December 2003 was essentially an application by Mr Arkin for leave to provide the Watson Reports to ACDT. The first of Hely J's two discretionary reasons for denying that leave is relevant to the issues before me for consideration. His first reason, extracted above, was that to allow Mr Arkin to provide the Reports to ACDT would circumvent ACDT's undertaking to this Court. That reasoning implies that by December 2003 the overall arrangement between the parties was that, pending resolution of the Supreme Court proceeding, Mr Arkin would remain a director of TAPL, and would have access with Mr Watson's assistance to TAPL's financial records in order to perform his duties as director, but the information obtained by that process was not to be shared with ACDT. His Honour reached his conclusions knowing that the Watson Reports had been provided to TAPL and had become its property.

47 In my opinion, even if ACDT's undertaking, on its proper construction, did not prevent it from calling for production of the Reports from TAPL, to permit it to obtain access to the Reports in that fashion would circumvent the package of undertakings given to this Court on 7 November 2002 and repeated to the Federal Court on 7 February 2003, and the arrangements reflected in the undertakings as at February 2003. It is clear from the terms of ACDT's undertaking to this Court that the arrangements were intended to prevent ACDT from having access to any reports by the accountant retained by Mr Arkin in the Federal Court proceeding. The making of the same undertakings to the Federal Court on 7 February 2003, as part of a package of orders which made specific provision for preparation of the Watson Reports, and for TAPL to be provided with those reports by Mr Watson, was a re-affirmation of the arrangements with a specific focus on the Watson Reports. ACDT's exclusion from access to the Reports was a central ingredient of the arrangements, notwithstanding that TAPL's acquisition of the Reports might have made them discoverable in a general sense.

48 Counsel for ACDT submits that it would be premature for the Court to exercise its discretion against production at this stage. He relies, by analogy, on the well-known observations of Moffitt P with respect to subpoenae for production, made in National Employers' Mutual General Association Ltd v Waind and Hill [1978] 1 NSWLR 373, 381. There his Honour identified three steps in the procedure of having a third party bring documents to court, and in their use thereafter. The first step is the third party obeying the subpoena by bringing the documents to court and handing them to the judge. The second step is the judge's decision whether to allow any party to have access to the documents. The third step is the admission of the documents into evidence.

49 Counsel for ACDT submits that at the first stage, where the issue is whether the documents should be produced to the Court, the question whether his client should have access to them, and the ultimate question whether the documents should be allowed into evidence, do not arise. He contends that at this stage, the Court should require TAPL to produce the Watson Reports to the Court so as to allow further argument as to their inspection.

50 While I agree that the discovery and inspection process has several steps, broadly analogous to the subpoena process, it seems to me that in the present case, having regard to the terms of ACDT's undertaking and the discretionary considerations to which I have referred, there is no point in requiring production of the Watson Reports to the Court, because there is no prospect that the Court will grant ACDT pre-hearing access to them. Conclusions 51 I have decided, both on the construction of clause 3(a) of ACDT's undertaking to the Court given on 7 November 2002, and for discretionary reasons, that ACDT should not be given access to the Watson Reports, and that the defendants should not be required to produce them for inspection in the discovery process for the referee proceeding. I do not think it is appropriate, in interlocutory circumstances, to make a declaratory order to that effect. I think the appropriate order is: "That the plaintiff be restrained, until further order, from seeking discovery and inspection or otherwise calling for production, in this proceeding, of the reports identified in paragraph 2(a) of the plaintiff's notice of motion filed on 11 February 2004." 52 Since the defendants have succeeded in their application, it will be necessary to make arrangements for the hearing of ACDT's notice of motion if, having considered these reasons for judgment, ACDT wishes to persist with it. 53 In an effort to minimise contentions with respect to the costs of the defendants' application and the hearing on 17 February 2004, I indicate that good reasons will need to be advanced if I am to be persuaded to abandon the following provisional views: (a) the issue before me is sufficiently separate from the issues that will arise at the final hearing that it is appropriate to make an order for costs now rather than to reserve costs or make them the defendants' costs of the cause; (b) having regard to the amount of time likely to pass before the proceeding is finally determined, it is appropriate to permit the assessment of costs to proceed forthwith; (c) the defendants having succeeded comprehensively, ACDT should be ordered to pay the defendants' costs of their application and the hearing on 17 February 2004; and (d) since ACDT did not behave unreasonably in construing the undertaking in a manner that I have held to be incorrect, or otherwise in calling for production of the reports and other documents, even though I have held that they were not entitled to do so, indemnity costs are not appropriate. 54 It is very likely that if any of these propositions is contested at a further hearing, I shall order the unsuccessful party to pay the costs of that hearing. 55 I shall fix a date for a further directions hearing, at which I shall hear any necessary submissions as to the form of the orders and as to costs, make orders, and (if necessary) give directions with respect to the preparation of ACDT's notice of motion for hearing. If there is no contest as to any of these matters requiring a further hearing, and the parties jointly ask me to do so, I am prepared to make orders in chambers.

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