The cross-claimant the Australian Special Opportunity Fund LP ("ASOF"), a limited partnership incorporated in Delaware, held approximately 86% of the secured notes issued by the company Metal Storm Limited, of which the cross-defendant Equity Trustees Wealth Services Limited ("EQT") was the trustee for noteholders under a security trust deed. Metal Storm was, until 30 August 2013, listed on the ASX. It went into voluntary administration on 26 July 2012. Under clause 6.1(b) of the security trust deed, EQT was, in the events which happened, obliged to appoint a controller of Metal Storm by 15 August 2012, but it did not do so. Metal Storm's creditors resolved that it enter into a Deed of Company Arrangement ("DOCA"); however on 23 July 2014, Black J made orders terminating the DOCA, appointing the administrators as liquidators, and also appointing receivers of the property of Metal Storm pursuant to (CTH) Corporations Act 2001, s 283HB(1)(d) and (g). Those receivers subsequently sold the assets of Metal Storm to Defendtex Pty Ltd.
On 11 August 2015, the Court of Appeal, allowing ASOF's appeal from a judgment of Black J, held [1] that by not appointing a receiver of Metal Storm by 15 August 2012, EQT incurred liability for breach of contract and breach of trust, and that ASOF had made out a prima facie case on causation and damage sufficient to warrant a further hearing on the issue, in that the loss of the opportunity to have a controller appointed had value as, had a controller been appointed, control of the assets of the company would be with the controller rather than the administrators, and the security trustee would have been empowered to release the security over the assets of the company to enable an early trade sale. [2] The Court of Appeal remitted ASOF's claim for damages or equitable compensation arising out of EQT's failure to appoint a controller in accordance with cl 6.1(b) of the security trust deed to a judge of the Equity Division for hearing. [3]
In its cross-claim, ASOF pleads its claim for damages in para 18, as follows:
18 By reason of the beaches of the Security Trust Deed and the Duties pleaded in paragraphs 13 to 17 above, ASOF has suffered loss and damage.
Particulars
Particulars of loss and damage will be provided as part of ASOF's evidence in the trial.
ASOF has subsequently, under cover of a letter of 21 October 2015, particularised its claim for damages in the following terms:
The loss and damage suffered by the cross-claimant is the loss of opportunity it had to find itself in a better position than it now is, being an opportunity that would have arisen had [EQT] appointed a receiver to the assets of Metal Storm Ltd in the period 27 July and 15 August 2012.
It is contended that on the hypothetical scenario in which a receiver had been so appointed, there would have existed the opportunity for:
1. The receiver to maintain and develop the assets of Metal Storm Ltd and to realise them expeditiously following its appointment and at a higher value than was actually realised later;
2. The cross-claimant to avoid costs incurred in consequence of what has been, in fact, a lengthy and ongoing administration of Metal Storm Ltd (incurring instead, fewer costs during the hypothetical receivership);
3. The cross-claimant to receive a return on the notes consequent upon a sale by the receiver of the assets of Metal Storm Ltd (which return would be in an amount reflective of the fact that the receivers would have sold the assets as described in paragraph 1 above, and of the fact that the trust would not have incurred the costs it did in consequence of the ongoing administration);
4. The cross-claimant to maintain and receive further investment and other funds;
5. The cross-claimant to invest and generate income and profit from:
a. The funds the subject of the payments referred to in paragraph 3;
b. The funds the subject of the costs differential described in paragraph 2; and
c. The funds referred to in paragraph 4;
6. The cross-claimant to purchase assets of Metal Storm Ltd from the receiver and thereafter deal with the assets for its own benefit.
The existence and value of the opportunity that has been lost are matters to be addressed in evidence to be served by the cross-claimant.
Thus, ASOF's case involves what is now fashionably called the "counter-factual" inquiry into what would have happened had EQT made a timely appointment of a receiver, as it ought to have. ASOF will endeavour to establish that timely appointment of a receiver would have resulted in the assets of Metal Storm being realised sooner and for greater value than transpired.
Directions have been made for the service of expert evidence in respect of the damages claim. ASOF proposes to adduce the evidence of an expert insolvency practitioner as to what a reasonably prudent receiver would have done if appointed, and of a valuer to give evidence as to the value that would have been realised. Those experts - Mr Olde and Mr Potter respectively - have been selected, and have provided lists of information and documents they require in order to provide their opinions.
By interlocutory application filed on 21 December 2015, ASOF seeks an order that EQT give discovery of all documents directly relevant to the issues raised by para 18 of the cross-claim and its particulars thereto. Alternatively, pursuant to an amended application filed at the hearing, ASOF seeks an order for discovery of all documents relevant to a number of specified questions relevant to its damages case. In the further alternative, discovery is sought of documents in a number of specified categories which substantially correspond with the list of information required by the two proposed expert witnesses.
EQT opposes an order for discovery, on the grounds that:
1. the types of documents sought are not within the possession of EQT and/or are otherwise available;
2. discovery in the form sought is impermissible having regard to (NSW) Uniform Civil Procedure Rules 2005, r 21.2(1) and (2);
3. discovery in the form sought would be oppressive; and
4. the application does not satisfy the requirements of Practice Note Supreme Court Eq 11 (Disclosure in the Equity Division).
General discovery (as distinct from discovery of specific documents under UCPR r 21.10) is no longer available as of right, as it once was (at least in proceedings on pleadings, other than personal injuries claims; it was never available as of right, but only where "necessary", in proceedings by summons). UCPR r 21.2 confers a discretion to make an order for discovery, in the following terms:
21.2 Order for discovery
(1) The court may order that party B must give discovery to party A of:
(a) documents within a class or classes specified in the order, or
(b) one or more samples (selected in such manner as the court may specify) of documents within such a class.
(2) A class of documents must not be specified in more general terms than the court considers to be justified in the circumstances.
(3) Subject to subrule (2), a class of documents may be specified:
(a) by relevance to one or more facts in issue, or
(b) by description of the nature of the documents and the period within which they were brought into existence, or
(c) in such other manner as the court considers appropriate in the circumstances.
(4) An order for discovery may not be made in respect of a document unless the document is relevant to a fact in issue.
As was pointed out by Allsop P (as his Honour then was) in Palavi v Radio 2UE Sydney Pty Ltd: [4]
Parties should understand that the restriction on discovery now contained in Pt 21 is the current framework for discovery. Discovery (and its uncontrolled use) always contains (and contain) the risk of abuse and oppression. Discovery can be a highly expensive exercise. Courts in defamation, as in all other matters, including commercial matters, should be astute to ensure that it is not used as a weapon of oppression by wealthy litigants to oppress less well-funded parties. Even when all parties are well resourced, over-enthusiastic and unnecessary use of discovery impedes the due administration of justice and undermines confidence in the court system's ability to resolve disputes justly, quickly and cheaply. Parties should understand that there is no entitlement to "chain of inquiry" discovery. If discovery is being used abusively, the courts can and should control it.
Practice Note SC Eq 11 (Disclosure in the Equity Division) provides guidance as to how the discretion to order discovery will be exercised in the Equity Division, relevantly in the following terms:
4. The Court will not make an order for disclosure of documents (disclosure) until the parties to the proceedings have served their evidence, unless there are exceptional circumstances necessitating disclosure.
5. There will be no order for disclosure in any proceedings in the Equity Division unless it is necessary for the resolution of the real issues in dispute in the proceedings.
Thus, the Practice Note addresses two aspects: whether an order for discovery will be made (only where "necessary"), and when (only after the evidence has been served, other than in exceptional circumstances).
However, the touchstone for discovery of a document in the possession, custody or power of a party required to give discovery (which I shall call, consistently with UCPR Part 21, "Party B"), is relevance to a fact in issue. A requirement to give discovery casts upon Party B the obligation to consider and make a judgment as to whether any document in its possession custody or power (within the specified class) is relevant to a fact in issue in the proceedings. If and only if it is relevant to a fact in issue is it discoverable. At least in the first instance, relevance is a matter for the judgment of Party B. It is often said that a subpoena cannot be used to obtain discovery; what that means is that a subpoena (as distinct from discovery) cannot cast on the recipient the obligation to make a judgment as to relevance to a fact in issue.
There has been a tendency, since the introduction of the predecessor of UCPR r 21.2 (and its predecessor in the Supreme Court Rules), for classes of documents for discovery to be framed, not by reference to facts in issue, but by description of the type and (sometimes) the dates of the documents. While it is sometimes apparent that documents so described are relevant to a fact in issue, often it is not. Moreover, framing classes of documents for discovery in that way tends to distract Party B from focusing on the question of relevance to a fact in issue, and direct it towards whether or not the document fits within the description. It tends to confuse the process of discovery with that of a subpoena for production. As I have pointed out on more than one occasion, [5] for this reason it is usually preferable to draft classes of documents for discovery by reference to facts in issue rather than by description of the nature of the documents and the period within which they were brought into existence, because doing so makes the relevance of the class clear beyond doubt, and because it makes clear that Party B is required to make the necessary judgment as to relevance of any particular document. When drafted by reference to facts in issue the relevance of the class is immediately apparent. This is the principal way in which ASOF has propounded its case for discovery. Discovery in the form sought is not only specifically authorised (by UCPR r 21.2(3)(a)), but is the preferable means of framing such an order. Save as to the requirement that a class of documents not be specified in more general terms than justified in the circumstances, there is no limit to the width of a class. An order framed in terms of "the issues raised by para 18 of the cross-claim" is permissible and appropriate, at least if para 18 represents real issues in dispute in the proceedings.
Accordingly, I reject the submission that discovery in the form sought is impermissible having regard to UCPR r 21.2(1) and (2). It is convenient to consider the remaining objections under the headings of necessity, oppression and exceptional circumstances.
[3]
Necessity
While UCPR r 21.2 does not itself contain a test of "necessity", such a notion is contained in the Practice Note. Moreover, the concept of "necessity" as a test is not new in this context. Insofar as par 5 of the Practice Note provides that discovery will be ordered only where necessary, it reflects a longstanding requirement, formerly contained in the rules (and still provided, in respect of interrogatories, by UCPR r 22.1(4)), that discovery would be ordered only where it was necessary. This provision was consistently interpreted to mean, not "essential", but "reasonably required for the fair disposition of the matter". [6] The notion has been variously described as "what is reasonably necessary for the disposing fairly of the cause or matter", [7] or "necessary in the interests of a fair trial"; [8] or "reasonably required or legally ancillary" to the achievement of a fair trial, not "essential" but to be "subjected to the touchstone of reasonableness". [9] That approach has been applied to the similar phrase in the Practice Note: in Leighton International v Hodges; Thiess v Reinforced Earth, McDougall J said: [10]
In the context of the Practice Note, the disclosure (either pre-evidence or at all) must be shown to be reasonably necessary for disposing of the matter fairly or in the interests of a fair trial.
In that context, it is necessary to remember the purposes of discovery. While it is a common use of discovery to obtain evidence of Party B's knowledge or conduct, that is far from its sole use or purpose. The purposes of discovery include not only obtaining relevant evidence, but also reducing surprise and promoting fairness by putting parties in an equal position at trial, so that the parties are "playing with all the cards face up on the table". [11] Discovery has the consequence that Party B cannot adduce documentary evidence at trial which takes Party A by surprise. Thus, simply ascertaining what documents relevant to a fact in issue are in the possession of Party B and may be deployed at trial by that party, or may aid Party A's case or harm Party B's case, is a relevant and proper purpose of discovery. It is a means of a party ascertaining what the other party has in its hand, and thereby avoiding surprise.
One feature of discovery (that distinguishes it from a subpoena for production) is that it casts upon the party giving discovery, the obligation to disclose every document in his or her possession (within the relevant class) that relates to a fact in issue in the proceedings. It casts on Party B the obligation to identify the documents - as distinct from a subpoena where the issuing party must frame, relatively precisely, the description of the documents production of which is required. Once these features of discovery are appreciated, objections by EQT to the effect that ASOF's application is in the nature of "trawling" or "fishing", or that it requires EQT to review its documents and form its own view as to the relevance of a particular document to the specified issues, can be seen to be misconceived. While those are legitimate objections to a subpoena for production, it is fundamental to the notion of discovery that Party B is required to disclose any of its documents that are relevant, and to make its own judgment as to relevance.
Metal Storm's primary business was the development of defence technologies, and its most valuable assets comprised patents, trademarks, and website domain registrations; it also held 49% of the shares in Metal Storm Inc, a company incorporated in Delaware to exploit its patents in the United States market. It would appear that central to ASOF's case will be establishing the prices at which those assets would have been realised had receivers been appointed in August 2012. While EQT will presumably endeavour to show that such an appointment would have resulted in little if any net difference from the course that in fact ensued, just what EQT's case on damages will be is not yet known. There remains in these proceedings a real issue in dispute as to ASOF's damages, which encompasses questions of causation and quantum, and potentially remoteness.
EQT admittedly has in its possession or control about 80,000 pages of documents that relate to Metal Storm during the potentially relevant period. [12] It is reasonable to suppose that the reason EQT (and its former holding company) holds such documents is connected with the performance of its functions as security trustee, which presumably involved monitoring the financial position of Metal Storm and the value of its assets. Thus, it is probable that at least some of the documents relating to Metal Storm in EQT's possession, custody or power relate to the financial position of Metal Storm and the value of its assets - which at least as at August 2012 and for some time thereafter, is apparently a fundamental issue in the case. Accordingly, it is probable that the documents held by EQT include documents that are relevant and material to the question of damages.
EQT however submits that the relevant documents can be and have been obtained from other more appropriate sources, and thus that discovery is unnecessary. EQT rightly emphasises that the way in which ASOF's damages claim is put, depending as it does on the "counter-factual inquiry" as to the course and outcome of a hypothetical receivership, does not involve the state of mind or conduct of EQT; that the Metal Storm documents in EQT's possession and power will typically not have been generated by EQT, but received from their primary source - in particular Metal Storm, its administrators and liquidators; and that ASOF has caused subpoenas for production to be issued to those "primary repositories", pursuant to which an extensive range of documents has been produced. ASOF's proposed experts have not said that they are unable to perform tasks with the material that has so far been produced.
It is undoubtedly true that because many of the documents in EQT's possession will not have originated from EQT, they may also be obtained from other sources. As EQT submits, obvious sources include the administrator/liquidator, and the receivers. No doubt many relevant documents could be obtained from those sources, and indeed they have been, pursuant to subpoenas for production.
However, the fact that many of the documents that might be obtained on discovery can also be obtained from another source does not render discovery from a defendant unnecessary or inappropriate. It is not impermissible to seek the same document from multiple sources. And there may be documents in EQT's power that are relevant to damages but have not been produced on subpoena - either because the other sources to which subpoenas have been directed never had or no longer retain them, or because they escape the descriptions of documents or categories listed in the subpoenas, based as they were on the experts' requirements. Moreover, it would be surprising if EQT as security trustee had not undertaken and documented some analysis of its own, which could have extended to obtaining its own independent valuations. Conceivably, such analysis and/or valuations could have attributed a relatively high value to assets which later were sold for much less.
In this respect, what is relevant to damages is not necessarily circumscribed by ASOF's particulars, because further questions might well be raised by EQT as to the proper approach to damages, and (for example) what instructions the note holders (including ASOF) might have given a hypothetical receiver. Although ASOF has particularised its claim for damages in the manner described, that does not mean that EQT is precluded from contending that damages should be assessed, if at all, on some different basis; or from contending that ASOF would not have instructed a receiver to act any differently - for which purpose, documents in EQT's possession could conceivably be used.
That all this is speculative would be highly relevant if this were an application to set aside a subpoena; but not in the context of discovery. If in fact EQT has no such documents, then it will have nothing to include in its list of documents.
Moreover, absent discovery, ASOF will not know the full extent of the documentary material at the disposal of EQT, including anything that might assist ASOF's case or harm EQT's case which EQT might prefer - understandably and, absent an obligation to give discovery, quite properly - not to disclose. Whatever relevant documents EQT has in its power are available to it for use in its defence. Absent discovery, EQT's cards will not be on the table. There will remain potential for surprise. It would not be reasonable to expect ASOF to go to trial not knowing what EQT has in its hand.
Accordingly, in my view, discovery of documents relevant to the issue of what, if any, damages ASOF has suffered by reason of EQT's established breach of contract and trust is reasonably required for the fair disposition of the matter and thus necessary in the relevant sense.
ASOF has indicated that it would not require discovery of documents that have already been produced in the proceedings, including on subpoena by other sources, or that are publicly available. EQT complained that the effect of these limitations was to impose on it the further burden of having to decide whether the document had previously been produced, and whether it was publicly available. This was a concession offered to reduce the burden on EQT. There is no intention to impose a further burden, but simply to relieve EQT from any requirement to discover such documents. If it wishes to avail itself of that concession, it may. If it does not, it need not: it can discover the documents that would have been excluded by the concession.
[4]
Oppression
Even when discovery was available as of right, the court could relieve a party from giving discovery the extent of which would be oppressive. [13] Under the current rules, the court will frame orders for discovery so that they are not oppressive. But oppression is not a mere factor of extent, time and cost: discovery is not oppressive merely because it is burdensome, but only if it is unnecessarily burdensome.
EQT adduced evidence that its lawyers would now need to review each and every one of the documents in the possession of ANZ and EQT that relate to Metal Storm before they can be discovered, and that it would incur legal costs in the order of $36,000 to $44,000 in reviewing its documents and drawing and certifying its list of documents.
In the context of commercial litigation of this kind and scale, I do not regard that as self-evidently oppressive. However, at an earlier stage of proceedings, in 2014, EQT was required to give discovery of "all documents in the possession of, created, received or sent by ANZ Trustees Limited [14] in the period from 1 July 2012 to date referring or relating to the insolvency of Metal Storm Limited and/or the putting of Metal Storm Limited into administration". For that purpose, EQT's lawyers conducted a review of all the documents EQT was obliged to discover, in order inter alia to identify any claim for privilege. Thus, it seems to me that there must already have been an extensive review by EQT's lawyers of its documents, and that they must already have a substantial degree of familiarity with the documents. While no doubt some further work will be required, I am unpersuaded that it will be necessary to review every one of the 80,000 pages. I do not accept that the exercise will be so extensive and expensive as EQT contends.
In my judgment, in the context of this litigation - particularly bearing in mind that ASOF has succeeded on liability and has been found to have established a prima facie case in respect of damages - a requirement to give discovery of documents relevant to ASOF's damages is not unreasonably burdensome.
[5]
Exceptional circumstances
As I endeavoured to explain in Graphite Energy Pty Ltd v Lloyd Energy Systems Pty Ltd, [15] Practice Note SC Eq 11, in providing that ordinarily, formal discovery should be deferred until the parties had served their affidavits, was intended to serve two main purposes: first, to reduce the burden of discovery by requiring it only after the issues had not only been defined by the pleadings (where relevant), but had also been refined by the affidavit evidence, and thus limiting its scope; and secondly, to avoid the mischief of parties constructing their affidavit evidence around the discovered documents, by requiring them first to commit their case to affidavits. [16]
There are a number of features of the present case which, together, constitute sufficiently exceptional circumstances to depart from the default position under the Practice Note. First, the liability of EQT has already been established by the judgment of the Court of Appeal. Secondly, directions have been made for the service of expert evidence. The experts have indicated that they require certain classes of documents to express an opinion. If relevant material were to emerge at a later stage, after the experts have prepared their reports, it may require them to revisit and modify their reports, at additional cost and delay. Thirdly, because the only remaining issue is damages, the testimonial evidence is unlikely to refine the issues in a way which will narrow the issues. Fourthly, because the evidence will chiefly be expert opinion, and does not involve the state of mind or conduct of EQT, the risks of 'shaping' evidence to the documents which otherwise make it desirable to obtain the testimonial evidence first, are not present. Thus, the rationale that informs the Practice Note is no longer relevant at this stage of these proceedings. To the contrary, the expert evidence to be served will necessarily be informed by the documents.
[6]
Conclusion
Accordingly, in my view:
1. discovery of documents in the possession, custody or power of EQT that relate to the issue of what if any damages ASOF has suffered is reasonably required for the fair disposition of the matter, notwithstanding that many relevant documents may be obtained from other sources, not only because it is conceivable that there may be some documents in the exclusive possession or power of EQT, but also because the wider scope of the discovery obligation may catch documents relevant to damages (including to such case in respect of damages as EQT might advance) which escape the particular documents or classes referred to in the subpoenas, and in addition, because it would not be reasonable to expect the ASOF to go to trial on damages without knowing what relevant documents EQT has in its possession;
2. the burden which such discovery will impose on EQT is not oppressive; and
3. at this stage of these proceedings, given that the only remaining issue is damages and that directions for expert evidence, which will rely on documents, have been made, the rationale for deferring discovery until after service of the evidence is not applicable, and discovery prior to service of the expert evidence is desirable.
Accordingly, upon the cross-claimant's interlocutory application filed on 21 December 2015, the Court orders that:
1. The cross-defendant give discovery to the cross-claimant of documents relevant to the issue of what if any damages ASOF has suffered by reason of EQT's failure to appoint a receiver in compliance with clause 6.1(b) of the Security Trust Deed, provided that the cross-defendant need not discover documents which have previously been produced by way of discovery or on subpoena in these proceedings, or which are publicly available from the Australian Securities and Investments Commission, the Australian Stock Exchange, or the United States Securities and Exchange Commission.
2. The cross-defendant pays the cross-claimant's costs.
[7]
Endnotes
The Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Ltd (2015) 323 ALR 570; [2015] NSWCA 225.
The Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Ltd (2015) 323 ALR 570; [2015] NSWCA 225 at [163] (Bathurst CJ), [183] (Macfarlan JA), [190] (Emmett JA).
The Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Ltd (2015) 323 ALR 570; [2015] NSWCA 225 at [182].
Schutt v Queenan & Anor [2000] NSWCA 341, [12] (Mason P); In the matter of Gerard Cassegrain & Co Pty Ltd [2011] NSWSC 241, [20]-[23].
Boyle v Downs [1979] 1 NSWLR 192, 205 (Cross J); Yamazaki v Mustaca [1999] NSWSC 1083.
Percy v General Motors-Holden Pty Ltd [1975] 1 NSWLR 289, 292 (Rath J).
Pelechowski v Registrar, Court of Appeal (1999) 198 CLR 435 (Gaudron, Gummow and Callinan JJ).
[2012] NSWSC 458 at [13]. See also In the matter of Mempoll Pty Ltd, Anakin Pty Ltd and Gold Kings (Australia) Pty Ltd [2012] NSWSC 1057, [18] (Black J); James v Royal Bank of Scotland Group plc [2013] NSWSC 402, [16] (Stevenson J); and Graphite Energy Pty Ltd v Lloyd Energy Systems Pty Ltd [2014] NSWSC 1326, [19].
Naylor v Preston Area Health Authority [1987] 1 WLR 958 at 967; Davies v Eli Lilly & Co [1987] 1 WLR 428 at 431; Black & Decker Inc v Flymo Ltd [1991] 1 WLR 753.
EQT was previously known as ANZ Trustees Limited and was a subsidiary of ANZ Banking Group Limited, which sold its shares in EQT to Equity Trustees Limited on 4 July 2014. About 73,000 pages of documents that relate to Metal Storm during the potentially relevant period are in the possession of ANZ. As ANZ is contractually bound to produce to EQT all documents in its possession relevant to Metal Storm, those documents are also in the power of EQT. EQT has a further 7000 pages directly in its own possession.
Alexander v Fitzpatrick [1981] Qd R 359; White & Co v Credit Reform Association [1905] 1 KB 653; Kennedy v Dodson [1895] 1 Ch 334.
As EQT was then known.
[2014] NSWSC 1326.
cf Armstrong Strategic Management and Marketing Pty Ltd & Ors v Expense Reduction Analysts Group Pty Ltd & Ors [2012] NSWSC 393, [65]-[66] (Bergin CJ in Eq); Leighton International v Hodges; Thiess v Reinforced Earth [2012] NSWSC 458, [15]-[16] (McDougall J); In the matter of Mempoll Pty Ltd, Anakin Pty Ltd and Gold Kings (Australia) Pty Ltd [2012] NSWSC 1057, [14] (Black J); Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2012] NSWSC 913, [3] (Gzell J); Bauen Constructions Pty Ltd v NSW Land and Housing Corporation [2014] NSWSC 684, [26] (Ball J).
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Decision last updated: 24 March 2016