Andrews Advertising Pty Ltd v David Andrews

Supreme Court of NSW|2011-03-22|Before: Ball J

Factual background 1Until recently, the plaintiff, Andrews Advertising, carried on the business of an advertising agency. It had two principal clients. One of them was the fourth defendant, who I will refer to as "Sleep City" and the other was the fifth defendant, who I will refer to as "Lowes". Until mid 2006, Andrews Advertising was owned by BM Bridson Pty Limited. The sole shareholders and directors of that company were the first defendant, Mr David Andrews, and his wife, Gillian Andrews. Mr Andrews' son, Dean Andrews, who is the second defendant, was also employed by Andrews Advertising. Mr Andrews Snr was principally responsible for the Lowes account and Mr Andrews Jnr was principally responsible for the Sleep City account. 2In mid 2006, Bridson sold 75% of the shares in Andrews Advertising to Adcorp Australia Limited for approximately $4.5 million. Following the sale, Mr Andrews Snr and Mr Andrews Jnr continued as employees of Andrews Advertising and, on 31 July 2006, both signed employment contracts with the company. 3For reasons that I will explain shortly, the employment contract between Mr Andrews Snr and Andrews Advertising is no longer relevant. However, the employment contract between Mr Andrews Jnr and Andrews Advertising is. Clause 3.1(c) of that contract provided that Mr Andrews must "use all reasonable efforts to promote the interests of [Andrews Advertising]". Clause 3.2 of the contract relevantly provided: "Without limiting [Mr Andrews'] duties, [Mr Andrews] must not: (a) act in conflict with [Andrews Advertising's] best interests; (b) engage or be involved in any business or employment: (i) during normal business hours other than for [Andrews Advertising]; or (ii) outside normal business hours that has or may have an adverse impact on [Andrews Advertising]; except with the prior approval of [Andrews Advertising]; (c) compete with [Andrews Advertising] ; (d) ..." 4Clause 9.1 of the contract provided that either party could terminate the contract on three months' written notice. Clause 9.3 gave Andrews Advertising a right to terminate the contract without notice for cause. 5Clause 11.1 provided: [Mr Andrews] must not during the Restraint Period in the Restraint Area: (a) promote, participate in operate or engage in (whether on his own account or in partnership or by joint venture) the Restrained Business; or (b) be concerned or interested (directly or indirectly, or through any interposed body corporate, trust, principal, agent, shareholder, beneficiary or as an independent, consultant or in any other capacity) in the Restrained Business. 6"Restraint Period" is defined in schedule 1 to the contract to mean, relevantly, the period of Mr Andrews' employment with Andrews Advertising together with a period of six months after Mr Andrews ceased his employment or, if that period is unreasonable, three months after he did so. "Restrained Business" is defined in that schedule to mean "the business of an advertising agency". Schedule 1 contains a cascading definition of "Restraint Area". At its narrowest, it includes a 50km radius from the Sydney GPO. 7Following Adcorp's acquisition of 75 percent of the shares in Andrews Advertising, the business carried on much as it had done before the acquisition. Mr Andrews Snr and Mr Andrews Jnr were left to operate the business as they had done previously. The business operated from the same premises. Mr Andrews Snr continued to be responsible for the Lowes account and Mr Andrews Jnr continued to be responsible for the Sleep City account. 8On 1 November 2007 the third defendant, Andrews Media & Creative Pty Ltd (" AMC "), was incorporated. Its sole shareholder and director is Mrs Danielle Andrews, who is Mr Andrews Jnr's wife and who is the sixth defendant. AMC's registered office at the time of its incorporation was Mr and Mrs (Dean) Andrews' residential address. It is not clear whether Mrs Andrews had any experience in the advertising industry at the time. 9In early 2008, Andrews Advertising lost Sleep City as a client when Sleep City moved its head office from Sydney to Melbourne. However, Mr Andrews Jnr was successful in regaining it as a client and, on 15 December 2008 he, on behalf of Andrews Advertising, signed heads of agreement with Sleep City under which Sleep City and its associated entities agreed to retain Andrews Advertising as its advertising agency. The heads of agreement recorded that a reference to "Sleep City" in the agreement included "all of its retail furniture businesses in Australia (including any such businesses under the Starcorp Pty Ltd or Uinta Beds Pty Ltd umbrellas and all its subsidiaries, affiliates and any of its trading names including but not restricted to "Sleep City", "Everyday Living", Easy Living Trading Pty Ltd t/a "Easy Living")". 10Clause 1(a) of the heads of agreement stated that various advertising services would, subject to an exception, "be totally and exclusively outsourced to Andrews Advertising and its associated companies" during the term of the agreement. The exception was set out in clause 1(d), which provided: Sleep City is permitted to do some in-house advertising without using Andrews Advertising. 11The agreement was expressed to commence on 1 February 2009 and to continue for 24 months until 1 February 2011, subject to a right to terminate by notice received on 4 January 2010. That right to terminate was not exercised. 12At some point, the relationship between Mr Andrews Snr and Adcorp's management began to deteriorate. Precisely when that began to happen is not clear from the evidence, although it appears that it was in the first half of 2009. The reasons it happened are also not entirely clear and are not important to this application. 13On 18 June 2009, Mr Andrews Jnr agreed to an amendment to the term of the heads of agreement with Sleep City with the result that that agreement terminated on 30 June 2010 rather than 4 February 2011. How and why that came about is not explained by the evidence. It appears that no one from Adcorp was told or consulted about the amendment. 14The relationship between Mr Andrews Snr and Adcorp's management deteriorated further in early 2010 when Mr Matthew Mellor was appointed chief operating officer of Adcorp and a director of Andrews Advertising. Ultimately, on 1 July 2010, Mr Andrews Snr resigned from Andrews Advertising and, at the same time, gave notice that Lowes intended to appoint a new advertising agency effective from 1 July 2010. 15In the meantime, from early April 2010, Mr Andrews Jnr started to take steps which, at least on one view, were consistent with a decision taken by him to leave Andrews Advertising and to provide services to Sleep City in some other capacity. He instructed Ms Hennessy, who was employed by Adcorp as the Head of Property and Retail for the East Coast of Australia, to transfer a photographic library relating to Sleep City so that he had ready access to it, although Mr Andrews was not involved in media production. Mr Andrews started to become more involved in the day to day management of the Sleep City account and in May 2010 he substantially reduced the television advertising spend for May and June 2010, although Sleep City had previously approved the budgets for those months. 16On 14 July 2010 Andrews Advertising received a letter from Sleep City announcing that it intended to take its advertising in-house as of 1 September 2010 and that consequently the relationship with Andrews Advertising would cease. On 19 July 2010, Mr Andrews Jnr's employment with Andrews Advertising came to an end. There is a dispute about whether that was because Mr Andrews resigned or because his employment was terminated by Andrews Advertising. On 29 July 2010, Sleep City appointed Smart Market Pty Ltd to provide it with media billing services. That appointment was to take effect on 1 September 2010. 17Following these events, Andrews Advertising ceased to trade and retrenched three employees. 18In August 2010, Uinta Beds mistakenly provided Andrews Advertising with a copy of an invoice it had received from AMC for a total amount of $81,092.00 for advertising booking services provided by AMC in June and July 2010. It turns out that AMC issued several other invoices for similar services to Uinta Beds. The earliest of those invoices in evidence is dated 30 April 2010. 19On 8 September 2010, Mr Andrews Jnr entered into an employment agreement with Sleep City by which Mr Andrews was appointed director of advertising of Sleep City. It appears that Mr Andrews had a close relationship with Mr Zhang, who was but no longer is Sleep City's managing director. According to the evidence, Mr Andrews Jnr's contract of employment with Sleep City ended on 30 December 2010. Whether that coincided with Mr Zhang's departure is not clear. 20In these proceedings, Andrews Advertising seeks preliminary discovery against each of the defendants in order to determine whether it should bring proceedings against them arising out of the circumstances that I have described. The application so far as it concerns Mr Andrews Snr and Lowes has been resolved. That leaves the application against Mr Andrews Jnr, AMC, Mrs Andrews and Sleep City.

Issues to be determined 21UCPR rule 5.3(1) provides: If it appears to the court that: (a) the applicant may be entitled to make a claim for relief from the court against a person (the prospective defendant) but, having made reasonable inquiries, is unable to obtain sufficient information to decide whether or not to commence proceedings against the prospective defendant, and (b) the prospective defendant may have or have had possession of a document or thing that can assist in determining whether or not the applicant is entitled to make such a claim for relief, and (c) inspection of such a document would assist the applicant to make the decision concerned. The court may order that the prospective defendant must give discovery to the applicant of all documents that are or have been in the person's possession and that relate to the question of whether or not the applicant is entitled to make a claim for relief. 22Consequently, Andrews Advertising's application raises the following questions in relation to each of the remaining defendants:

Does it appear that Andrews Advertising may be entitled to make a claim for relief against the defendant?
Does Andrews Advertising have sufficient information to decide whether or not to commence proceedings for that relief?
If not, has Andrews Advertising made reasonable inquiries to obtain that information?
Does it appear that the defendant may have or may have had possession of a document that can assist in determining whether or not Andrews Advertising is entitled to make a claim and would inspection of that document assist in making the decision?
Are there any discretionary grounds for refusing relief? 23The relevant principles to be applied by the court in answering these questions were not substantially in dispute between the parties. They are set out by McColl JA in Hatfield v TCN Channel Nine Pty Ltd [2010] NSWCA 69 at [47] to [52]. It is not necessary to repeat all that her Honour said there. There are, however, a number of points that need to be kept in mind. 24First, "it is not necessary for the applicant to show a prima facie or pleadable case". However, the mere assertion of a case is insufficient. The requirement under UCPR 5.3 is that it "appear" to the court that the applicant "may be entitled to make a claim" in contrast to the corresponding Federal Court rule (Order 15A r 6), which requires that there is "reasonable cause to believe" that the applicant may have a claim. Although UCPR rule 5.3 may be somewhat wider than Order 15A rule 6, the New South Wales rule still requires a "reasonable cause to believe that the applicant may have a right of action against the respondent resting on some recognised legal ground" ( Hatfield at [47]-[48], quoting Ian Edward Morton v Nylex Ltd [2007] NSWLR 562 at [25] per White J). In order to have the required belief, there must be "an inclination of the mind towards assenting to, rather than rejecting [the relevant] proposition." ( Hatfield at [49], quoting St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360; (2004) 211 ALR 147 (at 26) per Hely J). Consequently, "[i]f there is no reasonable cause to believe that one of the necessary elements of a potential cause of action exists, that would dispose of the application insofar as it is based on that cause of action." ( Hatfield at [49], quoting St George Bank Ltd at 26). 25Second, "the question posed by [UCPR 5.3(1)(a)] ... is not whether the applicant has sufficient information to decide if a cause of action is available against the prospective respondent [but]... whether the applicant has sufficient information to make a decision whether to commence proceedings in the Court. Accordingly, an applicant for preliminary discovery may be entitled to discovery in order to determine what defences are available to the respondent and the possible strength of those defences" ( Hatfield at [51], quoting St George Bank Ltd at 26) (emphasis in original)) or, it might be added, the likely quantum of any damages: Morton v Nylex at [33]. 26Third, "the Rule is to be beneficially construed, given the fullest scope that its language will reasonably allow, with the proper brake on any excesses lying in the discretion of the Court, exercised in the particular circumstances of each case" ( Hatfield at [52], quoting St George Bank Ltd at 26). 27Two other points need to be mentioned. First, preliminary discovery is only available against a person in order to decide whether to commence proceedings against that person. It is not available in order to decide whether to commence proceedings against someone else: Morton v Nylex at [27]. Secondly, under UCPR rule 5.6 the court may impose a condition requiring the applicant to give security for the costs of the person against whom an order is made. 28Against that background, it is convenient to deal with the position of each defendant.

Mr Andrews Jnr 29In my opinion, Andrews Advertising may be entitled to make a claim for relief against Mr Andrews Jnr. The nature of that relief falls into two categories. First, Andrews Advertising may be entitled to relief arising from the fact that Mr Andrews agreed to vary the term of the heads of agreement between Andrews Advertising and Sleep City. In the absence of an explanation for that variation, it appears that that conduct may have involved a breach by Mr Andrews of cls 3.1 (c) or 3.2 (a) of his employment contract or the fiduciary duties he owed to Andrews Advertising. Secondly, I think that there is sufficient evidence from which it may be inferred that Mr Andrews, at some time before he left Andrews Advertising, formulated a plan, either alone or together with his wife, by which he or they would, through a company controlled by one or both of them, provide advertising services to Sleep City and that for some period of time during the Restraint Period (as defined in his employment contract) he took steps to implement that plan. That may be inferred from the following matters:

AMC was incorporated after 75 percent of the shares in Andrews Advertising were sold to Adcorp. Although the director and shareholder of AMC is Mrs Andrews, it is not uncommon for one spouse to own property or engage in activities where the property or activities are part of some joint enterprise. The evidence is unclear whether Mrs Andrews had any experience in the advertising industry;
Mr Andrews agreed to a variation of the agreement with Sleep City without advising anyone from Adcorp at the time. That variation shortened the term of the agreement. In the absence of an explanation, it is hard to understand how the shortening of the term benefited Andrews Advertising. The variation was made at a time when the relationship between Adcorp and Mr Andrews Snr had begun to deteriorate;
AMC provided advertising services to Sleep City at a time when Mr Andrews continued to work for Andrews Advertising and invoiced Sleep City for those services. Sleep City's lawyers stated in a letter dated 22 October 2010 that, in engaging Andrews Media, it "acted honestly and simply accepted the invoicing proposal put to it by Mr Andrews ...";
In about May 2010, Mr Andrews engaged in conduct that suggested that he was planning to leave Andrews Advertising and to provide services to Sleep City in some other capacity;
Shortly after Mr Andrews Snr indicated that he resigned from Andrews Advertising and Lowes indicated that it no longer wished to use Andrews Advertising, Sleep City indicated that it intended to move its advertising in-house. Shortly after that, Mr Andrews Jnr left Andrews Advertising and took up a position as director of advertising of Sleep City. These events appear to be more than a coincidence. If it could be established that Mr Andrews formulated or participated in a plan of that type while he was an employee of Andrews Advertising or during the Restraint Period (as defined in his contract of employment), then there is a reasonable argument that he breached one or more of the obligations he owed under cls 3.1 c), 3.2 a) and 11.1 of his employment contract or the fiduciary duties he owed to Andrews Advertising. 30In my opinion, Andrews Advertising does not have sufficient information to decide whether to commence proceedings. It is unclear why Mr Andrews agreed to reduce the term of the agreement with Sleep City. It is unclear whether and, if so, what involvement he had or has with AMC. It is also unclear whether there was any agreement or arrangement with Sleep City concerning his departure from Andrews Advertising. They are all matters about which it is to be expected that Andrews Advertising would want further information before commencing proceedings. 31The next question is whether Andrews Advertising has made reasonable enquiries to obtain the information it needs. In my opinion, it has. The information it seeks is only known to the defendants. Gadens, Andrews Advertising's solicitors, wrote to each of the defendants seeking documents relevant to the matters on which Andrews Advertising requires further information. The categories of documents sought in those letters are, with some qualifications, substantially the same as the categories sought in the present application. Although some of the correspondence from Gadens incorrectly suggests that Andrews Advertising was entitled to preliminary discovery from the defendants other than Mr Andrews Jnr in order to determine whether to make a claim against him, those defendants could be expected to have information relevant to the claim against Mr Andrews, if such a claim existed. Consequently, although I do not think that it was necessary to seek documents from those defendants in order to discharge the obligation to make reasonable enquiries so far as the claim against Mr Andrews was concerned, a request of them for documents was consistent with that obligation. 32In response to the request, Duncan Cotterill, the solicitors acting for Mr and Mrs and Andrews Jnr and AMC agreed to produce some documents on behalf of Mr Andrews, although they denied that there was any basis for the allegation that Mr Andrews had breached any obligation he owed Andrew Advertising or for an order for preliminary discovery. The documents produced were the letter from Sleep City indicating that it had appointed Smart Market Pty Ltd to provide media billing services, a letter dated 23 July 2010 from Mr Zhang expressing his disappointment that Mr Andrews was leaving Adcorp and inviting Mr Andrews to contact him on his return from China "to discuss further with you my thoughts", Mr Andrews' employment contract with Sleep City and a covering letter to that contract. Mr Andrews salary and address were redacted from the contract. It is unclear from the correspondence whether these documents were all the documents falling within the categories sought by Andrews Advertising or whether they were only some of them. I accept the submission of Mr Jackman, who appeared for Andrews Advertising, that if they were all the documents falling within the categories sought by Andrews Advertising, then it would have been a simple matter for Mr Andrews Jnr to swear an affidavit to that effect. In the absence of such an affidavit, it is reasonable to infer that there may be other documents which Mr Andrews has been unwilling to provide. 33One category of documents sought in the summons (category 7) had not specifically been sought by Andrews Advertising previously. That category seeks documents recording, evidencing or referring to communications between Mr Andrews Jnr and Sleep City regarding Mr Andrews resignation from Andrews Advertising or the amendments to the heads of agreement or its termination. The category is not completely different from the other categories of documents sought by Andrews Advertising. For example, category 1 seeks documents recording, evidencing or referring to communications from 1 November 2007 between Mr Andrews Jnr and Sleep City in relation to the provision of advertising services to Sleep City by a person or entity other than Andrews Advertising. Mr Meehan, who appeared for Mr Andrews, submitted that, since Andrews Advertising had not asked for documents falling within category 7 previously, it had not made reasonable enquiries to obtain them. I do not accept that submission. The submission may have some force if Andrews Advertising had previously asked for specific categories of documents and all those documents had been produced. But in this case, what appears to have happened is that Andrews Advertising asked for various categories of documents and, in response, Mr Andrews Jnr produced some documents and took the view that that was sufficient for Andrews Advertising's purposes. Absent an order from the court, Mr Andrews' position is that he has done enough. I think that it was reasonable in those circumstances for Andrews Advertising to take the view that it had obtained all that it was going to get and, for that reason, that it has made reasonable enquiries to obtain the types of documents that it now seeks, even if it had not specifically requested all of those documents previously. 34In my opinion, with one qualification, the documents sought by Andrews Advertising could assist in determining whether to make a claim for relief of the types that I have described. I have already described categories 1 and 7. Category 2 is in similar terms to category 1, except that it is concerned with agreements rather than communications. Categories 3 and 4 mirror categories 1 and 2, except that they are concerned with communications and agreements between AMC and Sleep City relating to the provision of advertising services to Sleep City. Category 5 is no longer pressed. Category 6 mirrors category 1, except that it is concerned with communications between Mr Andrews Jnr and Mr Andrews Snr in relation to the provision of advertising services to Sleep City. Category 8 seeks documents provided by Mr Andrews Jnr to Sleep City in connection with his employment by Sleep City. Category 9 seeks an unredacted copy of his employment agreement with Sleep City. 35I accept Mr Meehan's submission that it is difficult to see how category 8, to the extent that it requires production of documents beyond those caught by other categories (in particular, category 1), would assist Andrews Advertising. Documents provided by Mr Andrews Jnr in support of his employment application, to the extent that they do not evidence communications between Mr Andrews and Sleep City, are unlikely to shed light on whether Mr Andrews breached his employment contract with Andrews Advertising or the fiduciary duties he owed to that company. In my opinion, Andrews Advertising should not be permitted to obtain documents of that type. On the other hand, I can see no reason why Mr Andrews Jnr should not produce an unredacted version of his employment contract. No reason has been advanced for why the redacted parts are confidential. To the extent that Andrews Advertising has a claim based on breach of fiduciary duties, it may be entitled to an account of profits and Mr Andrews' salary may be relevant to the question whether such a claim should be brought. As to the balance of the categories, in my opinion, inspection of documents recording, evidencing or referring to communications or agreements in relation to the provision of advertising services to Sleep City other than by Andrews Advertising and the resignation of Mr Andrews Jnr from Andrews Advertising would assist in determining whether Mr Andrews Jnr provided or was involved in the provision of services of that type in breach of his employment contract or fiduciary duties. In addition, documents recording or referring to communications with Mr Andrews Jnr in relation to the amendment and termination of the heads of agreement between Sleep City and Andrews Advertising would assist in determining whether Mr Andrews Jnr breached his employment contract with Andrews Advertising or his fiduciary duties in relation to that amendment. A number of the categories cover the period from 1 November 2007 to date. In my opinion, that is an appropriate date range since AMC was incorporated on 1 November 2007 and it appears arguable that it was incorporated for the purpose of providing advertising services to Sleep City sometime in the future. 36The only discretionary ground advanced by Mr Andrews Jnr for refusing relief is that he has already provided some documents to Andrews Advertising. In my opinion, that is not a reason not to make an order in this case. If the true position is that Mr Andrews has produced all that he has, then it will be a simple matter for him to swear an affidavit to that effect. If he has not, then for the reasons I have given, I consider it appropriate that he do so.

AMC and Mrs Andrews 37The question in relation to AMC and Mrs Andrews is whether it appears that they may have induced Mr Andrews Jnr to breach his employment contract or been knowingly involved in any breach by him of his fiduciary duties. The answer to that question will depend largely on the conduct of Mrs Andrews and whether her conduct is to be attributed to AMC or whether it is conduct she engaged in in a personal capacity. For that reason, it is convenient to deal with them together. 38There is nothing to suggest that AMC or Mrs Andrews was involved in the amendment to the heads of agreement between Andrews Advertising and Sleep City. On the other hand, I have referred to some material which suggests that, if Mr Andrews breached his obligations to Andrews Advertising by providing advertising services to Sleep City while he was an employee of Andrews Advertising or during the Restraint Period, then they were involved in that breach. In particular, AMC did provide advertising services to Sleep City and there is some evidence that Mr Andrews Jnr was involved in its doing so. It did so at a time when it might be inferred that Mr Andrews was contemplating leaving Andrews Advertising having regard to the deteriorating relationship between Adcorp and his father. As to Mrs Andrews, she was involved in incorporating AMC after Adcorp had acquired a 75 percent interest in Andrews Advertising. Subsequent events suggest that that could have been part of a plan to provide services to Sleep City in place of Andrews Advertising - which, to some extent at least, is what happened. Having regard to the relationship between Mr and Mrs Andrews, it could be inferred that Mrs Andrews and, through her, AMC were aware of the terms of Mr Andrews Jnr's employment contract with Andrews Advertising. If those matters could be established, that may form the basis of relief against them. 39In my opinion, Andrews Advertising does not have sufficient information to decide whether to pursue claims against Mrs Andrews and AMC. The information it has is insufficient in two respects. First, it does not know whether Mr Andrews Jnr has breached any of the obligations owed by him. Second, it does not know whether either Mrs Andrews or AMC participated in any breach by him. 40Andrews Advertising has sought documents from AMC and Mrs Andrews. Both have refused to provide them. In those circumstances, Andrews Advertising has made reasonable enquiries to obtain the information it seeks. 41Andrews Advertising seeks 4 categories of documents from AMC. Category 1 seeks documents in the period from 1 November 2007 recording, evidencing or referring to communications between it and Sleep City in relation to the provision of advertising services to Sleep City. Category 2 is in similar terms except that it is concerned with agreements rather than communications. Category 3 is similar to category 1 except that it is concerned with communications between Mr Andrews Jnr and Sleep City. Category 4 seeks documents in the period from 1 November 2007 recording etc communications between AMC and Mr Andrews Jnr on the one hand and a "media agency" including Foxtel and the Nine Network on the other in relation to advertisements placed by AMC on behalf of Sleep City. It appears that the reference to a "media agency" is intended to be a reference to a broadcaster. 42Andrews Advertising seeks 3 categories of documents from Mrs Andrews. Category 1 is in similar terms to category 1 sought from AMC. Category 2 has been abandoned. Category 3 seeks documents in the period from 1 November 2007 recording, evidencing or referring to communications between Mrs Andrews and Mr Andrews Jnr in relation to the provision of advertising services by Mrs Andrews to Sleep City. Category 4 is in similar terms except that it is concerned with communications between Mrs Andrews and Mr Andrews Snr. 43One of the complaints made about the application for preliminary discovery against AMC and Mrs Andrews is that the correspondence leading up to it suggests that the documents were sought for the impermissible purpose of determining whether Andrews Advertising had a claim against Mr Andrews Jnr. There is, however, no evidence to suggest that the current application is being pursued for that reason; and the fact that the documents that are being sought are also relevant to the claim against Mr Andrews Jnr is not a reason for refusing relief if the documents will also assist in determining whether to pursue claims against the person or entity against whom the orders are sought. It also needs to be borne in mind that the possible claims against AMC and Mrs Andrews are derivative in the sense that they depend on establishing a breach by Mr Andrews Jnr. Consequently, any documents which shed light on whether Mr Andrews breached his duties will shed light on whether there is a claim against Mrs Andrews and AMC. 44In my opinion, the categories of documents sought from AMC would assist in determining whether to make a claim against AMC. They would assist in determining whether Mr Andrews Jnr was in breach of the obligations he owed to Andrews Advertising and AMC's knowledge and participation in any such breach. The same is true of category 1 sought from Mrs Andrews. Documents falling within category 3 may shed light on whether Mrs Andrews was part of any plan developed in 2007 for Mr Andrews Jnr to provide advertising services to Sleep City other than through Andrews Advertising. Having regard to the family relationship between Mrs Andrews and Mr Andrews Snr, the same is true of category 4. If there were a plan of the type that I have referred to, that is something that may well have been discussed with Mr Andrews Snr. Consequently, communications with him may shed light on the existence of such a plan. 45No reasons were advanced for why the court should not, in the exercise of its discretion, make orders against AMC and Mrs Andrews.

Sleep City 46There are 3 types of claim that are relevant to Sleep City. First, it appears that it may have breached the exclusivity provision of the heads of agreement between it and Andrews Advertising. The evidence of the invoices from AMC addressed to Uinta Beds Pty Ltd provides considerable evidence in support of an allegation of that type. Secondly, Andrews Advertising may have a claim against Sleep City for inducing a breach by Mr Andrews of his employment contract or knowing assistance in a breach of fiduciary duty by him in connection with the variation of the term of the heads of agreement. Sleep City knew that Mr Andrews was employed by Andrews Advertising and it is to be expected that it knew that Mr Andrews owed fiduciary duties to Andrews Advertising and that it was likely that similar contractual duties were imposed on Mr Andrews. In the absence of an explanation for a variation of the heads of agreement, there is a reasonable basis for inferring that Mr Andrews Jnr breached his obligations in agreeing to that variation and Sleep City participated in that breach. Thirdly, Andrews Advertising may have a claim against Sleep City for inducing a breach by Mr Andrews Jnr of his employment contract or knowing assistance in a breach of fiduciary duty by him in connection with a broader claim that Mr Andrews Jnr engaged or participated in a plan to provide advertising services to Sleep City in breach of the obligations he owed under his employment contract or as part of his fiduciary duties. The evidence that supports an allegation of that type is evidence that Sleep City agreed to a variation of the heads of agreement, obtained services from AMC while it was still bound by exclusivity arrangements with Andrews Advertising and appears to have agreed to be invoiced for those services in accordance with instructions given by Mr Andrews Jnr at a time when it knew that Mr Andrews was still employed by Andrews Advertising. 47In my opinion, Andrews Advertising does not have sufficient information to decide whether to seek relief in relation to those three types of claim. As to the breach of the exclusivity provisions, it does not know when that apparent breach first occurred and the extent of the services provided by AMC to Sleep City before its own agreement with Sleep City was terminated. As to the variation of the heads of agreement, the critical information Andrews Advertising is lacking is why the agreement was varied. If it was varied to permit Mr Andrews to provide advertising services to Sleep City other than through Andrews Advertising that may provide strong evidence that Mr Andrews was in breach of his obligations. If Sleep City shared that purpose in varying the terms of the heads of agreement, that may provide strong evidence that it participated in that breach. As to the broader claim, Andrews Advertising is lacking information on whether there really was a plan on the part of Mr Andrews Jnr to provide advertising services to Sleep City other than through Andrews Advertising and, if so, when that plan was developed and what knowledge, if any, Sleep City had of it. 48Andrews Advertising has sought documents from Sleep City. Sleep City has refused to provide them. In those circumstances, Andrews Advertising has made reasonable enquiries to obtain the information it seeks. 49Ms Painter, who appeared for Sleep City, indicated that she was not in a position to address the specific categories sought by Andrews Advertising. In her submission, that was better done after the parties had had an opportunity to consider whether the court was prepared to make any order for preliminary discovery and the reasons for that conclusion. 50Before dealing with that submission, I should say something about Sleep City's submissions in relation to discretion. The documents sought from Sleep City fall into 5 categories, which mirror categories 1 to 4 and 7 of the categories sought from Mr Andrews Jnr. Sleep City filed evidence that the costs of searching for those documents would be in the order of $20,000. It submitted that that provided a discretionary reason for refusing an order in this case. Alternatively, Sleep City submitted that I should order Andrews Advertising to provide security in respect of those costs. 51The evidence in relation to costs was given by Mr Kouvardas, who is the General Manager, Corporate Services of Sleep City. Mr Kouvardas readily conceded that he had very limited knowledge of what documents might exist because, although he was employed by Sleep City during the relevant time, he was not involved in advertising. The responsible people were Mr Zhang and Mr Klein, both of whom have left Sleep City. Mr Kouvardas' estimate was based on the need to search through 40 archive boxes together with email in-boxes located on the company's server. 52In my opinion, the categories of documents sought by Andrews Advertising are reasonably confined and the costs are not so great that they should provide a discretionary reason for refusing to make an order. That is particularly so in circumstances where Sleep City is entitled to recover its actual costs of searching for the documents. I deal with the question of security below. 53Having regard to Ms Painter's submissions, I propose to give Sleep City an opportunity to make further submissions on the particular categories of documents sought by Andrews Advertising if the parties cannot agree on proposed categories in the light of these reasons.

Orders and costs 54So far as costs are concerned, UCPR rule 5.8(1) provides that "the court may make orders for the costs of the applicant, of the person against whom the order is made or sought and of any other party to the proceedings". Those costs may include the costs of preparing the affidavit of discovery and the costs of production: UCPR rule 5.8(2). The costs of production are recoverable in the same way as those incurred by a person who has responded to a subpoena: Airways Corp of New Zealand v Present Partners of Price Waterhouse Coopers Legal [2002] NSWSC 521 at [12] per Simpson J. 55In my opinion, Andrews Advertising has been substantially successful and, in those circumstances, it should have its costs of the application. 56Mr Jackman submitted that, so far as the costs of production are concerned, those costs should be dealt with as part of the costs of substantive proceedings if those proceedings are commenced in the next 3 months. Otherwise, he accepts that the remaining defendants should have their costs of production. The basis of that submission is that, if Andrews Advertising commences substantive proceedings, the costs in complying with orders for preliminary discovery were costs that would have been incurred by the defendants in any event. 57There is a difference of opinion between members of the Federal Court on whether the approach advocated by Mr Jackman is appropriate. In C7 Pty Ltd v FOXTEL Management Pty Ltd [2001] FCA 1864 at [50] Gyles J took the view that proceedings for preliminary discovery were discrete proceedings and should be dealt with on that basis. On the other hand, in Newcrest Mining Ltd v Apache Northwest Pty Ltd (No 2) [2008] FCA 1663 at [6] Tracey J, following Burchett J in Cappuccio v Australia & New Zealand Banking Group Ltd [1999] FCA 1188 at [3]-[4], adopted the approach advocated by Mr Jackman. I prefer the approach adopted by Gyles J. As Gyles J pointed out (at [50]), the jurisdiction to grant preliminary discovery is an extraordinary one. That is reflected in the fact that a defendant required to produce documents can recover its costs on a special basis, as can a subpoenaed party. It is unclear whether and to what extent work done in producing documents as a consequence of orders in these proceedings will be duplicative of work done in relation to discovery in any substantive proceedings. There is a likelihood that the scope of discovery in any substantive proceedings will be different from the scope of preliminary discovery with the result that a substantial part of the work will need to be redone. In addition, the internal costs incurred by a party in collating documents for discovery are not normally recoverable in substantive proceedings. If the defendants are ultimately successful in substantive proceedings, the effect of the order proposed by Mr Jackman is that they are unlikely to recover their internal costs relating to production. Taking these matter into account, I think the most appropriate order is that Andrews Advertising should pay the second, third, fourth and sixth defendants costs of production and preparation of their affidavits of discovery. 58That leaves the question of security. Having regard to the fact that Andrews Advertising has ceased to trade, this would, I think, normally be an appropriate case in which to order that it provide security for Sleep City's costs. However, it is relevant to bear in mind that Andrews Advertising will have an order for costs in its favour. To some extent at least, the costs recoverable by the defendants can be set off against that order. It is also relevant to bear in mind that Mr Kouvardas' estimate of Sleep City's costs was rough and is more likely to be an over-estimate rather than an under-estimate. Taking these matters into account and the amount involved, I do not think it is appropriate to order security in this case. 59The parties should within 14 days bring in short minutes of order which are consistent with these reasons. If they cannot agree on those orders within that time, the matter should be re-listed before me for further argument.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 April 2011

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