Steamship Enterprises of Panama Inc., Liverpool (Owners) v. Ousel (Owners) - The Liverpool (No. 2) (1963) P 64

Pilkington v. Wood (1953) Ch 770

Dickinson v. James Alexander and Co (1990) 6 P.N. 205

Field v. Commissioner for Railways for New South Wales [1957] HCA 92; (1957) 99 CLR 285

Rush and Tompkins Ltd. v. Greater London Council (1989) 1 AC 1,280

Rabin v. Mendoza and Co. (1954) 1 WLR 271 Pitts v. Adney (1961) 78 WN

(NSW) 886 Tomlin v. Standard Telephones and Cables Ltd. (1969) 1 WLR 1,378

Quad Consulting Pty Ltd v. David R. Bleakley and Associates Pty Ltd (1990) 27 FCR 86

Tenstat Pty Ltd v. Permanent Trustee Aust Ltd (1992) 28 NSWLR 625

Counsel for the Applicants in Mr F.M. Douglas QC

Solicitors for the Applicants Ebsworth and Ebsworth

Counsel for the Respondent to Mr J.D. Heydon QC

THE COURT ORDERS THAT the applicants in the motion bring in, on a date to be fixed, short minutes of orders proper to be made in the light of the reasons of the Court. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

BURCHETT J When this matter commenced, it was an action brought against Tooheys Limited as first respondent and the present respondents (who were the partners at relevant times in the firm Allen Allen and Hemsley, solicitors, and will hereafter be referred to as "Allens") as second respondents. The issues were quite complex, and the processes of pleading and discovery proved to be lengthy. More than two years after the institution of the proceedings, the applicants apparently reached some sort of accommodation with Tooheys Limited, as a result of which the action was discontinued against that respondent. It has since continued against Allens as sole respondents. A dispute has now arisen concerning whether, as Allens claim, the applicants are obliged to discover all documents relating to any agreement by which the claim against Tooheys Limited was compromised. Since the applicants were unwilling to consent to discover any documents of that nature, Allens took out a motion for "further and better discovery of all documents which in any way relate to the applicants' discontinuance of their action against the first respondent in these proceedings".

2. Allens say that the amended statement of claim, as it stood immediately prior to the discontinuance so far as Tooheys Limited was concerned, contained a number of significant allegations against that company. It alleged misrepresentations, in relation to the sale of a large number of hotels, concerning the rights to goodwill of tenants of those hotels, and the availability of indemnities against any claims arising out of those rights. It also alleged that at one stage Tooheys Limited held the hotels upon trust, and that it preferred its own commercial interests to those of the beneficiary, so as to fail to fulfil its fiduciary duties as trustee. The claims against Allens pleaded in the amended statement of claim involve allegations of breach of their retainer by negligence in the conduct of the purchase of the hotels by one of the applicants, upon which Allens are said to have been acting for the purchaser. It is alleged too that Allens were in a position of conflict of duty and interest, since they were acting also for Tooheys Limited in relation to its alleged liability to compensate the tenants of the hotels in respect of the loss of their goodwill. Allens are claimed to have failed to discharge their fiduciary duties to the applicants, with the result that they are liable to pay equitable compensation.

3. It will be apparent from this very brief summary that there is a connection between the claims that were made against Tooheys Limited and the claims that are made against Allens. Allens point out that there is, too, an obligation imposed by the law upon the applicants to mitigate their losses. They chose to sue Tooheys Limited, as well as Allens, in respect of the same losses, but have now discontinued the claims made against Tooheys Limited. If they did so unreasonably, Allens say, that must affect their claim to be compensated by Allens. Even more clearly, if they received some compensation from Tooheys Limited as the price of the discontinuance, that should be taken into account in favour of Allens, since the applicants are not entitled to be compensated twice over for the same loss. Accordingly, it is urged, there must be an obligation to discover all documents connected with the reaching of any compromise, or otherwise with the decision to discontinue the action so far as it was brought against Tooheys Limited.

4. The proposition concerning mitigation is somewhat complicated. The applicants pointed to the decision in Steamship Enterprises of Panama Inc., Liverpool (Owners) v. Ousel (Owners) - The Liverpool (No. 2) (1963) P 64, where Harman LJ, speaking for the Court of Appeal (Hodson, Ormerod and Harman LJJ) said (at 82-83):

"(T)his case, in our judgment, has nothing to do with

the duty to mitigate damages. It concerns the

board's legal rights, and no duty rests on it at the

demand of a tortfeasor to satisfy part of the

damages by resorting to another tortfeasor; still

less by resorting to an innocent party made liable

merely by statute.

If it were otherwise there would be no

necessity for the Law Reform (Married Women) and

Tortfeasors Act, 1935, and the law about

contributions between tortfeasors, for any

tortfeasor could oblige the creditor to sue the

other debtors (sic) in order to alleviate his

burden. ...

If there be no duty on the board to enforce its

rights against the Ousel it can prove for its whole

debt against the Liverpool without taking those

rights into account."

This decision is cited in Halsbury 4th ed. vol 12 para. 1,194 for the proposition that a plaintiff "need not seek to recover compensation from a third party who, in addition to the defendant, is also liable to him". See too McGregor on Damages 15th ed. (1988) para. 318.

5. But other cases suggest that, at least in relation to a claim against a solicitor that he was negligent in failing to secure for his client appropriate rights in connection with some transaction as against a third party, if a viable claim nevertheless lies against that third party to remedy the situation, the maintenance of which would not be unduly risky, protracted or expensive, a duty to mitigate by pursuing that remedy may not be out of the question. McGregor, in another paragraph, para. 316, says:

"A plaintiff need not take the risk of starting an

uncertain litigation against a third party. Thus in

Pilkington v. Wood (1953) Ch 770 the plaintiff

bought freehold land from a seller who purported to

convey the property as beneficial owner, the

defendant acting as the plaintiff's solicitor in the

transaction. When the plaintiff later tried to sell

the property he found the title was defective, since

the seller was a trustee of the property and had

committed a breach of trust in buying it himself.

In the plaintiff's action against the defendant

solicitor for negligence, the latter contended that

before suing him the plaintiff ought to have

mitigated his damage by suing the seller on an

implied covenant of title. This contention was

rejected by Harman J because, even conceding that

the defendant had offered an adequate indemnity

against costs in an action against the seller and

that the seller was solvent and therefore worth

suing, it was not clear that the plaintiff had a

good prima facie right of action against the seller.

The judge stated that he was of the opinion that

'the so-called duty to mitigate does not go so far

as to oblige the injured party, even under an

indemnity, to embark on a complicated and difficult

piece of litigation against a third party.'"

(Emphases added.)

And in Jackson and Powell on Professional Negligence 3rd ed. (1992) at 426-427, the learned authors assert that "whether the plaintiff ought to embark upon fresh litigation in order to mitigate his loss" is an issue "which frequently arises in solicitors' negligence cases". After referring to Pilkington v. Wood, they state:

"A contrasting case (is) Dickinson v. James Alexander

and Co (1990) 6 PN 205, 211. By reason of the

defendant solicitors' negligence the plaintiff

received a very disadvantageous settlement on the

divorce from her husband. She failed to apply to

vary the original order, despite her growing

financial difficulties and her former husband's

rising income which were evident in the year or two

following the divorce settlement. When she did

apply for the order to be varied, six years after

the original order, she received a very large

increase. Douglas Brown J decided that the

plaintiff had failed to mitigate her loss because

she should have applied to the court much earlier."

Jackson and Powell suggest that "if the plaintiff is simply asked to lend his name to litigation, under a full indemnity as to costs, and the litigation involves no hardship for the plaintiff, it probably would be unreasonable for the plaintiff to refuse." They put Pilkington v. Wood to one side on the basis that there the "proposed litigation would have involved considerable delay and would have seriously interfered with the plaintiff's domestic arrangements". Cf. Segenhoe Ltd v. Akins (1990) 29 NSWLR 569 at 587.

6. If the true position is that regard must be paid to the reasonableness, in the circumstances, of requiring a plaintiff to seek readily available relief against the consequences of a solicitor's negligence, rather than simply to sue the solicitor, it may make a difference that a particular plaintiff has actually sued the third party alleged to be liable. For in such a case, the question may really be whether it was reasonable to compromise the claim that was brought on the basis on which it was compromised. When such a problem arises upon an interlocutory application in respect of discovery, it seems to me the answer must be that the legal question should not be answered hypothetically, but upon the true facts of the case, after these have been ascertained in the usual way, including by any discovery from which the party seeking it is not otherwise disentitled.

7. Accordingly, I turn to what has emerged as the real issue, namely, the extent of the protection afforded by the umbrella of "without prejudice" under which the discontinuance as against Tooheys Limited was negotiated. For Australian courts, the basis and nature of this privilege was authoritatively expounded in the joint judgment of Dixon CJ, Webb, Kitto and Taylor JJ in Field v. Commissioner for Railways for New South Wales [1957] HCA 92; (1957) 99 CLR 285 at 291-292:

"As a matter of policy the law has long excluded from

evidence admissions by words or conduct made by

parties in the course of negotiations to settle

litigation. The purpose is to enable parties

engaged in an attempt to compromise litigation to

communicate with one another freely and without the

embarrassment which the liability of their

communications to be put in evidence subsequently

might impose upon them. The law relieves them of

this embarrassment so that their negotiations to

avoid litigation or to settle it may go on

unhampered. This form of privilege, however, is

directed against the admission in evidence of

express or implied admissions. It covers admissions

by words or conduct. For example, neither party can

use the readiness of the other to negotiate as an

implied admission. It is not concerned with

objective facts which may be ascertained during the

course of negotiations. These may be proved by

direct evidence. But it is concerned with the use

of the negotiations or what is said in the course of

them as evidence by way of admission. For some

centuries almost it has been recognised that parties

may properly give definition to the occasions when

they are communicating in this manner by the use of

the words 'without prejudice' and to some extent the

area of protection may be enlarged by the tacit

acceptance by one side of the use by the other side

of these words ... . ... The question, however,

does not depend altogether upon the expectations of

the parties. It depends upon what formed part of

the negotiations for the settlement of the action

and what was reasonably incidental thereto."

8. It will be noted that the High Court, in Field v. Commissioner for Railways, restricted the scope of the privilege by reference to the policy of the law of protecting the parties against express or implied admissions implicit in or arising out of the process of negotiation, and then restricted it further by the consideration of what was involved in or reasonably incidental to the negotiations actually pursued. In Pitts v. Adney (1961) 78 WN (NSW) 886 at 889, Walsh J added a further restriction:

"It is of importance that the rule protecting from

disclosure, discussions taking place in an endeavour

to put an end to pending litigation should, in

general, be applied. But it is, after all, a rule

based upon public policy. It cannot be permitted to

put a party into the position of being able to cause

a Court to be deceived as to the facts, by shutting

out evidence which would rebut inferences upon which

that party seeks to rely."

This principle was reaffirmed by the Court of Appeal of New South Wales in Lohar Corporation Pty Ltd v. Dibu Pty Ltd (1976) 1 BPR 97,014.

9. Where a document does fairly fall within the protection of the privilege, that protection is by no means absolute. Not only may the document nevertheless become admissible upon the principle of Pitts v. Adney; it will also become admissible, in the normal course, if a question arises as to whether the without prejudice negotiations resulted in an agreement: Phipson on Evidence 14th ed. (1990) paras. 20-66, 20-67; John Sopinka, Sidney N. Lederman and Alan W. Bryant, The Law of Evidence in Canada (1992) 730-731; Evidence Its History and Policies, Julius Stone, revised by W.A.N. Wells (1991) 345; Walker v. Wilsher (1889) 23 QBD 335 at 337; Bentley v. Nelson (1963) WAR 89; Tomlin v. Standard Telephones and Cables Ltd. (1969) 1 WLR 1,378 at 1,382, per Danckwerts LJ, and at 1,386, per Sir Gordon Willmer. The last case is an interesting one, because there the majority of the Court of Appeal considered the negotiations, entered into without prejudice, had resulted in a concluded agreement to settle the issue of liability on the basis of a verdict for the plaintiff for 50 per centum of his damages, although no agreement was reached as to the amount of the damages. I am unable to understand the criticism of this decision made in Suzanne B. McNicol on the Law of Privilege (1992) at 464, which seems to overlook the fact that the majority of the Court of Appeal, like the judge below, had held an actual agreement was concluded, though not in settlement of all issues, so that the question was not merely whether some admission was admissible in evidence, but whether the correspondence could be admitted in proof of the agreement.

10. It is not, of course, only an agreement which may come into effect as something done, quite apart from any admission made in or by the negotiations, of which the law should take cognizance, and which may be outside the ambit of the protection thrown over any such admissions by the privilege. As Hill J held in Quad Consulting Pty Ltd v. David R. Bleakley and Associates Pty Ltd (1990) 27 FCR 86 at 93, a negotiating party may engage in conduct which is misleading or deceptive or otherwise contrary to s. 52 of the Trade Practices Act 1974. The privilege will not prevent proof of the contravention of the statute. Citing this and other cases, McLelland J said in Tenstat Pty Ltd v. Permanent Trustee Aust Ltd (1992) 28 NSWLR 625 at 633 that the privilege does not "extend to preclude the proof of communications or statements relied on, not as an express or implied admission, but as an objective act having legal consequences". He instanced the exercise of an option as such an act. As Lord Griffiths (with whom the other members of the House agreed) said in Rush and Tompkins Ltd. v. Greater London Council (1989) 1 AC 1,280 at 1,300, "the rule is not absolute and resort may be had to the 'without prejudice' material for a variety of reasons when the justice of the case requires it".

11. Although "the right to discovery and production of documents does not depend upon the admissibility of the documents in evidence" (Rush and Tompkins at 1,303), where documents are protected by the "without prejudice" privilege, they should not be required to be revealed upon discovery: ibid at 1,303-1,305; Rabin v. Mendoza and Co. (1954) 1 WLR 271 at 273 per Denning LJ, 274 per Romer LJ. But in the latter case (at 274), Romer LJ said of the privileged document:

"I think that there is no question that it ought to

be disclosed in the affidavit of documents, because

it relates to a matter in question in the

proceedings, and the defendants have rightly

disclosed it; but ... they claim immunity from

production and inspection. I quite agree ... that

this is a justified claim ... . It seems to me that

it would be monstrous to allow the plaintiff to make

use - as he certainly would make use - for his own

purposes as against the defendants of a document

which is entitled to the protection of 'without

prejudice' status."

12. In Rush and Tompkins the circumstances bore some analogy to those that are before me. The privileged negotiations were not negotiations between the parties disputing the existence and extent of the privilege. The question arose between a head contractor and a sub-contractor in relation to "without prejudice" negotiations by the head contractor with its client which had led to an overall settlement, so far as they were concerned. Previously, the client had been a party to the proceeding, the head contractor having sued both it and the sub-contractor, and one item in the settlement was acknowledged to have involved a valuation of the sub-contractor's work. The House of Lords held the negotiations privileged. Following Rabin, Lord Griffiths concluded that the "without prejudice" communications were protected from production to another party in the same litigation (the sub-contractor) under the discovery procedure. He said (at 1,305):

"In multi-party litigation it is not an infrequent

experience that one party takes up an unreasonably

intransigent attitude that makes it extremely

difficult to settle with him. In such circumstances

it would, I think, place a serious fetter on

negotiations between other parties if they knew that

everything that passed between them would ultimately

have to be revealed to the one obdurate litigant.

What would in fact happen would be that nothing

would be put on paper but this is in itself a recipe

for disaster in difficult negotiations which are far

better spelt out with precision in writing.

... In my view the general public policy that

applies to protect genuine negotiations from being

admissible in evidence should also be extended to

protect those negotiations from being discoverable

to third parties."

13. It should be pointed out that in Rush and Tompkins the terms of the settlement had been disclosed; it was only the correspondence by which those terms had been negotiated, with its express and implied admissions, that was withheld. What Lord Griffiths said should be understood with this in mind. I do not think he was suggesting that an agreement relevant to the extent of a party's loss, the calculation of damages, or questions of mitigation would be privileged from disclosure. Early in his speech, he said (at 1,299) that the rule "is founded upon the public policy of encouraging litigants to settle their differences rather than litigate them to a finish". He cited a well known judgment of Oliver LJ (as he then was) in Cutts v. Head (1984) Ch 290 at 306:

"That the rule rests, at least in part, upon public

policy is clear from many authorities, and the

convenient starting point of the inquiry is the

nature of the underlying policy. It is that parties

should be encouraged so far as possible to settle

their disputes without resort to litigation and

should not be discouraged by the knowledge that

anything that is said in the course of such

negotiations (and that includes, of course, as much

the failure to reply to an offer as an actual reply)

may be used to their prejudice in the course of the

proceedings. They should, as it was expressed by

Clauson J in Scott Paper Co. v. Drayton Paper Works

Ltd. (1927) 44 RPC 151, 156, be encouraged fully

and frankly to put their cards on the table. ...

The public policy justification, in truth,

essentially rests on the desirability of preventing

statements or offers made in the course of

negotiations for settlement being brought before the

court of trial as admissions on the question of

liability."

14. It will be seen that Lord Griffiths assigned to the privilege the same basis as that which had been stated by the High Court in Field v. Commissioner for Railways. See also Hong Kong Bank of Australia Ltd v. Murphy (1992) 28 NSWLR 512 at 522-523, per Gleeson CJ. In Rush and Tompkins Lord Griffiths draws the conclusion, from the nature of the privilege, that it extends to protect negotiations with a third party from disclosure, even after the reaching of a relevant agreement with that party, and even though the negotiations themselves are relevant to continuing issues in the litigation. As Lord Griffiths points out (at 1,299-1,300), it is a consequence of the principle which forbids us to treat the privilege as lost merely because of the omission from correspondence of the words "without prejudice", or, on the other hand, gained merely by their use in an inappropriate setting, that questions as to the scope of the privilege are not to be resolved by any process of linguistic analysis. They are questions of substance.

15. Applying these considerations to the present case, it seems to me that the terms of the agreement at which the applicants and Tooheys Limited arrived, at the end of their negotiations, are clearly discoverable, both in the sense that any document in which they are set forth should be included in an affidavit of documents and in the sense that they must be revealed to Allens. In the words of Lord Griffiths in Rush and Tompkins (at 1,300), "the justice of the case requires" this. I accept that these words do not have some formless meaning, to be stretched or retracted to take in or leave out a document upon no discernible principle. But I think the conclusion of an agreement with Tooheys Limited must be regarded, in the context of this case, as "an objective act having legal consequences" within the meaning of the proposition stated by McLelland J in Tenstat already cited. It was just as much such an act as was the contravention of s. 52 of the Trade Practices Act involved in the substance of without prejudice negotiations in Quad Consulting (supra). Furthermore, the overriding right recognized by Walsh J in Pitts v. Adney (supra) entitling a party to insist that the court shall not be misled is, in my opinion, applicable to require the disclosure of any compromise; if the law did not require it, there would be all too great a risk that in the result the court would be misled. For the extent of any liability of Tooheys Limited to the applicants lies at the heart of the case brought against Allens.

16. Viewing the matter more narrowly, from the point of view of the duty to mitigate a loss, there is a general obligation imposed by the law upon the applicants to act reasonably. In my opinion, it is relevant for Allens to know the precise extent to which any claim was abandoned, or any recovery obtained. Only in the light of information on these matters can they make a true assessment of the issues relating to mitigation. They are entitled to know that much, and the policy of the rule which protects admissions in the course of negotiations does not extend so far as to erect a barrier against disclosure of these ultimate results of the negotiations. Additionally, I think Allens are entitled to say that they should not be excluded in limine from requiring the applicants to make an affidavit of documents which will cause the correspondence to be filtered in order to determine whether it involved disclosures outside of the privilege. As Hill J said in Quad Consulting (supra, at 90), nothing in Field v. Commissioner for Railways (supra) "suggests that the privilege extends to every word uttered during the course of settlement negotiations". On the contrary, I would add, protection was there (at 292) expressly held not to be available for "objective facts which may be ascertained during the course of negotiations", and it was limited by a consideration of what was involved in or reasonably incidental to the negotiations actually pursued. Hill J distinguished (ibid, at 91) between "the use of statements or offers by way of admission" and their use "by way of assertion". Assertions may not be privileged.

17. However, the right to disclosure is not concluded by relevance, since, if it were, there would be no point to the privilege. Provided the correspondence by which the arrangement with Tooheys Limited was negotiated was kept within the true scope of negotiation, its significance for Allens is a reason to uphold the privilege, rather than the reverse. The negotiating room is a private room where those who enter it do not speak to any outside audience, but when they have shut the door they speak to each other and are heard in secret. Despite the earnest plea of senior counsel for Allens, I do not think it is really open to me to decline to apply in these circumstances the decision of the House of Lords in Rush and Tompkins.

18. Accordingly, each side has had some success in this application. In my opinion, Allens are entitled to disclosure of the terms of any compromise that was reached between the applicants and Tooheys Limited, a disclosure which the applicants did not ultimately resist, although they claimed it was not required of them by law. I think it was. As well, I think Allens are entitled to an order requiring the filing of an affidavit of documents verifying the extent of the claimed privilege, and disclosing so much of the correspondence (if any part of it) as may not be privileged. But the applicants are entitled to insist upon the privilege protecting their negotiations from the disclosure of explicit or implicit admissions made therein or thereby, save as I have indicated. In Quad Consulting (at 93), Hill J gave effect to the same view by excluding from disclosure "the actual negotiations between the parties as to the settlement of their differences". The only order I will make at this stage is to direct that Allens bring in, on a date to be fixed, short minutes of orders proper to be made in the light of these reasons. I will, on that occasion, hear the parties as to the appropriate order in respect of costs.