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[2017] WASC 41
General information, not legal advice.
Supreme Court of WA
2017-02-16
Smith J
Original judgment source is linked above.
1 These reasons concern four interlocutory applications.
2 The plaintiff (ARG) applies to set aside certain subpoenas issued at the request of the defendants. It also applies for inspection of documents discovered by the defendants and for which a claim of legal professional privilege has been made. Its third application is for further and better discovery of certain communications including as between the defendants and their former lawyers. To the extent these applications have not been resolved by the parties, they are adjourned for the reasons set out below.
3 The defendants apply for further and better discovery by reference to 11 categories of documents. I have decided to allow this application in part. Originally, the defendants also applied for an order requiring ARG to properly depose to the basis upon which certain legal professional privilege claims are asserted but ARG has agreed to undertake that task and I do not need to determine that application.
4 The nature of the dispute between the parties is set out in Australian Reliance Group Pty Ltd v Coverforce Insurance Brokers Victoria Pty Ltd.[1] However, these applications raise particular aspects of the pleaded case, and it is useful to set out the key pleaded facts and contractual provisions relevant to the applications.
5 Until 18 February 2016, ARG and the second to fourth defendants (Byron Dreaming, Sun Devil and Howarth) were each the holders of shares in Reliance Insurance.[2] Two hundred shares had been issued and they were held as follows: ARG (70), Byron Dreaming (62), Sun Devil (62) and Howarth (6).
6 Those shareholdings were governed by a Shareholders Agreement dated 3 December 2013, made between each of ARG, Byron Dreaming, Sun Devil and Howarth. The Shareholders Agreement provides for the transfer of shares on certain terms.
7 Clause 12.6 of the Shareholders Agreement provides that a shareholder 'who wishes to transfer shares' shall by notice first offer those shares to parties nominated as Governing Shareholders by way of a 'Transfer Notice'.
8 There are terms that govern the issue of a Transfer Notice, including that the Transfer Notice is to remain open for 30 days and that the purchase price to be paid if a Governing Shareholder elects to purchase the shares is to be 80% of 'fair value'. Fair value is ascertained in accordance with a formula and is to be certified by the auditor of Reliance Insurance.[3]
9 A breach of the Transfer Notice provisions (for example, by purporting to transfer shares without first issuing a Transfer Notice) may comprise a default event.[4] Upon a default event, a shareholder may issue a notice to the defaulting party and the defaulting party is then deemed to have issued a Transfer Notice.[5] A defaulting party irrevocably appoints any two directors of Reliance Insurance to sign share transfer forms to facilitate the transfer of the defaulting party's shares.[6]
10 On 15 January 2016, ARG entered into a share sale agreement by which it was to sell its shares in Reliance Insurance to a company called PSC Insurance Group Limited (PSC) (PSC Sale Agreement).
11 For the purpose of these applications, it is the fact of entry into the PSC Sale Agreement that is of particular importance. However, two terms of the PSC Sale Agreement have some relevance.
12 First, it was a condition precedent to completion under the PSC Sale Agreement that ARG obtain the consent of all shareholders of Reliance Insurance to the transaction and waivers of relevant pre-emptive rights.[7]
13 Second, in addition to ARG transferring to PSC shares it owned, ARG was obliged to transfer to PSC the shares owned at that time by Sun Devil. Therefore, at least on its face, the PSC Sale Agreement would not complete unless those shares had first been transferred to ARG.[8]
14 On 15 January 2016 and 1 February 2016, PSC made announcements to the Australian Stock Exchange (ASX) that referred to the conditional acquisition of certain entities, including 66% of Reliance Insurance.[9]
15 Reliance Insurance (or Mr Denis Malady on behalf of the Governing Shareholders)[10] sent letters to ARG dated 27 January 2016 and 3 February 2016 (Letters) seeking information about the proposed sale to PSC.
16 On 5 February 2016, Reliance Insurance wrote to ARG and alleged that the ASX announcements and ARG's failure to respond to the Letters indicated that ARG 'wishes to transfer its shares', that ARG had failed to issue a Transfer Notice under cl 12.6, that a default event had occurred and that ARG was deemed to have issued a Transfer Notice.[11]
17 On 17 February 2016, Reliance Insurance notified ARG that in response to the deemed Transfer Notice, Byron Dreaming (a Governing Shareholder) wished to acquire the shares owned by ARG and that ARG proposed to sell to PSC. Reliance Insurance stated that the price had been determined in accordance with the Share Sale Agreement and provided share transfer forms for execution.[12] ARG did not sign the transfers, but they were signed allegedly under the power of attorney provision.[13]
18 The shares owned by ARG were accordingly transferred to Byron Dreaming. Each of Byron Dreaming, Sun Devil and Howarth then transferred their shares to the fifth defendant, Coverforce Victoria, which as at 19 February 2016, held all shares in Reliance Insurance.[14]
19 The defendants plead that ARG breached cl 12.1 and/or cl 12.6 by its conduct.[15] Clause 12.1 provides that no shareholder may transfer its shares except as permitted (it is unclear how an alleged breach of cl 12.1 adds anything to the plea of a breach of cl 12.6). The defendants by their particulars of breach say, relevantly, that ARG wished to transfer its shares by at least 15 January 2016 and failed to give a Transfer Notice as required by cl 12.6.[16] No other breach is asserted that would comprise a default event for the purpose of cl 15.2 and cl 15.3.
20 ARG disputes that its conduct in entering into the PSC Sale Agreement was such as to trigger a requirement that it issue a Transfer Notice, denies it breached the terms of the Shareholders Agreement and denies there were any grounds for a deemed Transfer Notice.
21 ARG seeks relief under various heads, including for breach of the Shareholders Agreement said to arise by the circumstances of the sale of ARG's shares in Reliance Insurance to Byron Dreaming and the on-sale to Coverforce Victoria.
22 The pleadings have closed and general discovery has been completed.
Defendants' application for further and better discovery
23 The categories sought by way of further and better discovery are set out in the schedule to these reasons.
24 The principles with respect to applications for further and better discovery under O 26 r 6 of the Rules of the Supreme Court 1971 (WA) were not relevantly in issue. The parties referred to Murphy JA's summary in Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd[17] and Edelman J's summary in Perpetual Trustees Company Ltd v Burniston.[18]
25 Before making an order, the Court should have reasonable grounds for being fairly certain that the class of documents exist, that the documents are relevant and that they ought to have been discovered. Relevance is to be determined taking into account that the documents may lead to a train of inquiry that would advance a party's case or damage the opponent's case. Case management principles also have a role, in particular in assessing whether the application is oppressive or unnecessary.
26 As to category 1, the relevance of the Sun Devil Agreement is peripheral to the pleaded dispute between the parties. ARG pleads that in April 2015, it entered into an agreement with Sun Devil, its director Mr Neate, and Reliance Insurance by which the plaintiff would acquire from Sun Devil its shares in Reliance Insurance (Sun Devil Agreement).
27 The Sun Devil Agreement was in writing. The fact that it was entered into is not in issue in the proceedings, although the plaintiff says that it explains why the number of shares the plaintiff proposed to sell to PSC included shares that it anticipated would be acquired from Sun Devil.[19]
28 Nor is it in issue that the Sun Devil Agreement had not completed by the date of entry into the PSC Sale Agreement, and did not complete at all. The defendants assert it was rescinded on about 8 November 2015.[20] Based on the pleadings, nothing in this litigation turns on the manner of termination. The defendants take issue in the pleadings with the summary of the terms of the Sun Devil Agreement as pleaded by the plaintiff, but the terms are not relevant to the overarching dispute. No relief is sought in relation to the Sun Devil Agreement or its termination.
29 The defendants contend that all documents relating to the Sun Devil Agreement are relevant to the background of how the PSC Sale Agreement was structured.[21] As appears from the summary above, the terms of the final PSC Sale Agreement are fundamental to the proceedings. However, how the Sun Devil Agreement came into being is not of itself important to the pleaded case. The fact that the parties may not agree as to how the Sun Devil Agreement was terminated does not of itself result in that question being material in a discovery sense.
30 For the above reasons, I refuse the application in the broad terms in which it was sought. However, it seems to me that some communications in the period prior to execution of the PSC Sale Agreement may be relevant if the status of the condition precedents is itself relevant to assessing the timing or formation of a 'wish' to transfer shares. The issue of the construction of cl 12.6 remains to be determined and is not straight forward, as addressed further below with respect to categories 2 and 3.
31 On the basis that the transfer of shares owned by Sun Devil is relevant to completion under the PSC Sale Agreement, there are reasonable grounds for inferring that further documents in relation to ARG's intention or decision to sell the shares registered in the name of Sun Devil to PSC and its negotiations with PSC in that regard are likely to exist.
32 Accordingly, I will order limited discovery and with respect to a limited period. The terms are addressed below.
33 ARG provided a further discovery affidavit said to relate to categories 2 and 3 on or about the date of the hearing of the applications. However, whether it addresses all of the defendants' concerns is unknown and it remains appropriate to determine the application.
34 At trial, much may turn on the meaning of the requirement that ARG issue a Transfer Notice when it 'wishes to transfer shares'. If cl 12.6 is read literally, the mere holding of a wish or desire could result in a forced sale of shares at a 20% discount. The word 'wish' itself is problematic, as it potentially covers a spectrum from mere idling and hope to actual intention and commitment.
35 The question is when a 'wish' is formulated for the purpose of cl 12.6 such that a Transfer Notice must issue: is it when an agreement is executed; when conditions precedent are met; when negotiations with a prospective purchaser commence; when the Board resolves to embark on a sale process; or some other time.
36 The defendants accepted at the hearing before me that there is a temporal question to be determined. Counsel for the defendants accepted that the 'wish' for the purpose of cl 12.6 arises upon the execution of an agreement for the sale of shares. That appears to be the defendants' position regardless of any conditions that may attach to the agreement. Counsel also contended that a 'wish' might arise on the making of an offer.[22]
37 The discovery application sought documents for an undefined period that related to or referred to ARG's 'wish' to sell its shares and Sun Devil's shares to PSC. The relevance was said to be that the 'wish' (and so the breach by failure to issue a Transfer Notice) might be earlier than that now pleaded.[23]
38 The defendants have expressly pleaded their case on breach. They do not plead a breach that comprises an event of default other than the failure to issue a Transfer Notice. Further, the deemed Transfer Notice does not have effect until the non-defaulting party gives notice under cl 15.3. Notice under cl 15.3 was given by letter on 5 February 2016. Even if an earlier 'wish' is discerned, it does not follow that there will be any impact on the deemed Transfer Notice.
39 In my view, the manner in which the defence is pleaded reduces the prospect of documents in the period prior to execution of the Share Sale Agreement having real forensic relevance to any pleaded issue.
40 However, there remains (as with the Sun Devil condition precedent dealt with above) a train of factual inquiry potentially relevant to determining the existence of the alleged 'wish' or intention within the meaning of cl 12.6 and depending upon findings as to the operation of that clause. I consider it likely that at least during the period immediately prior to 15 January 2016, relevant documents exist. It is reasonable to infer that ARG would have had at least some written internal and external communications in order to finalise the terms of the proposed sale.
41 The wording proposed in the application must be refined to reflect that the category is confined to documents in relation to ARG's intention or decision to sell its shares and those registered in the name of Sun Devil to PSC and its negotiations with PSC in that regard.
42 It does not follow that any such documents will be admissible when the operation of cl 12.6 is ultimately addressed.
43 I would be prepared to order limited discovery for the period from 21 December 2015 to 15 January 2016 (the pleaded case being that the 'wish' was formed by the latter date).
44 Despite the openended nature of the application, in their written submissions the defendants suggested a minimum starting point of 1 November 2015, based on an inference as to 'the ordinary course of commercial transactions' and 'the centrality of these documents'.[24] Based on the current evidence before me, I do not consider a wider temporal window is justified, taking into account that it is highly unlikely that any early negotiations would be sufficiently certain to properly evidence a 'wish' under cl 12.6 and that the defendants' pleaded case focuses on 15 January 2016. The defendants rely on the execution of the PSC Sale Agreement on that date, the ASX announcement of that date and correspondence that comes after that date. In setting that temporal window, I have taken into account the Christmas and New Year period.
45 I will invite the parties to provide a minute in due course. The proposed category of discovery pursuant to these reasons is intended to cover discovery to the extent allowed with respect to categories 1, 2 and 3 collectively.
46 The rationale for seeking discovery of documents relating to the ASX announcements was said to be to ascertain whether or not ARG knew or considered that it was in breach of the Shareholders Agreement.[25]
47 The defendants rely on the ASX announcements in support of the breach allegation. I do not consider ARG's view as to whether or not the announcements evidenced a breach of its obligations is determinative of any issue. Its subjective view is not to the point. Therefore, I do not consider the relevance threshold is met.
48 I am not satisfied that documents relating to any debt facility entered into by PSC are relevant to the dispute. It was submitted that under cl 12.1 of the Shareholders Agreement, no shareholder may encumber its shares. There was no evidence that ARG was in breach of the Shareholders Agreement by encumbering its shares by entry into the PSC Sale Agreement.[26]
49 Further, the PSC Sale Agreement has been discovered and the terms of the proposed acquisition have been disclosed to the defendants. I was told that the PSC Sale Agreement involved a cash purchase by PSC, and the defendants did not suggest otherwise. I accept ARG's submission that the threshold for discovery with respect to this category was not met.
50 At the hearing, the proposed wording for these categories was refined to 'internal communications', rather than 'documents relating to letters'.[27]
51 In short, the defendants seek discovery not of the prelitigation letters/email listed in the application, but of documents recording internal consideration by the officers ARG of those communications. The defendants contend ARG's assessment of those communications is relevant to whether or not it considered itself in breach of the Shareholders Agreement.[28] Again, I do not consider ARG's subjective view as to breach is determinative of breach, or indeed relevant to that question. The relevance threshold is not met.
52 In my view, any appropriate further and better discovery with respect to categories 10 and 11 will be met by the proposed further and better discovery with respect to categories 2 and 3, and no separate treatment of the categories is required.
53 This category has apparently been addressed voluntarily by ARG.[29]
Plaintiff's application for subpoenas to be set aside
54 On 19 August 2016, the defendants issued five subpoenas, addressed to each of ARG's parent company, Vantage Holdings Group Pty Ltd (Vantage), PSC, Mr Jon Fogarty (a director of Vantage), Mr Jonathan Asquith (a director of ARG and Vantage) and Mr Keith Muller (a former director of Vantage). PSC and Vantage are both parties to the PSC Agreement.
55 A comparison of the categories of documents sought by the subpoenas and the categories of documents sought by the defendants' further and better discovery application reveals that with one exception, in effect the same categories of documents are sought by both processes.[30] The subpoenas refer to five categories of documents. Category 1 is equivalent to category 3 of the Schedule to these reasons. Category 2 is equivalent to Schedule category 4. Category 3 is equivalent to Schedule category 2. Category 4 is equivalent to Schedule category 5. Category 5 is equivalent to Schedule categories 6, 7 and 8.
56 At the hearing, the determination of the plaintiff's application to set aside the subpoenas was adjourned pending the outcome of the further and better discovery application. That was done so that the defendants can consider whether the more efficient course, rather than continuing to contest the validity of the subpoenas, may be to revise and reissue them.
57 I note that the proposed subpoena recipients may have documents that are not in the possession, custody or control of the plaintiff, and so there may remain legitimate cause for subpoenas to issue.
58 ARG applies to inspect various documents listed in (relevantly) two discovery affidavits and for which legal professional privilege has been claimed by what is sometimes referred to as a global claim. The discovery affidavits were filed by Denis Malady on behalf of Reliance Insurance and Byron Dreaming, and Kasey Richmond on behalf of Coverforce Victoria.[31]
59 The affidavits do not provide the requisite information from which a proper claim for legal professional privilege could be discerned. The defendants sought to remedy the deficiencies in the affidavits by providing an affidavit sworn by their solicitor dealing with specific documents[32] and by providing two aides memoire that set out in some detail the evidentiary foundation for the claim. The affidavit did not address the issues in sufficient detail, and the aides memoire were not admissible as evidence. When a privilege claim is properly contested, the claim must be established by admissible evidence. The evidence must address each element of privilege in relation to each document:[33]
[The party] should put forward facts from which the court may make an informed judgment on whether legal professional privilege is available in relation to each document in respect of which privilege is claimed. The evidence should establish the facts in relation to each document, or a class of documents to which privilege applies on the same basis. The evidence must address the elements of privilege in relation to each document or class of document. For example, it should establish that each document, or class of documents, is a confidential communication. Secondly, it should identify whether the dominant purpose of the communication is to give legal advice or obtain legal advice or both, or for the purposes of the litigation or whether the communication reveals legal advice. If it is claimed that the communication is for the purposes of litigation then sufficient facts should be given to enable the court to make an informed judgment whether or not the privilege is available. It is not sufficient to refer to a number of documents and say that they are privileged on a number of alternative grounds without stating which ground applies to which document. For example, it is not sufficient to refer to a number of documents and say that each of them is for the purpose of giving or obtaining legal advice. If the communication is not for the dominant purpose of giving or obtaining legal advice but reveals confidential legal advice then the evidence should establish that fact. If privilege is claimed on the grounds of litigation privilege then sufficient facts should be stated to enable the court to make an informed judgment whether or not the document is privileged. If the identity of the author or recipient of the document is relevant then that fact should be stated.
60 The defendants' counsel at the hearing sought to adjourn the hearing of the inspection application so that appropriate evidence as to legal professional privilege could be provided. I granted the adjournment application because, although the plaintiff had previously aired its complaints as to the lack of foundation for the privilege claims, legal professional privilege is a substantive right and a party should not be lightly deprived of that right on the basis of incomplete evidence.[34]
61 Further, it was clear that the dispute would more easily be resolved if the court were able to view the communications said to be privileged. The court has such power.[35] Accordingly, the hearing of the inspection application was adjourned to another CMC judge of this court.
The plaintiff's further and better discovery application
62 The remaining application seeks further and better discovery of two categories of documents. The first relates to emails and attachments referred to or within email chains that have been discovered and over which a privilege claim is asserted, at least in part. The complaint is that it is not clear from the document descriptions which part of email communications are said to be privileged. The defendants have voluntarily agreed to redraft the part of the discovery list to address the plaintiff's concern,[36] and no further order is required at this stage.
63 The second category seeks costs and retainer letters and communications between the defendants and Minter Ellison. It was not initially clear whether Minter Ellison had acted for one or more of the defendants. After the application was filed, Ms Richmond on behalf of Coverforce Victoria filed an affidavit deposing to the fact that Minter Ellison acted for Coverforce Victoria and setting out the matters as to which Minter Ellison provided advice.[37] The affidavit answers the questions raised as to which party was represented by Minter Ellison. However, to the extent it has not been done, discovery must be made of relevant communications between Minter Ellison and Coverforce Victoria (whether in the hands of Coverforce Victoria or other defendants). The defendants have indicated that such documents are subject to legal professional privilege claims. There may also be claims that assert common interest privilege. That does not exclude them from the discovery process.
64 ARG asserts that to the extent legal professional privilege is claimed and otherwise established, the claim may be further challenged on the basis of waiver, the knowledge of the defendants having been potentially placed in issue by the defendants' defence.
65 For example, the plaintiff pleads that each of Byron Dreaming, Sun Devil, Howarth and Coverforce Victoria procured or induced a breach of the Shareholders Agreement at the time Byron Dreaming, Sun Devil and Howarth transferred their shares in Reliance Insurance to Coverforce Victoria.[38] The defendants plead that at the time of such transfers, each of those defendants held a bona fide and reasonable belief that the other defendants were not in breach of the Shareholders Agreement and that ARG was in default of the Shareholders Agreement.[39]
66 ARG says that until the defendants properly explain the basis for any privilege claim over communications with (in particular) Minter Ellison, it cannot assess whether or not a valid claim for common interest or some other privilege can be sustained or whether or not an assertion of waiver might be pursued.
67 The defendants must first properly make any privilege claims. Sensibly, ARG contends that this part of its further and better discovery application is best progressed by the defendants as part of the deferred inspection application to be dealt with by another CMC judge.[40] The defendants accepted such a course was appropriate.[41]
68 Accordingly, programming orders for the filing of additional materials by the defendants were made at the hearing. It follows that at this stage I need not make further orders with respect to the plaintiff's further and better discovery application.
69 The defendants' application for further and better discovery is allowed in part with respect to categories 1, 2 and 3 and otherwise dismissed. The remaining applications are adjourned, for the reasons set out above.
70 These contested interlocutory applications resulted in the filing of some eight affidavits, two aides memoire and twelve sets of submissions. It is possible that issues will remain for further determination once the legal professional privilege claims are resolved and once the parties attend to the steps to which they agreed on a voluntary basis. Accordingly, the matter can be relisted for directions at the request of any party.
[1] Australian Reliance Group Pty Ltd v Coverforce Insurance Brokers Victoria Pty Ltd [2016] WASC 244.
[2] The first defendant was formerly known as Reliance Insurance Brokers Pty Ltd and for ease of reference, the parties continue to refer to it by that name (or as abbreviated).
[4] Shareholders Agreement, cl 15.2, in particular cl 15.2.3.
[7] PSC Sale Agreement, cl 3.1 (attachment 'RMD3' (in redacted form) to affidavit of Rebecca Mary Dunn filed 24 May 2016).
[8] PSC Sale Agreement sch 1; sch 5 cl 3.2; sch 6 cl 1.
[10] The capacity of Mr Malady in sending the letters is in dispute in the proceedings.
[17] Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2010] WASC 218 [3] [8].
[18] Perpetual Trustees Company Ltd v Burniston [2012] WASC 26 [29] [36].
[23] ts 65 67. The Defendants' submissions referred to other potential grounds for relevance, such as purportedly evidencing ARG's subjective knowledge of breach, but at the hearing counsel developed the argument as to relevance based on the temporal issue.
[28] ts 71, defendants' submissions dated 22 September 2016 [67].
[30] Schedule to plaintiff's reply submissions dated 5 October 2016.
[31] A question as to a document referred to in an affidavit filed by James Neate on behalf of Sun Devil and referred to at par 1.2 of the plaintiff's application was resolved during the hearing: ts 90 91.
[32] Affidavit of Rebecca Mary Dunn filed 30 September 2016.
[33] CMA Assets Pty Ltd v John Holland Pty Ltd [No 3] [2012] WASC 501 [26] (Le Miere J).
[34] CMA Assets Pty Ltd v John Holland Pty Ltd [No 3] [25].
[35] Esso Australia Resources Ltd v Commissioner of Taxation (Cth) [1999] HCA 67; (1999) 201 CLR 49 [52]; CMA Assets Pty Ltd v John Holland Pty Ltd [No 3] [8]; see also Carey v Korda [2012] WASCA 228; (2012) 45 WAR 181 [121]; Brian Neville Mayfield & Marlene Theresa Mayfield (ATF B & M Mayfield Superannuation Fund) v P & B Corporation Pty Ltd (ATF North Cape Development Trust) [No 4] [2016] WASC 292 [7].
[37] Affidavit of Kasey Richmond filed 30 September 2016.
[38] Statement of claim [32] [34]. The defendants suggested (defendants' submissions [30] [33]) that as they had made discovery of all precontractual documents as to the sale of shares to Coverforce Victoria, then the plaintiff should discover all precontractual documents relating to the PSC Sale Agreement - but that does not follow. The issues arising on the pleadings are different, as these paragraphs in the statement of claim reveal.
(1999) 201 CLR 49
(2012) 45 WAR 181