Bailey v Beagle Management Pty Ltd

REASONS FOR JUDGMENT 1 The first to fifth respondents and the sixth respondent ("the trustee") have made applications to the Court that the applicants provide security for their costs of the proceeding. On 12 February 2001, the solicitors for the first to fifth respondents served a notice to produce on the applicants requiring them to produce at the hearing of the motion for security for costs the following document: "The independent chartered accountant's report relating to the financial affairs of Equuscorp, as referred to on line 12, page 9, of Exhibit 'PK1' to the affidavit of Phillip Kotsanis sworn 1 February 2001" ("the document"). 2 The reference to the affidavit of Phillip Kotsanis sworn 1 February 2001 was a reference to an affidavit filed before a Full Court of the Federal Court on an application for leave to appeal from an earlier decision whereby I ordered the applicants to respond to other notices to produce. Leave to appeal against that decision was refused on 12 February 2001. The document was produced to the Court when the motions for security for costs came on for further hearing on 14 February 2001. The applicants, in particular the eighteenth applicant ("Equuscorp"), indicated that a claim for privilege from production would be made in relation to that document. I adjourned the motions to enable the applicants to file evidence in support of the claim for privilege. 3 Thereafter, an affidavit was filed on behalf of Equuscorp by its solicitor, Mr Phillip Kotsanis, in which he referred to the manner in which the document came into existence. The context was New South Wales proceedings brought by the trustee against Equuscorp and others, proceeding VG 610 of 1996 in the Federal Court between Equuscorp and the trustee ("the 1996 proceeding") and proceeding VG 140 of 1998 in the Federal Court between Equuscorp, the trustee and others ("the 1998 proceeding"). Mr Kotsanis said that the 1996 proceeding had been set down for trial on 13 September 1999. 4 Shortly prior to trial, on 10 September 1999, the trial was adjourned by consent to 27 September 1999, insofar as matters between Equuscorp and the trustee were concerned to facilitate settlement of the 1996 proceeding and the 1998 proceeding. The adjournment came about through a deed of agreement dated 10 September 1999 between the trustee, Equuscorp, two directors of Equuscorp, and Equuscorp's parent company, which provided for adjournment of the proceeding. The terms of that deed of agreement were confidential, with the exceptions of clauses 1 and 25. 5 Mr Kotsanis said in his affidavit: "5. … (b) For the purposes of exploring the possibility of settlement and accordingly determining the future course of the 1996 proceeding and the 1998 proceeding, the directors of Equus commissioned an independent's accountant's report ('the report') from Dean McVeigh of 'McVeigh Corporate Advisory Service'. It was solely commissioned and created for use in the 1996 proceeding and the 1998 proceeding to aid in the conduct of that litigation. The report was made to the directors of Equus and paid for by Equus. It was considered by the directors of Equus and advice was taken in respect of it for the purposes previously stated. (c) The report was then disclosed to the Trustee on a confidential basis solely for the purpose of advancing settlement. The 1996 proceeding and the 1998 proceeding duly settled as between Equus and the Trustee by an undated deed executed on or about 27 September 1999 ('the deed of settlement'). The 1998 proceedings, however, remain on foot." There was then a reference to a number of attachments to the document which include assessments of, and advice by, solicitors for Equuscorp and Equuscorp paralegal staff and matters relating to the prospects of success of proceedings to which Equuscorp was and is a party. It was said that these matters are the foundation of the document and the conclusion expressed in it. 6 The claim for privilege from production was based not only on legal professional privilege, but on the basis that the communication was a without prejudice communication, or was part of a without prejudice communication, between the trustee and Equuscorp for the purpose of seeking to resolve the 1996 and the 1998 proceedings. 7 Mr Horgan, who appeared for the first to fifth respondents, challenged the claim for privilege from production, but indicated that he was not seeking production of the attachments referred to but only the document itself. Criticism was made by Mr Horgan of the manner in which Mr Kotsanis made the claim for legal professional privilege. 8 The document was the subject of observation by Bergin J in a judgment handed down on 5 December 2000 in proceedings between the trustee and Equuscorp: [2000] SC NSW 1120. In par 15 of the judgment, Bergin J said: "Pursuant to the September Agreement [the agreement providing for the adjournment] the plaintiff agreed to consent to the adjournment of the Trial to enable the first defendant [Equuscorp] to obtain an independent chartered accountant's report to attempt to satisfy the plaintiff that the proposed settlement was the 'best reasonably available' to the plaintiff. The plaintiff was provided with the chartered accountant's report and was satisfied that the payment of $500,000 on the terms and conditions contained in the Deed 'was an appropriate settlement of the 1996 Proceedings'." There is annexed to Bergin J's judgment a schedule which sets out the terms of the settlement agreement. For present purposes I need only refer to recitals F and G. Recital F was in the following terms: "On 10 September 1999 the Trustee, Equus, Nick Russo, Katie Russo and Targridge (the 'Parties') entered into an Agreement ('the Agreement') whereby: 1. Equus proposed to the Trustee that the disputes between the parties including the 1996 Proceedings be settled by the payment to the Trustee of the sum of $500,000.00 ('the payment'), and otherwise on the terms contained in this Deed (being in identical terms to annexure 'A' to this Agreement) on the basis that the Payment is greater than that which would be available to the Trustee if it attempted to enforce any judgment which it might obtain on its Cross Claim in proceedings VG610 of 1996; and 2. the Trustee agreed to consent to an adjournment of the Trial on the terms contained in the Agreement in order to give Equus an opportunity to obtain an independent chartered accountant's report to attempt to satisfy the Trustee that the proposed settlement is the best reasonably available to the Trustee." Recital G provided: "The Trustee has been provided with the independent chartered accountant's report and is satisfied that the Payment on the terms and conditions contained in this Deed is an appropriate settlement of the 1996 Proceedings having regard to its duties as Trustee of the Trust Fund associated with investment in the production of the film 'Night of the Leopard' ('the Trust Fund')". 9 The claim made by Equuscorp that the document was privileged from production was based on legal professional privilege and the fact that it was a without prejudice communication. It was submitted by Mr Colbran QC, who appeared with Mr Scott for Equuscorp, that the document was brought into existence for the purpose of the conduct of the 1996 proceeding and the 1998 proceeding. This submission was challenged by the first to fifth respondents. In order to understand or to appreciate fully what Mr Kotsanis was saying in his affidavit, it is necessary to take into account the observation in par 15 and the schedule in the judgment of Bergin J. 10 Although the document came into existence for the purpose of exploring the possibility of settlement and, although Mr Kotsanis said it was solely commissioned and created for use in the 1996 proceeding and the 1998 proceeding to aid in the conduct of that litigation, I am satisfied that the purpose for which the document came into existence was to be passed on to the trustee for the purpose of persuading the trustee that the settlement proposed was an appropriate financial settlement. Mr Colbran QC submitted that although the document was brought into existence for the purpose of seeking to achieve a settlement of the matter, it nevertheless came into existence for the purpose of the conduct of the litigation, and accordingly came within the relevant principles initially expounded in Grant v Downs (1976) 135 CLR 674 and later explained in Esso Australia Resources Ltd v Federal Commissioner of Taxation (1999) 168 ALR 123. 11 One has to be careful about the use of the phrase "brought into existence for the purpose of the conduct of the litigation" as a distinction should be drawn between bringing a document into existence for the purpose of conducting litigation by a party on the basis that the document will not be shown to the other party, unless there be an express waiver, and a document brought into existence during the course of litigation for the purpose of settling the litigation which is intended to be shown to the other party. Properly characterised, it is not correct to say that a document is brought into existence for the purpose of the conduct of litigation, and so is privileged from production, if it is brought into existence, albeit to try and settle the litigation, but for the purpose of being shown to the other side. 12 Having regard to that distinction, notwithstanding that Mr Kotsanis said that the document was solely commissioned and created for use in the 1996 proceeding and the 1998 proceeding, I am satisfied that certainly the dominant, if not the sole, purpose for which the document came into existence was for the purpose of being presented to the trustee in an effort to persuade the trustee that the settlement proposed was an appropriate settlement. In those circumstances, I am not satisfied that the document is privileged from production on the ground of legal professional privilege. 13 I turn then to the issue of without prejudice communications. A useful explanation and exposition of the principle in relation to the privilege which is gained from without prejudice communications is found in the joint judgment of Dixon CJ, Webb, Kitto and Taylor JJ in the following passage in Field v Commissioner for Railways for NSW (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 or 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." This passage makes it clear that negotiations for the purpose of settlement should be protected from being the subject of use by any of the parties to a without prejudice communication to enable parties to attempt to compromise litigation, without the embarrassment which might occur if their communications were put into evidence. 14 As was stated by Lord Griffiths in Rush & Tompkins Ltd v Greater London Council [1989] 1 AC 1280 at 1299: "The rule applies to exclude all negotiations genuinely aimed at settlement whether oral or in writing from being given in evidence." The rule does not depend upon a rigorous application of the use of the words "without prejudice". Lord Griffiths pointed out that if it is clear from the surrounding circumstances that the parties were seeking to compromise the action, evidence of the content of the negotiations will, as a general rule, not be admissible at trial. 15 It is clear from the authorities that the without prejudice rule is directed to protect negotiations and documents brought into existence for the purpose of trying to settle proceedings from being admissible in evidence in subsequent proceedings. The issue then arises whether the rule is restricted to one of precluding admissibility, or whether it extends to precluding the documents from being produced for inspection. 16 I am satisfied that the document is entitled to shelter under the umbrella of a without prejudice communication so that it cannot be admitted in evidence in any subsequent proceeding. But it has been called for at this stage not for the purpose of being tendered in evidence before me, but for the purpose of being inspected. The financial viability of Equuscorp is very much an issue in the motions for security for costs and a number of primary documents, accounts, balance sheets and income tax returns, have already been produced for inspection. Whether they are used hereafter by way of evidence remains to be seen on the hearing of the motions, on which matter I express no view. 17 In Rush & Tompkins v Greater London Council (supra), Lord Griffiths, with whom the other Law Lords agreed, examined the history of the without prejudice communication principle and reached the conclusion that it should be extended to discoverability as well as admissibility. By discoverability, his Lordship was referring to production for inspection. Lord Griffiths analysed a number of decisions, in particular Rabin v Mendoza & Co [1954] 1 WLR 271 in which it was stated that a without prejudice communication was not only privileged from being tendered in evidence, it was also privileged from production. His Lordship analysed a number of decisions which dealt with this issue. He considered conflicting decisions in Canada, and said, at 1304: "I suspect that until the present decision of the Court of Appeal the general understanding of the profession was that 'without prejudice' negotiations between parties to litigation would not be discoverable to other parties and that admissibility and discoverability went together." His Lordship continued at 1305: "I have come to the conclusion that the wiser course is to protect 'without prejudice' communications between parties to litigation from production to other parties in the same litigation. 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." Lord Griffiths then concluded at 1305: "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. The same view was taken by Burchett J in Austotel Management Pty Ltd v Jamieson (1995) 57 FCR 411 at 416, where his Honour cited Rush & Tompkins (supra) for the proposition that: "where documents are protected by the 'without prejudice' privilege, they should not be required to be revealed upon discovery". (See also Rabin v Mendoza & Co (supra) at 273 per Denning LJ, 274 per Romer LJ.) 18 I have therefore reached the conclusion that the document sought in the notice to produce is privileged from production under the without prejudice umbrella, having regard to the circumstances in which it came into existence to which I have already referred. 19 Mr Horgan submitted that one of the matters I should take into account is that the Court should not allow itself to be misled by only having part of the story, or part of the facts before it. He relied upon Pitts v Adney [1961] NSWR 535. Walsh J said, at 539: "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." (See also Austotel Management Ltd v Jamieson (supra) at 418.) 20 By allowing the claim for privilege from production on the ground of the without prejudice umbrella, I am not putting the Court in a position of being misled as to the facts. It is inevitable in claims for privilege from production, whether on the ground of without prejudice communications or legal professional privilege, that the Court is precluded from being made privy to certain documents and certain facts. However, the document is an investigating accountant's report and not a primary document of account itself. Primary documents of account and income tax returns have already been produced before the Court and made available for inspection. 21 I do not consider that in this case, public policy requires me not to apply the principle of protection from production on the basis that the document is a without prejudice communication on the ground that the Court might be misled. If it was a document of primary accounting or primary entry, my decision might be different, but it is a report from an investigating accountant and no more than that. 22 I therefore uphold the claim that the document sought in the notice to produce dated 12 February 2001, and which was produced to the Court on 14 February 2001, is privileged from production to the first to fifth respondents and they are not entitled to inspection of it. My understanding is that the sixth respondent, the trustee, took no position on the hearing of the motion but abided the result.