Practice and procedure - Application for discovery - Relevance - Turns on own facts

Beecham Group Ltd v Bristol Myers Co [1979] VicRp 27; [1979] VR 273

Mulley v Manifold [1959] HCA 23; (1959) 103 CLR 341

1 MASTER NEWNES: This is an application by the defendant for discovery of particular documents by the plaintiff. The plaintiff says that the documents are irrelevant to the matters in issue in the action.

2 It is convenient first to consider the issues raised in the pleadings in the action.

3 In the re-amended statement of claim, the plaintiff pleads that, at all material times, its business has substantially comprised the manufacture of ammonia gas and chemicals derived from ammonia gas, and has been carried on from a site situated in Kwinana.

4 By a contract of insurance, dated 27 March 2000, the defendant agreed to indemnify the plaintiff against certain losses on the happening of certain events. Relevantly, for present purposes, the defendant agreed, in effect, to indemnify the plaintiff in respect of additional expenditure necessarily and reasonably incurred by the plaintiff for the sole purpose of avoiding or diminishing a reduction in the turnover or output of the business which would, but for that expenditure, have occurred as a consequence of interruption or interference with the business as a result of mechanical failure or malfunction. The indemnity was subject to allowance for any amounts saved by the plaintiff as a consequence of the interruption to the business.

5 The defendant also agreed to indemnify the plaintiff, in respect of any mechanical failure or malfunction, by payment of any additional increase in the cost of working of the business, including but not limited to, the cost of acquisition of additional materials sold or consumed in the course of the business not otherwise recoverable under the previous head, which were necessarily and reasonably incurred for the purpose of avoiding or diminishing a reduction in turnover, or alternatively output, and/or maintaining and/or resuming normal business operations and/or services.

6 The plaintiff pleads that, in or about January or February 1999, it acquired and installed a synthetic gas compressor, which was the sole source of ammonia gas produced at the site. The operation of the plaintiff's business depended upon the production or other availability of ammonia for sale or for use in the production of other chemicals manufactured and sold by the plaintiff. The compressor was commissioned and went into production on or about 24 April 1999.

7 In fact, the compressor had a manufacturing defect and it broke down on 13 September 2000. The business of the plaintiff was interrupted for a period of 35 days, from 13 September 2000 to 17 October 2000.

8 The plaintiff pleads that, on and following 13 September 2000, it did not know for how long the compressor would be out of operation for repair and for how long the business of the plaintiff would be interrupted. From 13 September 2000 to 18 September 2000, the plaintiff reasonably apprehended that the compressor would be out of operation, and its business interrupted, for at least four to six weeks.

9 The plaintiff alleges that, as at 13 September 2000, the total stock of available ammonia in storage on the site was 23,643 tonnes. The plaintiff says it had held, or endeavoured to hold, in storage on site approximately that amount of ammonia to safeguard against plant failure or unexpected increased demand. The demand for ammonia for use in the business and for sale had been approximately 4500 to 5000 tonnes per week.

10 During the period 13 September to 20 September 2000, the plaintiff sold or consumed in its operations 4037 tonnes of ammonia from the stock. Between 20 September and 17 October 2000, the plaintiff sold or consumed in its operations 16,690 tonnes of ammonia from the stock.

11 The plaintiff pleads that for the purpose of avoiding a reduction in turnover or output derived from payments to the plaintiff for ammonia or other products produced from it, and for the purpose of maintaining or resuming its normal business operations, on 18 September 2000 the plaintiff purchased 25,843 tonnes of ammonia (the "replacement ammonia") from a third party and incurred the costs of the acquisition, transport and unloading of the replacement ammonia. When the replacement ammonia was delivered to the plaintiff on 17 October 2000, the usable stock on site had been reduced to 2917 tonnes.

12 The plaintiff claims that the defendant is liable to indemnify the plaintiff for the cost of the replacement ammonia (less certain deductibles and cost savings), as that cost was necessarily and reasonably incurred as additional expenditure for the sole purpose of avoiding or diminishing a reduction in turnover or output as a result of the compressor failure. Alternatively, it was expenditure which the plaintiff necessarily and reasonably incurred as additional increased costs of working for the sole purpose of avoiding or diminishing a reduction in turnover or output, or of maintaining normal business operations, as a consequence of the interruption to the business resulting from the compressor failure.

13 The defendant, so far as relevant for present purposes, admits that it entered into a contract of insurance with the plaintiff (albeit, some of the terms and the proper construction of the policy are in issue) and admits that the plaintiff purchased the replacement ammonia, but the defendant says the replacement ammonia was not purchased for the purpose of avoiding or diminishing a reduction in turnover or output, or for maintaining or resuming business operations, as a result of the failure of the synthetic compressor. Rather, it was for other reasons, namely, due to boiler repairs required to the plant and which would result in an actual or expected loss of production until 24 October 2000, to meet later expected reductions in turnover or output due to planned and/or unplanned shutdowns up until at least 30 September 2002, to replace the need for other purchases of ammonia that would have otherwise occurred up until 30 September 2002 in accordance with the plaintiff's historical practice, and with a view to making extra profit.

14 The defendant pleads that the replacement ammonia was not required or used to avoid or diminish a reduction in turnover or output resulting from the compressor failure. It alleges that, as at 13 September 2000, the plaintiff held 26,071 tonnes of ammonia. When the compressor could have resumed production on 16 October 2000 (but did not due to other unrelated repairs), the plaintiff held 6,806 tonnes of ammonia and could have continued to maintain turnover or output derived from payments it received for ammonia. The defendant also pleads that the plaintiff could have repaired the compressor so that the plant could have resumed production earlier than 16 October 2000, when its stock of ammonia was in excess of 6,806 tonnes. It further alleges that, at the time the compressor could have resumed production on 16 October 2000, the plaintiff had not received the replacement ammonia and/or was unable to use it to avoid a reduction in turnover or output.

15 The defendant further pleads that the replacement ammonia was not required or necessary to maintain or resume normal business operations. But for other unrelated repairs, the compressor could have resumed production on 16 October 2000, when the plaintiff still held 6,806 tonnes of ammonia. The replacement ammonia was not received until after 16 October 2000.

16 The defendant alleges that replacement ammonia enabled the plaintiff to increase turnover (and increase profits) irrespective of the compressor ceasing operation. In support of that plea, the defendant says that the plaintiff's total ammonia sales for the three months ended 30 September 2000 totalled 42,924 tonnes; for the three months ending 31 December 2000 totalled 55,807; and for the three months ending 31 March 2001 totalled 46,028 tonnes. The defendant pleads that the increased sales after receipt of the replacement ammonia were achieved due to the plaintiff using it for new sales, as it did not need to use that ammonia to meet existing sales.

17 The defendant also says that the amount of the replacement ammonia was excessive and unreasonable to avoid a reduction in turnover or output or to maintain or resume normal business operations as a result of the failure of the compressor.

18 The defendant alleges that there was not and would not have been any reduction in turnover or output in the indemnity period as a consequence of the failure of the compressor.

19 It is further pleaded by the defendant, among other things, that under the policy the plaintiff is not entitled to be paid an amount which exceeds the amount which indemnifies it for its losses as a result of the failure of the compressor. The amount to which the plaintiff is entitled by way of indemnity is to be calculated by reference to the plaintiff's "gross profit", "turnover", "annual turnover" and "standard turnover", as defined in the policy.

20 The "rate of gross profit", "annual turnover" and "standard turnover", as defined, are subject to adjustment pursuant to an "adjustments/trends" clause in the policy. That clause provides, in effect, that such adjustment shall be made as may be necessary to provide for the trend of the business and for variations in other circumstances affecting the business, either before or after the damage, or which would have affected the business had the damage not occurred, so the figures thus adjusted shall represent as nearly as practicable the results which, but for the damage, would have been obtained during the relevant period after the damage.

21 The defendant says that the trend of the business and circumstances affecting, or which would have affected, the business had the damage not occurred, is to be calculated by reference to the 12 month period preceding and 24 month period subsequent to the compressor failure.

22 The defendant says that the plant had been in operation for less than five months when the compressor failed. The plant had numerous planned and unplanned shutdowns in the period 31 May 2000 to 26 July 2001 which were unrelated to the compressor failure and comprised approximately 13.5 per cent of production time. The plant had further planned and unplanned shutdowns after 26 July 2001, including a scheduled major inspection and overhaul in October 2001. The plant had difficulty reaching planned operational capacity between 25 April 2000 and 30 September 2001 and operated below planned capacity on many occasions during that period. The plant continued to have difficulty reaching operational capacity until at least 30 September 2002.

23 Accordingly, the defendant pleads, the plaintiff's entitlement to indemnity (if any) is subject to the operation of the adjustments/trends clause, but the plaintiff has not given sufficient discovery to enable the defendant to calculate the amount of any such entitlement.

24 On this application the defendant says that it is entitled to discovery of all documents which are relevant to the extent to which the replacement ammonia was purchased for the purposes alleged by the defendant and to the amount (if any) to which the plaintiff is entitled by way of indemnity.

25 The defendant therefore seeks discovery of the following classes of documents:

(a) all documents in relation to the statutory maintenance shutdown of the ammonia plant in October 2001;

(b) all documents in relation to its purchase of, and its decision to purchase, ammonia in April 2000, June 2000, October 2001 and November 2001; and

(c) all documents in relation to ammonia production, sales and turnover from September 2001 to 31 March 2002.

26 It was submitted on behalf of the defendant that the first category of documents, relating to the statutory maintenance shutdown in October 2001, was relevant to the trend of the business and the circumstances affecting it in the 12 months prior to and the 24 months following the compressor failure, and therefore to the adjustments to be made to the turnover and rate of gross profit.

27 The ammonia plant was originally scheduled for its statutory maintenance shutdown in July 2001. Following the shutdown due to the compressor failure, the statutory shutdown was postponed to October 2001. Had the compressor failure not occurred, the statutory shutdown would have remained scheduled for July 2001, within the indemnity period of the policy.

28 The documents are therefore required to ascertain what would have been the impact on the plaintiff's business had the statutory shutdown occurred as scheduled in 2001. Those documents include the sales, operational and production records for the actual shutdown period in October 2001 and records relating to purchases of ammonia consequent on that shutdown.

29 The documents in the second category, relating to the purchase of ammonia at other times, are sought on the basis that they are relevant to whether the plaintiff purchased the replacement ammonia for the sole purpose of avoiding or diminishing a reduction in turnover or whether it was a cost necessarily and reasonably incurred in consequence of the compressor failure.

30 Counsel submitted that the plaintiff's discovered documents do not demonstrate the plaintiff's considerations when determining what quantity of ammonia to import, how it determines what quantity of ammonia to import or the ability to "shortload" vessels (that is, purchase less than a full shipload of ammonia), or whether the plaintiff shortloaded vessels when it was ordering ammonia at its own expense. The documents are therefore relevant to the plaintiff's considerations in determining what quantity of ammonia to purchase, how it determines what quantity to purchase, and the ability to shortload vessels and its practices on other occasions in that regard.

31 The defendant says that the documents relating to the other occasions on which the plaintiff has decided to import ammonia will be relevant to those considerations.

32 It was submitted that the documents in the third category, relating to ammonia production, sales and turnover from September 2001 to 31 March 2002, are relevant to the defendant's allegation that the replacement ammonia was purchased and used for the purpose of increasing sales of ammonia to 31 March 2002, meeting expected reductions in turnover and output due to planned or unplanned shutdowns in that time, or replacing the need for other purchases of ammonia up to 31 March 2002. That is, they are relevant to the defendant's contention that the replacement ammonia provided a benefit to the plaintiff unrelated to avoiding a reduction in turnover or output due to the compressor failure. The defendant pleads that the plaintiff is not entitled to recover the cost of the replacement ammonia to the extent that it provided a benefit unrelated to avoiding a reduction in turnover or output due to the compressor failure.

33 It was submitted that the defendant requires the records to consider what benefit the plaintiff obtained from the replacement ammonia unrelated to the compressor failure. To the extent it was used for other purposes, it exceeds the indemnity principle on which the policy is based. The defendant contends that it is demonstrable on the sales and production figures up to 30 September 2001 that the replacement ammonia made additional amounts of ammonia available to meet increased sales or avoid purchases of ammonia that would otherwise have had to be made after September 2001. Alternatively, the defendant says that the amount recoverable cannot exceed the amount required to indemnify the plaintiff for its loss as a result of the compressor failure and it is demonstrable that the replacement ammonia provided a benefit after 30 September 2001 unrelated to the failure.

34 It was submitted by counsel for the defendant that it was not the case that had the compressor not failed the amount of ammonia on hand would have been maintained throughout the period in question by means of the continued production of ammonia. It is the defendant's contention that the plaintiff used the shutdown caused by the compressor failure to undertake unrelated repairs and maintenance that would otherwise have required the plant to be shutdown for a period of up to 41 days. The replacement ammonia was used largely to meet shutdowns that were to occur anyway and which were unrelated to the compressor failure.

35 It was submitted that discovery of the records, being for an additional six-month period over those already discovered, is reasonable to investigate the extent to which the replacement ammonia was used for purposes which would violate the indemnity principle. They were also relevant to the adjustments which the defendant pleads are applicable to take account of trends and circumstances of the business in the calculation of the plaintiff's right to indemnity.

36 It was submitted on behalf of the plaintiff that in relation to the statutory shutdown documents, the only documents that were relevant were those up to September 2001. On the pleading, documents past that point were not relevant to the quantification of the loss.

37 Counsel argued that documents will be relevant to the plaintiff's claim if they relate to the circumstances involving the shutdown of the plant, to the importation of ammonia in October 2000, or in order to quantify the plaintiff's loss. Counsel for the plaintiff referred to a copy of an expert report obtained by the plaintiff in which the expert, Mr Morgan, concluded that records beyond September 2001 would not be relevant for the purposes of adjustments to turnover for the relevant period. As to the broader question of whether records beyond September 2001 would reveal some ongoing benefit from the purchase of the replacement ammonia, Mr Morgan concluded the figures that are available indicate there would not have been any windfall gain arising from the purchase. Even if there was, it would not affect the claim given the terms of the policy. It was submitted that the defendant's assertion that documents after September 2001 are relevant was unsupported by any material.

38 In relation to the ammonia purchase and import records, it was submitted that the documents do not relate to any matter in issue on the pleadings. Rather, the defendant seeks to use the documents to test the consistency of the plaintiff's conduct, a question of credibility, rather than proof or disproof of a pleaded issue.

39 It was submitted that the sales production and operational records to 31 March 2002 are once again irrelevant to any matter in issue on the pleadings. There was no logical basis for the defendant's assertion that the replacement ammonia enabled the plaintiff to increase its sales of ammonia. As pleaded in the re-amended statement of claim, the replacement ammonia in effect replaced the ammonia in stock which was depleted during the period of the breakdown. But for the failure of the compressor, the plaintiff would have had the usual amount of ammonia in stock. The replacement ammonia could not, therefore, enable the plaintiff to make greater sales after 30 September 2001. If the compressor had not failed, the plaintiff would not have had to use the replacement ammonia to maintain sales during the period of the breakdown. If normal production had continued, the amount of ammonia in storage would have been sufficient to cover the periods of non-production that occurred between 17 October 2000 and 30 September 2001.

40 The contention by the defendant that the plaintiff obtained substantial additional financial benefits from the replacement ammonia is unsupported by any properly particularised benefit. It is simply an assertion and therefore does not form a proper basis for requiring discovery of documents.

41 I should say at the outset that, in relation to the first category of documents, I raised with both counsel the breadth of the request but it appears the parties understand what is in fact intended and it is a much narrower class of documents than that suggested by the terms of the request. No question of oppression was raised by the plaintiff.

42 An important issue between the parties in the action is the purpose for which the replacement ammonia was purchased by the plaintiff in September 2000. Another central issue is the extent to which any entitlement of the plaintiff under the policy is subject to adjustment to reflect the trends and circumstances otherwise affecting the business.

43 The plaintiff contends, in effect, that the replacement ammonia was purchased at a time when it did not know for how long its business would be interrupted by the compressor failure and was purchased to maintain the ammonia on site at its usual level, an amount equal to about five weeks of plant use and sales. The cost of the replacement ammonia was therefore additional expenditure it incurred solely to avoid a diminution in turnover or in the output of the business.

44 The defendant, on the other hand, alleges that the replacement ammonia was purchased for various other purposes, namely, to enable other programmed shutdowns and repairs to occur, to take the place of purchases of ammonia that would otherwise have been made in the ordinary course of business, and with a view to making additional sales of ammonia and therefore extra profit. The cost does not therefore fall within the policy.

45 The defendant also says that any entitlement of the plaintiff under the policy is subject to adjustment by reference to the trends of the business and circumstances affecting it for the 12 months preceding and the 24 months following the compressor failure, so that, among other things, the effect of the planned and unplanned shutdowns of the business around that time (apart from the shutdown due to the compressor failure) are relevant to the plaintiff's entitlement.

46 Under O 26, a document is discoverable if it relates to any matter in question in the action. It is trite law that a document relates to a matter in question, not only if it would be evidence upon any issue, but also if it is reasonable to suppose that it contains information which may either directly or indirectly enable the other party to advance their own case or to damage their opponent's case; and it is sufficient if it is a document which may fairly lead to a chain of enquiry which may have either of those two consequences: Mulley v Manifold [1959] HCA 23; (1959) 103 CLR 341 at 345. But documents which go solely to the credit of the party from whom discovery of them is sought do not relate to a matter in question: Beecham Group Ltd v Bristol Myers Co [1979] VicRp 27; [1979] VR 273 at 278.

47 I am satisfied that documents in relation to the statutory maintenance shutdown of the ammonia plant in October 2001 are relevant to the question of the adjustments which the defendant pleads are to be made under the policy to take account of circumstances which would have affected the plaintiff's business had the damage not occurred. The fact that the plaintiff's expert witness has concluded that documents beyond September 2001 would not be relevant for the purposes of those adjustments is not, of course, to the point.

48 I am not satisfied that documents relating to the plaintiff's purchase of, and its decision to purchase, ammonia in April 2000, June 2000, October 2001 and November 2001 are relevant to the purpose for which the plaintiff purchased the replacement ammonia on 18 September 2000, on the first ground upon which the defendant sought their discovery.

49 The defendant sought those documents, first, in order to establish how the plaintiff made decisions to purchase ammonia on other occasions and what factors it took into account on those occasions in making the decision to purchase ammonia, in order to cast light on how the plaintiff made the decision to purchase, and what factors it took into account in making the decision to purchase, the replacement ammonia on 18 September 2001. The purpose, as I understood it, is, simply by way of comparison with other occasions, to test the veracity of the plaintiff's claim that the sole purpose of the purchase of the replacement ammonia was to maintain the stockpile so as to avoid a reduction in turnover or output as a result of the compressor failure.

50 I do not consider that, on that basis, the documents are sufficiently material to the matters in issue and I would not require discovery of them.

51 In the course of argument, counsel for the defendant submitted that, as the purchase occurred at about the time of the scheduled statutory shutdown in October 2001, the documents relating to the purchase of ammonia in October 2001 were also relevant to the purpose for which the replacement ammonia was purchased and whether the plaintiff derived other benefits from it. I accept that the documents relating to the October 2001 purchase are relevant on that basis.

52 I consider that the documents in the third category, that is, documents relating to ammonia production, sales and turnover from September 2001 to 31 March 2002, are sufficiently relevant to the matters in question and are discoverable. They go to the defendant's plea that the replacement ammonia was purchased for the purpose of increasing sales of ammonia, meeting expected reductions in turnover and output due to future planned or unplanned shutdowns or replacing the need for other, future purchases of ammonia. They also relate to the adjustments which the defendant pleads are applicable to take account of the trends and circumstances of the plaintiff's business.

53 While the plaintiff contends that that plea is without merit or logic because the plaintiff demonstrably required the replacement ammonia to maintain its usual stockpile on site and did not make the purchase for any other purpose, the fact remains that that is a matter in issue between the parties and, in my view, the defendant is entitled to discovery of the documents.

54 I would therefore order the plaintiff to provide discovery of:

(a) all documents in relation to the statutory maintenance shutdown of the ammonia plant in October 2001;

(b) all documents in relation to its purchase of, and its decision to purchase, ammonia in October 2001; and

(c) all documents in relation to ammonia production, sales and turnover from September 2001 to 31 March 2002.

55 I will hear the parties on the time within which discovery should be given and on costs.