Leave to the Applicant in both proceedings ('Boral') to appeal on Ground 1A of its draft second further amended notice of appeal and on the question of whether s 122(2) was ever engaged.
THE COURT ORDERS THAT:
Boral file a notice of appeal with those two grounds within 1 day hereof.
The appeal be allowed with costs.
Ruling 3 made on 9 September 2024 be set aside and in lieu thereof rule that:
'The applicants not be permitted to adduce evidence in cross-examination of Mr Kane of representations, being representations made by persons within Ernst & Young LLP (EY), received or communicated to Mr Kane prior to 8:49am on 25 January 2020, being communications recording or referring to findings by EY about the controls that existed in the Windows business'.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
THE COURT:
These applications for leave to appeal arise from rulings given by a judge during the conjoint trial of two investor class actions. The class actions involve allegations that Investors purchased shares in Boral at an overvalue due to a failure on Boral's part to disclose to the market accounting irregularities in certain parts of one of its subsidiaries. One question in the litigation concerns the adequacy of the accounting controls at the subsidiary. Boral has opened the trial on the basis that the accounting controls at the subsidiary were adequate.
On the eighth day of the trial, 26 August 2024, Boral's former chief executive officer Mr Michael Kane was being cross-examined about an email sent by him on 25 January 2020 to Boral's company secretary, Mr Dominic Millgate, Boral North America's chief executive officer, Mr David Mariner, and Boral North America's Vice-President and General Counsel, Mr Ernest McLean. The pertinent part of the email is underlined below:
David [Mariner] - for next weeks call you and Oren [Post, CFO of Boral North America] need to be prepared, in addition to a further explanation of what you are doing to respond to market (and Karen's question on Windows document ex Houston), yo both need to tell Board how we missed the opportunity presented by this Magnolia letter. Lastly, if controls were as bad as EY suggests how did KPMG, inside audit and Allen and Oren miss it.
(emphasis added; typographical errors in the original)
The role of Ernst & Young ('EY') in the matter arises from the fact that Boral had retained external lawyers in the United States, Alston & Bird ('A&B'), to provide advice to it about the events at the subsidiary. A&B then retained EY to carry out certain activities for it in relation to the subsidiary. The terms of the retainer between A&B and EY show that, subject to any question of waiver, communications passing between EY and A&B in relation to the subsidiary would be privileged. The retainer envisaged that EY would provide at least one report to A&B. It is not clear whether EY did provide a report but, in light of its retainer, it may be inferred that it did.
A&B produced three reports for Boral about the events at the subsidiary. In an earlier interlocutory dispute heard by Rares J, it was held that these three reports were the subject of valid claims for legal professional privilege: Parkin v Boral (Privilege Argument) [2022] FCA 1467.
The cross-examiner sought to elicit from Mr Kane evidence about any communications he had received from EY prior to sending the above email which recorded or referred to findings by EY about the accounting controls which existed at the subsidiary. Objection was taken to this line of questioning by counsel for Boral on the ground that it would disclose privileged communications. Boral's submission was that since communications from EY to A&B were privileged, asking Mr Kane to reveal the contents of any communications from EY about the accounting controls at the subsidiary prior to the time he sent his email would involve disclosure of privileged material.
Argument then ensued on a voir dire. During the voir dire, the email chain containing the email set out above was tendered as Exhibit A1 and the Investors indicated that they wished to tender it at trial. Importantly, Boral did not object to the tender of Exhibit A1 on the basis that it was a privileged communication.
Having heard argument on the voir dire on 26 August 2024, the trial judge then reserved judgment on the objection. Whilst his Honour considered the objection, he adjourned any further hearing of the trial. On 9 September 2024, the trial judge then resumed the hearing and made these two rulings:
Exhibit A1 on the voir dire be admitted as evidence in the trial and be given the same exhibit marking in the trial.
The applicants be permitted to adduce evidence in cross-examination of Mr Kane of representations, being representations made by persons within Ernst & Young LLP (EY), received or communicated to Mr Kane prior to 8:49am on 25 January 2020, being communications recording or referring to findings by EY about the controls that existed in the Windows business (subject to further rulings relating to any objections to individual questions).
At the same time, his Honour delivered reasons for these rulings: Parkin v Boral Limited (Loss of Privilege Issue) [2024] FCA 103 ('TJ'). Leaving aside their form, the trial judge's view of the types of questions Mr Kane could be asked was preliminary ([TJ[121]) and appears at TJ[119]-[120]:
119 Reduced to its essence, what the applicants propose to do is to cross-examine a witness about a previous representation the witness made in a document he created. This is hardly novel nor surprising. I am not ruling upon specific questions now, but given the facts put in issue by Boral, it is easy to envisage questions that might be thought to arise in relation to one of those representations, the relevant communication. Leaving aside the specific matters referred to above about the controls, which render the relevant communication opaque, and are part of the reason why s 126 is engaged, other questions can be legitimately asked in cross examination, including after the relevant communication is "thoroughly understood". These include: (a) confirming whether Mr Kane believed at the time that he wrote the email that he had appropriately characterised what he understood EY had conveyed; (b) what was the basis of this belief; (c) what weight he gave to it, if any, in forming his own assessment about adequacy of controls; (d) if he disagreed with what he understood EY had conveyed; (e) if he did disagree, the reasons why; and (f) why he raised the question he then directed to his fellow Boral officers based upon the relevant communication: "if controls were as bad as EY suggests how did KPMG, inside audit and Allan and Oren miss it?".
120 It may be that there are further questions directed to the end of testing whether Mr Kane adheres to his view, expressed in chief, as to his current belief as to the adequacy of the controls and the reasonableness of such a belief.
This shows that Ruling 3 permits both questions of Mr Kane whose answers will disclose his understanding of EY's findings when he sent Exhibit A1, and the testing of that understanding. In this Court, Boral submitted that Ruling 3 would lead to the Investors seeking the production of documents concerning EY's findings and the three legally privileged A&B reports. The Investors resisted, submitting that this would depend on Mr Kane's answers. This debate is irrelevant. Ruling 3 permits the eliciting of Mr Kane's views about EY's findings and therefore the findings themselves. It does not appear to be in dispute that those findings are subject to legal professional privilege. Ruling 3 therefore permits questions of Mr Kane whose answers will disclose communications which are subject to legal professional privilege.
Having delivered judgment, the trial judge then further adjourned the trial to 11 September 2024 at which time his Honour determined that he would adjourn the trial sine die. This was to give Boral the opportunity to apply for leave to appeal the rulings: Parkin v Boral (Loss of Privilege Issue) (No 2) [2024] FCA 1082. Boral then sought leave to appeal and expedition of that application.
Upon the trial being listed for the further cross-examination of Mr Kane on Thursday 19 December 2024, expedition was granted. The application was heard by the Full Court on Friday 22 November 2024 and final written submissions were received on Friday 29 November 2024.
There was no issue as to the principles to be applied in determining whether leave should be given. They are well known. They were summarised in KTC v David [2022] FCAFC 60 at [18]-[20] per Wigney J (Jackson J agreeing) in terms that we adopt for present purposes.
Boral's two contentions on the question of leave were: (a) if Ruling 3 stood, evidence of privileged communications would become public and privilege would be lost; and (b) its proposed grounds had substantial merit.
For present purposes, the prejudice may be accepted. The competing contentions of the parties focussed on the merits of the proposed grounds.
Boral's contentions turn on the provisions of the Evidence Act 1995 (Cth). The relevant provisions are ss 118, 122(1)-(3), 126 and 135. These are as follows:
Section 118: Legal advice
Evidence is not to be adduced if, on objection by a client, the court finds that adducing the evidence would result in the disclosure of:
(a) a confidential communication made between the client and a lawyer; or
(b) a confidential communication made between 2 or more lawyers acting for the client; or
(c) the contents of a confidential document (whether delivered or not) prepared by the client, lawyer or another person;
for the dominant purpose of the lawyer, or one or more of the lawyers, providing legal advice to the client.
Section 122: Loss of client legal privilege: consent and related matters
(1) This Division does not prevent the adducing of evidence given with the consent of the client or party concerned.
(2) Subject to subsection (5), this Division does not prevent the adducing of evidence if the client or party concerned has acted in a way that is inconsistent with the client or party objecting to the adducing of the evidence because it would result in a disclosure of a kind referred to in section 118, 119 or 120.
(3) Without limiting subsection (2), a client or party is taken to have so acted if:
(a) the client or party knowingly and voluntarily disclosed the substance of the evidence to another person; or
(b) the substance of the evidence has been disclosed with the express or implied consent of the client or party.
Section 126: Loss of client legal privilege: related communications and documents
If, because of the application of section 121, 122, 123, 124 or 125, this Division does not prevent the adducing of evidence of a communication or the contents of a document, those sections do not prevent the adducing of evidence of another communication or document if it is reasonably necessary to enable a proper understanding of the communication or document.
Example: A lawyer advises a client to understate her income to avoid tax liability, referring to a previous letter dated August 11, 1994. In tax evasion proceedings against the client, the contents of that letter may be admissible to understand the second letter, even if it would otherwise be privileged.
Section 135: General discretion to exclude evidence
The court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might:
(a) be unfairly prejudicial to a party; or
(b) be misleading or confusing; or
(c) cause or result in undue waste of time.
As has been mentioned, Boral did not object to the tender of Exhibit A1 on the basis that it was a privileged communication. That is to say, it did not seek to invoke s 118. It did however object to the tender on the basis that Exhibit A1 was not relevant within the meaning of s 55 and it submitted that even if it was admissible under s 55 the Court should exercise its discretion to exclude the evidence under s 135.
On the voir dire, the Investors had argued that Exhibit A1 was a privileged communication, that s 122 applied to it, and therefore that the questioning of Mr Kane about it was justified under s 126. They submitted that Exhibit A1 was privileged because it disclosed the substance of privileged communications from EY to A&B.
In making the two rulings, the trial judge reasoned that the email was a privileged communication to which s 118 applied because it disclosed the substance of communications from EY to A&B. That privilege had been lost pursuant to s 122. Since Exhibit A1 had been adduced as a result of the operation of s 122, his Honour next reasoned that s 126 had been enlivened. In terms of s 126, his Honour concluded that Mr Kane could be questioned about what EY had communicated about the accounting controls at the subsidiary because it was 'reasonably necessary to enable a proper understanding of' what Exhibit A1 meant. His Honour rejected Boral's submissions that Exhibit A1 was inadmissible because it was irrelevant to any fact in issue, that its tender should be rejected under s 135 and that the Investors' efforts to deploy s 126 were an abuse of process in light of the earlier ruling by Rares J that the three A&B reports were privileged.
The trial judge's conclusion that s 126 applied in the present case should be reversed for two reasons.
[2]
First reason: Exhibit A1 was not adduced in evidence as a result of the operation of s 122(2)
Section 126 could only be engaged if Exhibit A1 had been adduced under, relevantly, s 122. The only relevant part of s 122 is s 122(2). It is clear that Exhibit A1 was not tendered by the Investors under s 122(2). Section 122(2) refers to a client or party 'objecting' to the adducing of evidence. Since s 122(2) operates as an exception to s 118, it necessarily follows that the act of objection to which the provision refers is the 'objection' referred to in s 118 (or, where relevant, the objections referred to in ss 119 or 120). The operation of the prohibition in s 118 and the exception to that prohibition in s 122(2) requires for either to be relevant that Boral should have objected to the tender of Exhibit A1 under s 118. But Boral made no such objection. Its objection was that Exhibit A1 was irrelevant or that its tender should be excluded under s 135. Without any objection from Boral on the ground of privilege, the trial judge was not called on to decide whether any such claim could be overcome because of s 122(2) and, indeed, it is clear that his Honour made no decision that Exhibit A1 should be admitted under s 122(2). It is impossible to say therefore that the operation of s 122(2) has resulted in Exhibit A1 being adduced into evidence. That being so, it follows that s 126 could not have been engaged.
This problem was raised by the Court with counsel for the Investors during argument: T53.6-56.2. Counsel submitted that s 126 was engaged because it 'pick[ed] up th[e] common law waiver' which had occurred before Rares J: T55.10-15. That submission cannot be reconciled with the text of s 126. Section 126 can only apply if, relevantly, s 122(2) has first been enlivened. Section 122(2) cannot be enlivened without an objection on the ground that the communication is privileged under s 118 and a determination by the Court under s 122(2) that the privilege has been lost. There was no such objection and the trial judge made no such ruling.
The Investors submitted that s 118 applies if an objection is taken to the admission of evidence, irrespective of whether the objection was taken on the ground of client legal privilege. However, that submission fails to have regard to the terms of s 118 which contemplate the making of findings as to particular matters if an objection is taken. The matters about which findings are to be made concern whether the evidence to be adduced is of a confidential communication between a lawyer and client or a confidential document prepared by a lawyer or client. Necessarily implicit in that language is the making of an objection on a basis that invites the Court to make such findings.
It was further contended for the Investors that to require an objection to be taken on the basis of privilege in order for the prohibition expressed in s 118 to arise, would be to encroach on the right to the privilege 'by prescribing the manner of its exercise'. However, the construction we prefer does no more than require the party claiming privilege to exercise the right which protects the confidentiality in the communications. The Investors' submission confuses the role of the Court in taking steps to ensure that a 'client' is afforded an opportunity to claim privilege (on the one hand) with the entitlement of the client to choose whether to do so (on the other). It has always been a matter for the party entitled to privilege to decide whether to exercise the right. It would be more than passing strange if a court was to be required to make findings as to whether proposed evidence would disclose a privileged communication even if the party who would have the right to claim any such privilege makes no claim to privilege.
These contentions tend to distract from the true forensic focus of the Investors, which is to seek to bring themselves within s 126 in order to be able to pursue a line of questions that goes beyond the terms of Exhibit A1. It was not suggested that there was some use to which Boral sought to put Exhibit A1 which meant that the privilege in the EY reports could not be maintained. Put another way, it was not suggested that Boral had acted in a way that was inconsistent with it objecting to evidence being adduced as to the content of the EY reports. There would be difficulties in that course in circumstances where Rares J had ruled against an interlocutory application by the Investors to inspect those reports.
Rather, the Investors sought to invoke s 126 on the basis that the questions they proposed to ask were necessary for a proper understanding of what was communicated by Exhibit A1. As we have explained s 126 only applied if Exhibit A1 was to be adduced by reason of exceptions to the prohibition in s 118. If the prohibition did not apply then there could be no exception and, consequently, s 126 could not apply.
Finally, the Investors contended that if an objection was 'in substance' taken (having regard to the course of conduct of a party) then s 118 is engaged. However, s 118 is concerned with whether evidence can be adduced, not whether there has been an earlier claim to privilege that is no longer maintained by the time that a communication is sought to be adduced into evidence. Further, the Investors' contention would result in a rather strange collateral investigation to determine whether a party who disavows any objection on the ground of privilege but maintains a different objection is, 'in substance', objecting on that basis. The purpose that might be served by an evidentiary provision of that kind is not evident.
This point is not contained in Boral's draft second further amended notice of appeal. It concerns the proper construction of the statutory provisions upon which the Investors seek to rely in pursuing further cross-examination of Mr Kane. The Investors have put on further written submissions to deal with the point. We would grant Boral leave to amend its notice of appeal to include the following ground:
The trial judge erred by assuming that Exhibit A1 had been adduced into evidence as a result of the operation of s 122(2) of the Evidence Act 1995 (Cth).
We would grant leave to appeal on this ground and allow the appeal.
[3]
Second reason: Exhibit A1 was never privileged (Grounds 1 and 1A)
As the trial judge correctly held, Exhibit A1 will have been privileged if it disclosed the substance of other privileged communications. The other privileged communications were between EY and A&B. The question is whether Mr Kane's statement in Exhibit A1 'if controls were as bad as EY suggests' constitutes a disclosure of the substance of other communications between EY and A&B.
There is a tension between the trial judge's finding that Mr Kane's statement in Exhibit A1 had disclosed the substance of communications from EY to A&B (so that Exhibit A1 had at one time been privileged) and his subsequent finding under s 126 that questioning of Mr Kane was reasonably necessary to enable a proper understanding of Exhibit A1: TJ[115].
As to the former, the trial judge accepted that the substance of a communication would be disclosed if it supported an inference of fact as to the content of a confidential communication or document which had a definite and reasonable foundation: TJ[55], citing Re Southland Coal Pty Ltd (Receivers and Managers Appointed) (In Liquidation) [2006] NSWSC 899; 203 FLR 1 ('Re Southland Coal') at [14(e)] per Austin J. The parties agreed that this was a correct statement of principle. His Honour then reasoned that whilst Mr Kane's statement in Exhibit A1 that 'if controls are as bad as EY suggests' might have been opaque, nevertheless, it was a broad summation of the effect or substance of what EY told A&B: TJ[57].
As to the latter, the trial judge again accepted that Mr Kane's statement in Exhibit A1 that 'if controls were as bad as EY suggests' was opaque: TJ[113]. It was opaque because it did not disclose:
the actual controls to which Mr Kane was referring, the time such controls were in place, and any explanation as to why Mr Kane believed that EY had concluded that the controls were, in an ambiguous, general and unparticularised sense, "bad".
His Honour felt that the Investors were entitled to explore those issues 'including whether Mr Kane understood EY was referring to a lack of integration, manual processes, or any delay in implementing a perpetual inventory system': TJ[114].
It follows from his Honour's conclusions in relation to s 126 that Exhibit A1 could not disclose the substance of the communications between EY and A&B. The terms of Exhibit A1 did not support an inference of fact as to the content of those communications which 'ha[d] a definite and reasonable foundation': Re Southland Coal at [14(e)] per Austin J. As the trial judge found at TJ[113]-[114], Exhibit A1 did not disclose:
the actual controls to which Mr Kane was referring;
the time such controls were in place;
why Mr Kane believed that EY had concluded that the controls in an ambiguous, general and unparticularised sense were 'bad';
whether EY was referring to a lack of integration;
whether EY was referring to manual processes; or
whether EY was referring to delay in implementing a perpetual inventory system.
These findings cannot be reconciled with his Honour's earlier conclusion that Exhibit A1 represented a broad summation of the effect or substance of the communications from EY to A&B (so that Exhibit A1 had once been privileged). The substantial uncertainties correctly detected by the trial judge in Exhibit A1 (when dealing with s 126) show that Exhibit A1 could not disclose the substance of what EY had told A&B.
This issue is raised by Ground 1A of the draft second further amended notice of appeal. We would grant leave to appeal in relation to Ground 1A and allow the appeal. In light of this conclusion it is unnecessary to consider or to grant leave on proposed Ground 1.
For those reasons, leave to appeal should be granted in respect of Ground 1A and the additional ground referred to at [27] and the appeal allowed. It remains to consider Boral's other arguments.
[4]
Necessity under s 126 (Grounds 3 and 3A)
Had Exhibit A1 been privileged (which it was not), had objection been taken by Boral to its tender on the basis of s 118 (which it did not), and had his Honour admitted Exhibit A1 into evidence under s 122(2) (which he did not), then the question would arise whether the trial judge's approach to s 126 was correct.
There are difficulties in assessing whether the trial judge erred in his approach to this because it is necessary to assume a state of affairs which is not correct and, in particular, to assume that Exhibit A1 did disclose the substance of advice given by EY to A&B. We do not think that it is useful to consider whether his Honour's approach to s 126 was correct on this false assumption. His Honour's analysis of what was reasonably necessary to enable a proper understanding of Exhibit A1 cannot be disaggregated from his conclusion that Exhibit A1 disclosed the substance of communications passing from EY to A&B.
Since this issue does not arise and cannot meaningfully be assessed in light of our conclusion that s 126 could not have been enlivened, no purpose is served by granting leave to appeal on Grounds 3 and 3A and we decline to do so.
[5]
Abuse of process (Ground 2)
Boral submitted to the trial judge that permitting the Investors to adduce evidence from Mr Kane about prior communications from EY on the topic of the accounting controls at the subsidiary constituted an abuse of process. Here the thinking was that it was inconsistent with the fact that Rares J had held that the three A&B reports were privileged. Rares J did not hold, but as already noted it does not appear to be in dispute, that whatever EY communicated to A&B was, in principle, privileged.
To get to this part of the appeal one must assume:
Exhibit A1 was privileged;
Boral objected to its tender on the basis that it was privileged under s 118; and
the trial judge admitted Exhibit A1 under s 122(2).
These assumptions bear no resemblance to reality. Exhibit A1 was never privileged, Boral did not object to its tender on the basis that it was privileged and at no point did the trial judge ever admit it under s 122(2). We do not consider it useful to speculate whether, if those assumptions were correct, it would have been an abuse of process by the Investors to seek to question Mr Kane under s 126. Leave should not be granted in relation to the abuse of process contention in Ground 2.
[6]
Relevance and discretionary exclusion under s 135 (Grounds 4-6)
The trial judge rejected Boral's contention that Exhibit A1 was not relevant to a fact in issue or should have been rejected under s 135. We would not grant leave in relation to either of these grounds. Boral's case is that the accounting controls were satisfactory. Exhibit A1 showed that Mr Kane was aware that EY had said the accounting controls were bad. Plainly, Exhibit A1 is capable of bearing upon that question. The trial judge was correct to conclude that it was relevant. In relation to s 135, Boral had submitted that the trial judge had failed to take into account the disruptions to the trial that the questioning would cause and its lack of probative value. The trial judge examined both matters in detail and we are unpersuaded that any error is shown in his Honour's approach. Leave in relation to Grounds 4-6 should be refused.
We observe at this point that Boral's challenge to Ruling 2 is contained in these grounds. That challenge proceeded from the premise that the proposed cross-examination is not relevant or ought to be discretionarily excluded, to the conclusion that the tender of Exhibit A1 for the purposes of that cross-examination was erroneous. The failure of Grounds 4-6 therefore carries with it the failure of Boral's challenge to Ruling 2.
[7]
Common law privilege
The Investors also submitted that Boral should not be permitted to rely upon any common law privilege in Exhibit A1. As we have explained, the merits of the appeal do not depend upon any point of that kind.
[8]
Costs
Boral has been substantially successful. The Investors sought to reserve their ability to contend for costs orders by reason of what they said was the late advancement of new arguments concerned with the scope of s 126. Having regard to the overall outcome, we are not persuaded that the discretion as to costs would be properly exercised by making some provision for individual issues, especially where we have not substantively determined the points in relation to s 126.
[9]
Appeals on evidentiary rulings
Generally speaking, the Full Court will not grant leave to appeal in relation to rulings made by a trial judge on evidentiary matters arising during the course of a trial and the Court's reasons ought not be taken as any kind of encouragement for such a practice. However, two matters took the case outside that ordinary principle. First, Ruling 3 was, as his Honour correctly apprehended, a possibly irreversible step on a central issue which might not have been able to be undone if the matter were left to any appeal after final judgment. In particular, the questioning of Mr Kane about privileged matters was likely to have several practical consequences for the running of the trial which could not be undone even if the Full Court subsequently held Ruling 3 to be in error.
Secondly, the trial judge adjourned the trial so that a leave application could be pursued. The principle to which we have referred exists to prevent the fragmentation of trials which are underway. In this case, the trial judge's adjournment of the trial whilst reserved on Ruling 3 together with the subsequent adjournment of the trial sine die means that fragmentation has already occurred and the principle of non-intervention has no work to do on its own.
[10]
Result
We would make the following orders:
Grant leave to Boral to appeal on Ground 1A of its draft second further amended notice of appeal and on the question of whether s 122(2) was ever engaged.
Boral file a notice of appeal with those two grounds within 1 day hereof.
The appeal be allowed with costs.
Ruling 3 made on 9 September 2024 be set aside and in lieu thereof rule that:
'The applicants not be permitted to adduce evidence in cross-examination of Mr Kane of representations, being representations made by persons within Ernst & Young LLP (EY), received or communicated to Mr Kane prior to 8:49am on 25 January 2020, being communications recording or referring to findings by EY about the controls that existed in the Windows business.'
I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Perram, Colvin and Abraham.