Esso Australia Resources Pty Ltd & Anor v BHP Billiton Petroleum

(a) Esso was not bound to make discovery of certain documents in respect of which it claims legal professional privilege;

(b) there be separate trials of the respondent's ('BHP's') claim and Esso's counterclaim;

(c) the hearing of the counterclaim be stayed pending the hearing and determination of BHP's claim; and

(d) until then, Esso not be required to make discovery in the counterclaim.

2 In order to succeed, Esso needed to establish that his Honour's decision was attended with sufficient doubt to warrant its being reconsidered on appeal and that substantial injustice would arise if the decision were left to stand. At the conclusion of argument, we announced that leave to appeal would be refused, and that we would publish our reasons subsequently. These are our reasons.

**3 Esso and BHP (through their respective companies) are parties to a joint undertaking to recover hydrocarbons from Bass Strait and process them at facilities at Longford in Victoria which they jointly own, but which are operated by Esso. The parties' relationship in that respect is governed by an operating agreement which relevantly provides that expenditures made for the joint undertaking are to be borne equally by the parties 'unless [the expenditure relates to] injury, loss or damage ... caused by the gross negligence or wilful misconduct by [Esso] in directing or supervising the Joint Undertaking'. For this purpose, shared expenditures are defined to include 'costs of litigation or arbitration, reasonable outside counsel fees and payments made in settlement or satisfaction of any such claim'.

4 Following the notorious explosion and fire at the Longford facility on 25 September 1998, BHP brought a claim against Esso for over $400 million for breach of contract and negligence. Shortly afterwards, Esso commenced a proceeding against BHP, seeking recovery, pursuant to the operating agreement, of one half of the expenditure that it incurred as a result of the accident.

5 Relevantly for present purposes, Esso claimed reimbursement of half of its legal costs associated with the explosion and fire, including the costs of defending itself at the Royal Commission of Inquiry into the event and of defending itself against the criminal charges and civil claims arising from it. Esso claims approximately $54 million, of which approximately $31 million is for legal costs. BHP has refused to meet Esso's claim. Subsequently, the two proceedings were consolidated (without objection from Esso).

6 Esso replicated its claim as a counterclaim in the consolidated proceeding and pleaded its claim for reimbursement as a set-off against BHP's claim. In its reply and defence to counterclaim, BHP alleged that the expenditures claimed by Esso were not recoverable under the agreement because:**

(a) they resulted from Esso's breaches of the operating agreement;

(b) they were expenditures caused by the gross negligence of Esso in directing or supervising the joint undertaking;

(c) to the extent that the expenditures comprised 'outside counsel fees', they were not reasonably incurred; and

(d) to the extent that the expenditures were in respect of the defence of lawsuits arising out of the joint undertaking, there was no consultation with the supervisory committee as required by Article 4.04(e) of the operating agreement.[1]

7 A judge of the Trial Division ordered that the parties provide mutual discovery. To date, this has resulted in the parties making discovery of tens of thousands of documents. Esso, however, has not made discovery of documents relevant to its claim for reimbursement of legal costs, which Esso claims are subject to legal professional privilege. When BHP's solicitors sought discovery of those documents, Esso applied for the above orders.

**8 The learned primary judge concluded that Esso had waived legal professional privilege in respect of the relevant documents. He noted that Esso had accepted that 'a high proportion, if not all' of the documents were relevant to both BHP's claim and Esso's counterclaim and to the claim brought by the respondents. In particular, the judge referred to the written acknowledgement by Esso's counsel that the relevant documents constituted 'the best, and possibly the only, evidence' available to Esso by which it could demonstrate the reasons for, the nature of and the reasonableness of the legal costs that it claims from BHP.

9 His Honour referred to authorities that deal with the question of implied waiver in a context relevant to the present situation, in particular, Mann v Carnell ('Carnell'),[2] Commissioner of Taxation v Rio Tinto Ltd[3] ('Rio Tinto') and Secretary to the Department of Justice v Osland.[4] He concluded that Esso had impliedly waived any privilege it may have had in relation to the documents. His Honour said: 'Esso has laid the contents of the privileged documents open to scrutiny, both in respect of proof of its counterclaim and in respect of defences reasonably raised by BHP'.

10 The judge also rejected Esso's argument that, if there had been waiver, it was confined to its counterclaim as a separate proceeding, such that there was no obligation on Esso to discover any of the relevant documents in relation to BHP's claim. As noted earlier, Esso argued that BHP's claim should be heard and determined before the hearing of Esso's counterclaim, a submission his Honour also rejected. The judge considered that the conduct of Esso in bringing its claim (and in pursuing its set-off as a defence to BHP's claim) was inconsistent with its contention that any relevant waiver by it should be confined to the counterclaim.**

**11 Before us, Esso accepted that his Honour had correctly identified the applicable principles regarding implied waiver of privilege. Its contention was that the judge misapplied the principles.

12 The primary submission was that his Honour erred in concluding that the commencement by Esso of its counterclaim was inconsistent with the maintenance by Esso of confidentiality in the privileged documents. Esso argued that, having commenced its counterclaim, it retained the 'right to elect whether to waive privilege over the relevant documents in order to prove aspects of its counterclaim or maintain privilege in relation to them and thus risk failing to prove those aspects'. Esso contended that the mere fact that a matter had been put in issue in a proceeding by way of pleading did not mean that the privilege inhering in a communication relevant to that issue was waived. According to the submission, an election to waive privilege 'is not necessarily made merely by bringing a claim'.

13 In our view, his Honour correctly treated the case as calling for an orthodox application of the principles clearly enunciated in Carnell. Applying Carnell, the issue which his Honour had to decide was whether Esso's conduct in pleading its claim for reimbursement of legal costs was inconsistent with the maintenance of confidentiality in documents relevant to that claim. If it was, privilege had been waived. If it was not, there was no waiver. Either way, no question of 'election' arose.

14 That a party may waive privilege by the mere institution of proceedings is not in doubt. The second of two examples of implied waiver given by the High Court in Carnell was that of a client instituting proceedings against a lawyer for professional negligence. By that conduct, the client waives privilege, and the lawyer can give evidence as to advice given to the client. The case cited in Carnell was Lillicrap v Nalder & Son (a firm),[5] in which Dillon LJ adopted the following formulation of the scope of the implied waiver:**

A client who sues his solicitor invites the court to adjudicate the dispute and thereby ... waives privilege and confidence to the extent that is necessary to enable the court to do so fully and fairly in accordance with the law including the law of evidence.[6]

... [B]y bringing civil proceedings against his solicitor, a client impliedly waives privilege in respect of all matters which are relevant to the suit he pursues and, most particularly, where the disclosure of privileged matters is required to enable justice to be done.[7]

15 It could hardly be doubted that disclosure of Esso's privileged documents is required 'to enable justice to be done' between itself and Esso. In its written submissions before the primary judge, Esso acknowledged that in order to succeed on its counterclaim it would need to prove in respect of each 'claimed expenditure' on legal costs that it was -

(b) made 'for the joint undertaking' within the meaning of the operating agreement;

(d) not incurred as a result of Esso's gross negligence.

**16 Improbably, however, senior counsel for Esso declined to concede before us that he would, at trial, need to tender at least some of the privileged documents in order to prove Esso's case for reimbursement. He even refused to concede that counsel for BHP would be entitled to inspect the privileged documents in order to be able to test - and contest - the reimbursement claim. It would not, he argued, be unfair to deny BHP that opportunity. It is self-evident, in our view, that it would be grossly unfair. As the High Court made clear in Carnell, the application of the inconsistency test should "where necessary [be] informed by considerations of fairness".[8]

17 In our view, the position here is relevantly similar to that in Rio Tinto. In particulars filed in the tax appeal proceeding, the Commissioner said that he had taken into account matters in the privileged documents in coming to the impugned assessment decision. In doing this, the Full Court said, the Commissioner did more than concede the relevance of the privileged documents; he put their contents in issue. He '[laid] open the privileged documents to scrutiny'.[9]

18 Esso's counterclaim puts in issue whether its expenditure on legal costs fell within the operating agreement and that, in turn, depends on the nature and purpose of the legal work which occasioned the payments. The documents in question are plainly relevant to these issues. By making its claim for reimbursement, Esso made an assertion about the contents of the documents. Esso thereby laid the documents open to scrutiny. It would plainly be inconsistent for it now to maintain a claim for confidentiality in respect of them, even if we accepted the possibility that Esso might choose not to rely on the documents in the proceeding.

19 Nor do we doubt the correctness of his Honour's decision to distinguish Giannarelli v Wraith [No. 2][10] ('Giannarelli') from the present situation. The claim by Esso is not analogous to the submission of a bill of costs for taxation. Here, Esso's conduct in claiming reimbursement of its costs created the relevant inconsistency. In Giannarelli, on the other hand, no inconsistency arose by the submission of the bill of costs for taxation. Any incompatibility, if it was to arise, would arise later, when privileged documents were sought to be tendered. At that point the party would be required to elect whether to waive the privilege. That would be an express waiver. Here, however, the waiver was not express but implied. It was not dependent upon any election by Esso subsequent to the launching of its case.

20 Nor could the effect of Esso's waiver have been limited to the counterclaim, given the interrelationship of the principal issues in BHP's claim on the one hand and Esso's set-off and counterclaim on the other. As noted earlier, the contractual provision on which Esso founds its claim for reimbursement contains an exclusion for expenses occasioned by Esso's gross negligence. By pleading reliance on that provision, Esso put in issue all of the contractual criteria - qualifying and disqualifying alike - which governed its entitlement to reimbursement. It matters not for this purpose that it was for BHP to plead by way of defence - as it has done - that the legal expenses were occasioned by Esso's gross negligence and are hence not recoverable.

21 It is common ground that the factual matters relevant to the 'gross negligence' aspect of BHP's defence to Esso's counterclaim are the very matters which found BHP's claim against Esso for damages. Documents which the counterclaim makes discoverable - and free of privilege - are available for use in the conduct of the principal claim. This is routine civil procedure. Were it otherwise, the absurd situation would be created in the present case where BHP's 'gross negligence' defence to Esso's counterclaim was litigated by reference to the privileged documents, but BHP's negligence claim against Esso (arising out of the same facts) was litigated without them.

22 But the position is made even clearer by the fact that Esso has pleaded its reimbursement claim as a set-off to BHP's primary claim. Axiomatically, the defence of set-off must be determined in the principal proceeding. The privileged documents, 'laid open for scrutiny' by the pleading of the set-off, are therefore available for use by BHP in the prosecution of its claim, as the primary judge said. Esso made some play of the fact that it had, before the hearing of its application, 'offered' to abandon its set-off. But it did not do so, and the defence remains on foot.

23 As is made plain in Goldberg v Ng,[11] the circumstances in which implied waiver occurs may be such that it can be taken to operate in relation to all aspects of the relevant proceeding. The ambit or extent of the waiver must depend on the circumstances of the particular case.

24 Esso challenges his Honour's decision not to stay the hearing of the counterclaim until BHP's claim is heard and determined. That decision was made in the exercise of judicial discretion in a matter of practice and procedure. Appellate courts are, for good reason, reluctant to interfere with such decisions.[12] In any event, we consider that it is not reasonably arguable that his Honour erred in principle in exercising the discretion, or that his decision is plainly wrong. On the contrary, the decision is entirely understandable given the desirability of determining, in the one proceeding, all matters concerning alleged gross negligence by Esso. To split this complex trial would delay its resolution for an unacceptable period and would give rise to the risk of inconsistent findings.

25 Before the primary judge, and again before us, Esso argued that issue estoppel would remove the possibility of inconsistent findings. In our view, his Honour was correct to reject the argument on the grounds of unfairness. As his Honour said:**

... [I]f the waiver is confined to the counterclaim only, this would mean that evidence of the contents of the privileged documents would not be admissible to determine the common question of gross negligence in the BHP proceeding, but would be admissible to determine that question in the counterclaim. This could give rise to inconsistent decisions on the same question. Counsel for Esso submitted that this risk would not eventuate if the Court ordered that the trial of the counterclaim take place after the hearing and determination of the plaintiff's claim, because an issue estoppel on the common question of gross negligence would arise from a determination of that issue on the plaintiff's claim. In other words, Esso submits that the gross negligence issue should be determined once, and for all purposes, in the absence of the privileged documents, with the result that BHP will be unable to effectively use the privileged documents to support its gross negligence defence to the counterclaim. In circumstances where the mounting of that counterclaim has given rise to the waiver of privilege, this would be an obviously unfair result. This reinforces my view that it is inconsistent for Esso to mount its claim and continue to insist on the maintenance of its privilege in relation to BHP's claims against it. [13]

26 For these reasons, we concluded that Esso's appeal had insufficient prospects of success to warrant a grant of leave to appeal.

[1] See BHP Billiton Petroleum (Bass Strait) Pty Ltd v Esso Australia Resources Pty Ltd & Ors [2007] VSC 281, [10]. Article 4.04(e) gives Esso the specific power: 'To engage legal counsel and, subject to consultation with the Supervisory Committee, prosecute and defend lawsuits arising out of the Joint Undertaking.'

[2] [1999] HCA 66; (1999) 201 CLR 1.

[3] [2006] FCAFC 86; (2006) 151 FCR 341.

[4] [2007] VSCA 96.

[5] [1993] 1 WLR 94.

[8] Carnell [1999] HCA 66; (1999) 201 CLR 1, 13 (Gleeson CJ, Gaudron, Gummow and Callinan JJ).

[9] [2006] FCAFC 86; (2006) 151 FCR 341, [52], [65].

[10] [1991] HCA 2; (1991) 171 CLR 592.

[11] [1995] HCA 39; (1995) 185 CLR 83, 98 (Deane, Dawson and Gaudron JJ).

[12] Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; (1981) 148 CLR 170, 176-178 (Gibbs CJ, Aickin, Wilson and Brennan JJ).

[13] BHP Billiton Petroleum (Bass Strait) Pty Ltd v Esso Australia Resources Pty Ltd & Ors [2007] VSC 281, [35].