Field v Commissioner for Railways for New South Wales [2016] NSWSC 386 | Case summary

principal proceedings - the ultraceutical dispute

The first plaintiff (Dowling) sues the first defendant (Ultraceuticals) for damages for alleged breach of an agreement by which Ultraceuticals agreed to employ him. Dowling says that Ultraceuticals repudiated the agreement. The second plaintiff (Ofer), which is Dowling's company, is a shareholder in the second defendant (Investments), which is Ultraceuticals' holding company. Ofer seeks to enforce a share buy-back agreement between it and Investments, or alternatively, seeks relief, including a buy-out order for its shares in Ultraceuticals, on the grounds that the affairs of Ultraceuticals have been conducted oppressively.
Ultraceuticals brings cross-claims against Dowling, Ofer, Dowling's wife Pauline, one Daniel Raihani (who was the bookkeeper of Ultraceuticals) and Raihani's company, alleging misleading and deceptive conduct in connection with Ofer's original acquisition of its shares, misappropriation of funds, breach and participation in breach of fiduciary duty, and other wrongs.
For present purposes, only one of Ultraceuticals' cross-claims against Dowling and Ofer, and their response to it, are relevant.
Prior to becoming associated with Ultraceuticals, Dowling had a 50% interest in Star Car Wash Café Holdings Pty Ltd (Star), which, as its name suggests, carried on a car wash combined with café business. The other 50% of Star was owned by interests associated with one Richard Gavin Chimes (Chimes). Differences between Dowling and Chimes arose on business issues. Dowling describes the differences as irreconcilable. Chimes took the position that Dowling should leave Star, and they negotiated on the terms of Dowling's exit. This was achieved on 4 April 2012 by a written Deed of Termination and Release under which the Dowling interests in Star were acquired by the Chimes interests, which included Chimes' company, Tocco No 2 Pty Ltd (Tocco).
The gravamen of the relevant cross-claim, which is pleaded in paragraphs 9 to 14 of Ultraceuticals' Commercial List Cross-Claim Statement, is that in May 2011, in the course of negotiating Dowling's and Ofer's proposed association with Ultraceuticals with Dr Geoffrey Heber (Heber), the managing director of Ultraceuticals, Dowling and Ofer engaged in misleading and deceptive conduct, but for which, Ultraceuticals would not have entered into any agreements to obtain Dowling's services or for Ofer to acquire shares in Investments.
The misleading and deceptive conduct alleged is that on 10 May 2011, Dowling sent an email to Heber, in which he represented that he was then the Chief Executive Officer of Star, that Star had a turnover in excess of $25 million per annum, that he would continue to have an involvement with Star for at least the next four years, and that he would be a non-executive director of Star for the foreseeable future, when in fact, at the time, there was no real prospect of him continuing to have an involvement with Star for another four years, or acting as a non-executive director of Star for the foreseeable future, because:

Star had recently conducted an investigation into unauthorised drawings of Star's funds by Dowling,
Star had recently conducted an investigation into Dowling's misappropriation of Star's funds to pay for personal expenses incurred on his and his wife's credit cards,
Star had recently conducted an investigation into his mismanagement of Star's corporate funds and his administration of Star's business, and
the investigations conducted by Star had concluded that over the period of 2005 to 2011, Dowling had drawn $886,000 out of Star's business to which he was not entitled, and that over the period July 2008 to February 2010, he had misappropriated a further $292,000 of Star's funds to pay for personal expenses on his and his wife's credit cards.

Dowling and Ofer's response, which is pleaded in paragraphs 15 to 18 of their Commercial List First Cross-Claim Response, is that as at February 2011, Ofer had engaged in a process of sale of its 50% interest to Star, and as part of that process, a dispute arose between Dowling, Ofer and Tocco concerning the value of Dowling's loan account and certain drawings on it. They deny that Star conducted an investigation into unauthorised drawings of Star's funds by Dowling or mismanagement, as pleaded by Ultraceuticals. They do not deny that the investigation occurred, but they positively aver that any analysis or investigation as to those matters was an analysis or investigation done by Tocco for its negotiating purposes as part of the dispute concerning the value of Dowling's loan account and the drawings on it. I will call this dispute the "Star dispute".
The background to the Star dispute was that Chimes retained an accountant, one Kevin Gordon (Gordon), to conduct a review of Star's business and accounts. Chimes was concerned that Star's accounts did not correctly reflect the financial state of Star's business, and in particular, its cash flows. Gordon (who gave affidavit evidence and was cross examined) reviewed Dowling's loan account and identified apparent irregularities. He reported his findings to Chimes in writing in early 2012.
Dowling (who gave affidavit evidence, but was not cross examined) says that in order to resolve his "dispute" with Chimes, agreement had to be reached on the terms of his exit and the sale of his interest in Star. He says that as part of the negotiations, a dispute arose about the value of the Star business. He says the essence of the dispute was the reconciliation of his and Chimes' loan accounts with Star.
Dowling says further that in the course of seeking to resolve "the loan account dispute", he had a number of communications with Chimes and Gordon for the purpose of first, attempting to come to an agreed value of the Star business and then, coming to agreement on what Chimes would pay for his remaining interest in it.
I turn then to the circumstances which give rise to the present duel.

privilege

The onus of establishing the privilege rests on those claiming it: ASIC v Rich [2004] NSWSC 1089 at [2].
The parties agreed that the documents should be examined by the Court. The Court has done this to scrutinise and test the claim of privilege: Hancock v Rinehart (Privilege) [2016] NSWSC 12 at [31].
Document 1 is a letter or memorandum addressed to "Martin" (that is Dowling) dated 28 April 2011. The author is not identified, but I infer that it was Gordon (on behalf of Chimes). The document is clearly part of negotiations relating to Dowling's exit from Star, which included seeking to resolve disputes about Dowling's expenditure. The document makes accusations against Dowling, and amongst others, it makes reference to litigation advice and a forensic audit.
Document 3 is a letter or memorandum addressed to "Richard, Martin" (that is Chimes and Dowling) dated 5 May 2011. Again, the identity of the author is not stated, and again I infer that it was Gordon (on behalf of Chimes). This document is part of the same negotiations, and discloses aspects of the dispute about Dowling's position vis a vis Star.
Document 4 is entitled "Final Summary on Martins indebtedness to Star", it is dated 27 March 2012, and is clearly Gordon's report. It was prepared to report both to Chimes and Dowling the results of another review of Dowling's loan accounts since inception, about which there had not yet been resolution. The document refers to the possibility of an external forensic audit.
Without prejudice privilege prevents admission into evidence of settlement negotiations between parties, when litigation between them is in contemplation. The privilege extends to protect without prejudice communications between parties to litigation from production to other parties in the same litigation. In Rush & Tompkins Ltd v Greater London Council [1989] AC 1280 at 1305, in an oft quoted passage, Lord Griffiths said: 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. If the party who obtains discovery of the "without prejudice" correspondence can make no use of it at trial it can be of only very limited value to him. It may give some insight into his opponent's general approach to the issues in the case but in most cases this is likely to be of marginal significance and will probably be revealed to him in direct negotiations in any event. In my view this advantage does not outweigh the damage that would be done to the conduct of settlement negotiations if solicitors thought that what was said and written between them would become common currency available to all other parties to the litigation. 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. (see Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 at 523; Glengallan Investments v Arthur Anderson [2002] 1 Qd R 233 at [34]; Dr R. J. Desiatnik, Without Prejudice Privilege In Australia (2010, LexisNexus Butterworths Australia) at 49-53).
The documents here fall into neither of these categories because Ultraceuticals was neither party to, nor concerned with, the Star dispute. Ultraceuticals is a third party, involved in different litigation.
But does the without prejudice privilege nevertheless apply to them?
It is now clear that the privilege extends to cover disclosure to third parties in a subsequent dispute provided there is sufficient connection between the subject matter of the original dispute and the later one.
The extension, it seems, is a development based on the policy underlying the privilege, traceable to Lord Griffiths' holding in Rush & Tompkins that the privilege extends beyond the immediate protagonists, to third parties. It has come about despite the observation of Gleeson CJ in Hong Kong Bank v Murphy at 523 (Mahoney and Priestley JJA concurring), that Lord Griffiths' comments were made in the context only of multi-party litigation, and that the proposition should not be taken as authority for a wider proposition, and despite the observation of the Queensland Court of Appeal to similar effect in Glengallan Investments v Arthur Anderson at [34] (Williams JA, McPherson JA and Ambrose J concurring).
In Bailey v Beagle [2001] FCA 185, Goldberg J said at [15] that: 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. [Emphasis added.]
As to the policy underlying the extension of the privilege, in Mercantile Mutual Custodians v Village/Nine Network Restaurants [1999] QCA 276 at [18] Pincus J said: One looks to the purpose of the privilege, which is as mentioned above to encourage compromises - or, more fully: "… to encourage compromises by sparing the parties the embarrassment which might be caused to them if the negotiations fail and later their communications are liable to be put in evidence." (Harrington v. Lowe (1996) 190 C.L.R. 311 at 323) The embarrassment is not necessarily less if the suit in which the communications go into evidence is one in which the disputes and disputants are different from those involved in the negotiations. It is true that one generally thinks of the privilege as being directed against disclosure of the negotiations by a party to them; but that is so because it will but seldom occur that the content of negotiations will become known to a person who, although not a party to them, happens to be able to make good use of their content, in relation to another dispute altogether. There are two English cases from about a century ago, confining the privilege to instances in which disclosure is sought by a party to the negotiations; but these cases are dealt with in Rush & Tompkins Ltd (at 1301-1302) in such a way as not to encourage one to treat them as authoritative. One can understand rational arguments being advanced, as a matter of policy, against too great an extension of the privilege, one being that it can be a cloak for dishonesty. But that can be so whether or not the person damaged by application of the privilege is a party to the negotiated dispute. There is no sound basis for holding that the basic purpose of protecting negotiations is sufficiently served if one allows the negotiators to be exposed to the risk that what they privately say, to settle their dispute, may be broadcast to the world at the instance of any person who can make use of it in litigation, unless that person is a party to the dispute being negotiated. and, at [35] Byrne J held that: There are, it is true, passages in the speech of Lord Griffiths which refer to protection against disclosure to other parties to extant litigation. These should be understood in context: viz that a party to the litigation had sought access to the documents. This is the impression of the British Columbia Court of Appeal, which treats the speech as showing that communications in settlement negotiations are, in general, "privileged" "both from production to other parties to the negotiations and strangers". The same view has been taken in England: Hobhouse J. considered that the House of Lords decided that the privilege "affects not only the party who received the communication but also any other party" to subsequent litigation. This must be correct. The policy that underpins the privilege is not served only where access is sought by another party to pending litigation in which the negotiators happen to be parties. To restrict its reach to parties to litigation would be to render the privilege capricious in operation. Its availability would then depend upon such inconsequential variables as whether proceedings were already on foot and the identity of the particular parties who had been joined when the negotiations took place.
As to the ambit of the extension, in Yokogawa Australia Pty Ltd v Alstom Power Ltd [2009] SASC 377; (2009) 262 ALR 738, Duggan J (with whom Sulan J agreed) said at [83]: It is unnecessary to decide in the present case whether the privilege is wide enough to prevent disclosure to all third parties except in cases of fraud or other recognised exceptions. However, it is my view that the privilege should apply in a case such as the present where the litigation has a connection with the same subject matter as the negotiations.(cf Glengallan Investments Pty Ltd v Arthur Anderson [2001] QCA 115). In such a case the result should not turn on the question whether all concerned are joined in the same action. The rationale for without prejudice privilege which is relied upon in authorities such as Rush & Tompkins, is equally applicable in cases where the negotiations and the litigation arise out of the same subject matter and the negotiations and settlement (if achieved) are of potential relevance to subsequent litigation between one of the parties to the negotiation and a party involved in the litigation. [Emphasis added.] whereas, Kourakis J (as his Honour then was) said at [139]: On the question of the scope of the settlement privilege I agree, for the reasons given by Duggan J, that it extends to those cases where the subject matter of the settlement discussions is substantially the same as the subject matter of the legal proceedings. Where the subject matter is not substantially the same, the communication is unlikely to have had a direct connection with the settlement discussions. Moreover, it is unlikely that so limiting the privilege will inhibit settlement negotiations. [Emphasis added.] (I respectfully suggest that where in the penultimate sentence Kourakis J referred to the "settlement discussions", his Honour had in mind the "subsequent dispute").
In Verge v Devere Holdings [2009] FCA 832, McKerracher J held at [51]: Both on the ground that the subject matter and parties of this litigation differ from those of the Kevill litigation and on the basis that the respondents have 'pleaded into relevance' the documents concerned, in my view the privilege cannot be maintained in this litigation. [Emphasis added.]
As can be seen from these dicta, the required connection has been articulated in different and not necessarily consistent ways. The formulations have included cases where the litigation has a connection, or a direct connection, with the same subject matter as the negotiations, cases where the negotiations and the litigation arise out of the same subject matter and the negotiations and settlement are of potential relevance to subsequent litigation, cases where the subject matter of the settlement discussions is substantially the same as the subject matter of the legal proceedings, and cases where the subject matter of the negotiation does not differ from that of the proceedings.
The extension of the privilege is squarely based on the policy underlying the privilege. Therefore, assessment of whether there is sufficient connection between two disputes, to justify extension of the privilege to the second, should be made by reference to whether or not the policy (which did or would have protected the documents from disclosure in the first dispute) will be served by extending the privilege to the second dispute in the particular circumstances of the case.
That policy, as the High Court said in Field, is to enable free communication without the embarrassment which the liability of a communication being put in evidence subsequently might impose on a party, or as Lord Griffiths articulated it in Rush & Tompkins, it would discourage settlement if a party believed that admissions might be held against it.
Accordingly, the Court must assess whether the party resisting disclosure would have had a legitimate expectation that the material brought into existence for the purposes of settling the earlier dispute would not be used against it in the later dispute.
Put another way, protection is given to induce lack of inhibition in making potentially damaging statements to facilitate dispute resolution. The policy protects those statements from disclosure in a later dispute if, fairly viewed, having regard to the subject matter of the later dispute, the party making them would be expected legitimately to have had the same inhibition.
Each case will of course turn on its own particular circumstances. There is no bright line. Ordinarily, however, one might assume such a legitimate expectation if the subject matter of the two disputes is exactly the same. Where the subject matter is not the same, the nature of the connection will need to be examined to determine whether the policy will be served by protecting disclosure.
This, it seems to me, is in effect the approach taken by the South Australian Court in Yokogawa v Alstom, where the documents were settlement agreements between the plaintiff, Alstom, and FPP, the operator of a power station at Port Augusta. FPP had retained Alstom to refurbish the power station, and Alstom had subcontracted the electrical work to the defendants, YDRML. Alstom claimed that delays caused by YDRML exposed it to potential liability in their agreement with FPP. Alstom settled the consequences of those delays with FPP by entering into deeds, and later sued YDRML claiming, amongst others, money which it became liable to pay FPP under the settlement. YDRML issued a claim for production of documents created in connection with the settlements. Alstom claimed either legal professional privilege or without prejudice privilege applied. Clearly, the policy which applied in protecting Alstom against FPP in respect of its communications with FPP applied with equal force.
I record that Dowling and Ofer initially put, but then abandoned, a submission that the privilege prevails against third parties in a subsequent and different dispute without any further qualification or limitation.
Their ultimate submission is that there is sufficient connection between the Star dispute and the present litigation, as disclosed by the allegations in the cross-claim and their response to it. For the reasons which follow, I reject this submission.
The policy which would protect use by Star against Dowling and Ofer of communications in the course of settling the Star dispute, has no legitimate application to the dispute now before the Court. To the contrary, the connection between the Star dispute and the present one, as articulated in the cross-claim and response, only comes about because Ultraceuticals claims that the fact of the investigations conducted and the findings made in the context of the Star dispute, falsify representations made by Dowling to Heber in an entirely different context, namely, Dowling's acquisition of shares in and retention by Ultraceuticals.
Where, as is the case here, the claim being litigated and for which disclosure is being sought is that the fact of things done and said to settle the first dispute falsifies things later done and said in a different context by the party resisting disclosure, it can hardly be said that the inhibition pertinent to the first dispute has any application to the second.
The subject matter of this dispute is different and divorced from the Star dispute. Dowling and Ofer could have had no legitimate expectation of protection from disclosure of material which becomes relevant to the second dispute, only because it is alleged that it falsifies statements separately made by them in a different context. Extending protection in such circumstances would encourage dishonesty, not candour, in settlement discussions.
Additionally, in Field at 291 the High Court observed that the privilege is not concerned with objective facts that may be ascertained during the course of negotiations. These may be proved by direct evidence. Rather, it is concerned with the use of the negotiations or what is said in the course of them as evidence by way of admission. Although it is now accepted that the privilege can extend beyond admissions - see for example, Unilever Plc v Procter & Gamble Co [2001] 1 All ER 783; [2000] 1 WLR 2436; Yokogawa v Alstom [2009] SASC 377; (2009) 262 ALR 738 at [100]; Pihiga Pty Ltd v Roche [2011] FCA 240; (2011) 278 ALR 209 at [81] - the cross-claim does not allege that the conclusions reached by Star as to Dowling's alleged misconduct were the fact. The documents are not sought for that purpose, but rather, to establish the objective facts of the Star dispute, not the correctness of Chimes' stance, or the incorrectness of Dowling's stance, in it.
There are further reasons why the documents are not privileged from disclosure.
Ultraceuticals submitted that the privilege does not extend to the documents for the additional reasons that when the documents were brought into existence litigation was not contemplated; the documents do not record communications made for the purpose of negotiating a compromise; and by positively asserting that the Star dispute was of a different character to that asserted by Ultraceuticals, Dowling and Ofer have waived any privilege. These submissions are well founded.
Dowling and Ofer identify the dispute as one which arose as part of the negotiations to determine the value of the Star business, and concerned the calculation of that value and the proper reconciliation of Dowling's loan accounts with Star. A reading of the documents reveals that litigation was raised as a possibility with respect to the state of accounts between Dowling and Star. But the documents hardly reflect any negotiation or suggestion of any compromise about this.
Dowling and Chimes were undoubtedly negotiating a price for Dowling's exit and, self-evidently, the state of accounts between Dowling and Star was a relevant factor in those negotiations. The documents (particularly document 4, being Gordon's report) reflect an attempt to determine with certainty the state of accounts between Dowling and Star, but do not appear to be part of any process of compromise. They offer no concession and do not indicate any intention to make a compromise: see Trade Practices Commission v Arnotts (1989) 88 ALR 69; [1990] ATPR 41-010 (5) at 71; Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at 368.
The only real dispute which was being negotiated was as to the commercial terms of Dowling's exit (not any dispute as to the state of accounts), about which itself, I am not satisfied, litigation was in contemplation.
Finally, in a case where there is no intentional waiver of privilege, the question of if a waiver should be imputed depends on whether it would be unfair or misleading to allow a party to refer to or use material, and yet assert that the material, or material associated with it, is privileged from production: see Attorney General for the Northern Territory v Maurice (1986) 161 CLR 475 at 481. In paragraphs 15, 16 and 17 of their Response, Dowling and Ofer positively aver that the dispute concerned the value of Dowling's loan account and certain drawings, and that the investigation was done by Tocco for its negotiating purposes as part of the loan account dispute. In my opinion, having regard to these averments, it is unfair to allow Dowling and Ofer to refer to the analysis or investigation and attribute a character to it, while at the same time to deny disclosure of the documents which will establish or refute that character. I accordingly consider that any without prejudice privilege has been waived in any event.

Field v Commissioner for Railways for New South Wales

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