Maser Technology Group Pty Ld v Edmondson

CATCHWORDS : PROCEDURE [83] - Practice under Supreme Court Rules - Preliminary discovery - Setting aside order refusing preliminary discovery - Decision made on wrong basis.

LEGISLATION CITED : Uniform Civil Procedure Rules r 5.3

Adam P Brown Male Fashions Pty Ltd v Phillip Morris Inc (1981) 148 CLR 170 Apache Northwest Pty Ltd v Newcrest Mining Ltd [2009] FCAFC 39 Do Carmo v Ford Excavations Pty Ltd [1981] 1 NSWLR 409 CASES CITED : House v The King (1936) 55 CLR 499 Papaconstuntinos v Holmes a Court [2006] NSWSC 945 Re Dernacourt Investments Pty Ltd (1990) 20 NSWLR 588 St George Bank Ltd v Rabo Aust Ltd [2004] FCA 1360 Tomko v Palasty (No 2) [2007] NSWCA 369

Maser Technology Group Pty Limited (A) Keith Edmondson (R1) PARTIES : Logitek Electronic Systems, Inc (R2) Dingbat Technology Pty Limited (R3) Logitek Australia Pty Limited (R4) Australian Broadcasting Corporation (R5)

M S Willmott SC and F Maghami (A) COUNSEL : S R Meehan (R1) L Gor (R3&4) No other appearances

Dunstan Legal (A) SOLICITORS : Harris Freidman Hyde Page (R1) Dooley & Associates (R3&4) No other appearances

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2008/277899 MASER TECHNOLOGY GROUP PTY LIMITED v KEITH EDMONDSON JUDGMENT 1 HIS HONOUR: This is an appeal from a judgment that Associate Justice Macready delivered on a notice of motion by the plaintiff seeking a review of a decision by Registrar Walton who dismissed an application for preliminary discovery made by the plaintiff and ordered the plaintiff to pay those defendants' costs. 2 In an amended summons of 22 July 2008, the plaintiff made an application for preliminary discovery under r 5.3 of the Uniform Civil Procedure Rules ("the UCPR") against the first defendant, Keith Edmondson, the third defendant, Dingbat Technology Pty Ltd and the fourth defendant, Logitek Australia Pty Ltd ("Logitek Australia"). 3 The plaintiff asserted that it may have a right to obtain relief against (a) the first defendant for breach of his duty of loyalty and/or fiduciary obligations to the plaintiff and/or for breach of his statutory obligations under s 182 of the Corporations Act 2001 (Cth); and (b) the third defendant and the fourth defendant for having been knowingly involved in those breaches by the first defendant or received benefit from them. 4 The Associate Justice included in his judgment a statement of facts which was concise and accurate: see [4] - [15]. Rather than repeat or resummarise those facts, I have included them in an Appendix to this judgment. 5 From a factual point of view, the only thing that need be added concerning the case against the third and fourth defendants is what has been called the first defendant's "business case" of 5 February 2007. This is a document which was extracted from the first defendant's computer. It is in the form of an email or draft email to Paul Dengate, the principal of the third defendant, and representatives of Logitek USA. It is not at present demonstrated that it was sent or that it was received by the addressees or what was the response to it (if any), particularly by Mr Dengate. Equally it is not negatived that it was ever sent as an email or otherwise communicated to the addressees. 6 The business case adverts to the first defendant's intention to leave the plaintiff and proposed options available to him. Those options include the course ultimately followed of the first defendant and Mr Dengate together creating Logitek Australia and taking over the ABC contract that was at that time held by the plaintiff. 7 The Registrar wholly dismissed the plaintiff's application for preliminary discovery. 8 Vis-a-vis the first defendant, she said that the plaintiff had sufficient information to decide whether or not to commence proceedings against the first defendant and also regarding its prospects of success. She refused discovery of any of the further documents sought by the plaintiff relating to the first defendant. 9 On the other hand, so far as concerns the third defendant and the fourth defendant, she stated that the evidence before her did not show that the plaintiff might be entitled to make a claim against them. For that reason she would not make an order for preliminary discovery against them. 10 The Registrar's decision in both these regards was confirmed by the Associate Justice, who dismissed the appeal from her review. 11 As well as containing a useful statement of the facts, the Associate Justice's judgment contains useful discussions of various matters of law relevant to the proceedings, all of them accurate. In fact, all of the matters of law to which I subsequently advert are dealt with in his Honour's judgment, other than the material relating to whether or not preliminary discovery is or is not a matter of practice and procedure or a substantive matter. His Honour set out r 5.3 of the UCPR. In particular, I advert to the words in r 5.3(1)(a) that one of the matters that must be established is whether the applicant may be entitled to make a claim for relief against a person but is unable to obtain sufficient information to decide whether or not to commence proceedings. 12 Thereafter his Honour set out Simpson J's useful analysis of the effect of r 5.3 in Papaconstuntinos v Holmes a Court [2006] NSWSC 945 at [14]. Her Honour adverted to the corresponding Federal Court rule and the differences between that rule and the New South Wales rule, but those differences do not seem to me to be material to the decision of this case. His Honour set out at length the discussion of the law by Hely J in St George Bank Ltd v Rabo Aust Ltd [2004] FCA 1360. In particular his Honour said the following at 26: "[26] The following propositions emerge from the authorities in which the proper application of Order 15A r 6 has been considered by judges of this Court:

(f) the question posed by sub-paragraph (b) of the rule is not whether the applicant has sufficient information to decide if a cause of action is available against the prospective respondent. The question is whether the applicant has sufficient information to make a decision whether to commence proceedings in the Court: Quanta Software at [33] - [34], Alphapharm at [24] - [26]. Accordingly, an applicant for preliminary discovery may be entitled to discovery in order to determine what defences are available to the respondent and the possible strength of those defences, or to determine the extent of the respodent's breach and the likely quantum of any damages award: CGU Insurance Ltd v Malaysia International Shipping Corp Berhad (2001) 187 ALR 279 at [21]; Quanta Software at [33] - [34]; Alphapharm at [24] - [26]; Airservices Australia at [5]". 13 His Honour referred to the recent decision of the Court of Appeal in Tomko v Palasty (No 2) [2007] NSWCA 369 at [52]. It is that process of review that Macready AsJ carried out in respect of the decision of the Registrar. However, the appeal from the Associate Justice to a Judge of this Court, which is what is before me, is an appeal in the true sense of the word and conducted on the same principles as an appeal from a Judge to the Court of Appeal: UCPR r 49.4; Do Carmo v Ford Excavations Pty Ltd [1981] 1 NSWLR 409. 14 An important fact at all stages of this case is that the decision, both of the Registrar and of the Associate Justice on appeal, was a discretionary decision. This upon any review or appeal relating to it brings into play the principles stated in House v The King (1936) 55 CLR 499. This principle is so well known that simple reference to it is often deemed sufficient, but it plays an important part in the decision of this case and it should be set out in full. "But the judgment complained of, namely, sentence to a term of imprisonment, depends upon the exercise of a judicial discretion by the court imposing it. The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred." 15 I should add that preliminary discovery has been submitted, correctly in my view, to be a matter of practice and procedure rather than a matter of substance. The distinction was adverted to in the High Court in Adam P Brown Male Fashions Pty Ltd v Phillip Morris Inc (1981) 148 CLR 170 at 176 where their Honours said: "The essence of such a matter is described in terms which are sufficient for present purposes in Salmond on Jurisprudence 10th ed (1947), P476: 'Substantive law is concerned with the ends which the administration of justice seeks; procedural law deals with the means and instruments by which those ends are to be attained. The latter regulates the conduct and relations of courts and litigants in respect of the litigation itself; the former determines their conduct and relations in respect of the matters litigated'." 16 That pursuant to this test matters relating to preliminary discovery are to be treated as procedural appears from the decision of Powell J in Re Dernacourt Investments Pty Ltd (1990) 20 NSWLR 588 and the decision of the Federal Court in Apache Northwest Pty Ltd v Newcrest Mining Ltd [2009] FCAFC 39. 17 The effect on the approach to the matter arising from the fact that it is a decision on practice and procedure rather than substantive law was dealt with as follows by Hodgson JA in Tomko supra as follows: "[7] In my opinion, this discretion extends to a discretion as to whether, and if so how, to intervene; and in my opinion, there is an onus on a person seeking to have a court set aside or vary a registrar's decision to make out a case that the court, in the interests of justice, should exercise its discretion to do so.

[8] In the case of a decision on practice or procedure, this will normally require at least demonstration of an error of law, or a House v The King error, or a material change of circumstances, or evidence satisfying the strict requirements for fresh evidence. Even then, a court may not think that the interests of justice require intervention. This could be so, for example, if the error of law is a deficiency of reasons and the result is on its face not an unreasonable one." 18 It is on the basis of the foregoing that I approach the decision of Macready AsJ. I shall deal first with the decision relating to the third and fourth defendants. 19 In the end it seems to me that the material question is whether there was an error of principle within the meaning of House in the decision of Macready AsJ (and, indeed, of the Registrar below). It was submitted that this point was not taken below or in the notice of appeal, at least as regards the third and fourth defendants. However, the ground is relevantly stated in ground 6 of the Appeal Grounds in the Notice of Motion on Appeal and, although there was some confusion in the proceedings below, it was in my view substantially agitated below. 20 The material in the Registrar's judgment central to her decision was in [26] as follows: "26 I agree with the third and fourth defendant [sic] that the evidence they have taken me to does not show that the plaintiff may be entitled to make a claim against them. The plaintiff's evidence being the business case, the email and the attendance at a trade fair also fails to satisfy me that the plaintiff may have a claim against the third and fourth defendants. None of the evidence I was taken to show that these defendants assisted Edmondson in the alleged endeavours. I am not satisfied that the evidence points to any accessorial liability on the part of the third and fourth defendants. For that reason I would not make an order for preliminary discovery against them." 21 The passages in Macready AsJ's judgment most significant to my decision are as follows: "[69] The two pieces of evidence the Registrar cites have not convinced her that they show the plaintiff is entitled to make a claim against the third and fourth defendants. ...

[78] However, it is to be remembered that we are here concerned with the third and fourth defendants knowing participation in a breach by the first defendant of his duties of good faith and loyalty.

[79] If one asks what is disclosed in the evidence on that aspect, it is plain there is nothing. A businessman may be suspicious by suspicion is not evidence. If the plaintiff was asked to particularise the conduct it could not do so because no such conduct is apparent. A consideration of the evidence leads me to the same conclusion as the Registrar, namely, that it does not appear that the plaintiff may be entitled to make a claim for relief." 22 This is a case in which it is not entirely clear how the learned Associate Justice reached his conclusion. He certainly gave lip service to the principle that the relevant question is whether the plaintiff may be entitled to relief (as did the Registrar below). But the result produced by the Associate Justice and the formulation of that result lead to the suggestion that his Honour was in fact deciding that on the body of evidence it was not established that the plaintiff was entitled to relief against the third and fourth defendants. The formulation in [69] of his judgment that the Registrar was not convinced that "the plaintiff is entitled to make a claim against the third and fourth defendants" may be significant in that the formula of may be entitled is abandoned in favour of is entitled. 23 In any event, this is a case in which I infer, in the words of House, that there has been a failure properly to exercise the discretion, whether through the error stated above or otherwise. The reference appears to be particularly to the fact that there is said to be no evidence of knowing involvement by the third and fourth defendants in the first defendant's undoubted breaches. 24 What the Associate Justice said in [58] noted below in relation to the first defendant may also convey the suggestion that what was central to his Honour's mind (and that of the Registrar below) was simply whether or not a cause of action was established. 25 The conclusion that I have reached is that I infer that the decision was made on a wrong basis and ought to be upset. In coming to this conclusion I have borne in mind that, while preliminary discovery can be a process that bears heavily on defendants (although this is mitigated by the obligation of the plaintiff to bear the expenditure), preliminary discovery is a beneficial process which should not be stultified but which should be given ample interpretation and operation: see Rabo 26. 26 It is clear that in a matter of this nature if the decision below is upset the Court must exercise its own discretion: Tomko per Hodgson JA at [6]. 27 Proceeding to do so, on the material I have outlined, I have come to the conclusion that it is established to the requisite extent that the plaintiff may be entitled to commence proceedings against the third and fourth defendants. 28 There is a suggestion in the evidence that there was discussion ahead of time between the first defendant and Mr Dengate concerning possible courses to be followed if the first defendant left the plaintiff. There is the undoubted fact of the course that was followed after this in fact occurred. 29 Furthermore, there is a possibility that the business case was in fact sent in or about February 2007 to the addressees and the possibility that further documents exist concerning its receipt and further discussions between, among others, the first defendant and Mr Dengate. In my view the plaintiff is entitled to seek documents of that nature that may on the material before me well exist. 30 It should also be borne in mind that preliminary discovery may have advantages, not only for the plaintiff, but also for the defendants, since it may lead not only to a decision to sue, but a decision not to sue based on its result. 31 Turning to the first defendant, the Registrar said at [40] of her judgment: "40 In my view the evidence shows clearly that the plaintiff already has enough information to decide whether or not to commence proceedings against Mr Edmondson. Apart from the reference to seeking discover [sic] in due course, there is at least two pages of allegations of facts and circumstances regarding Mr Edmondson's alleged breaches referred to in the letter dated 20 September 2007. In my view this is sufficient information to both decide whether to commence proceedings and also regarding the prospects of success. It might not be all the information that the plaintiff would like and whilst they have identified areas in which information is lacking that, in my view, is not information that is reasonably necessary for them to make the decision whether or not to commence proceedings." 32 The Associate Justice at [52] referred to the plaintiff's complaint that the Registrar did not consider the extent of the defendants' breach. At [58] the Associate Justice said: "[58] The second matter, namely, the extent of the first defendant's breach is nothing more than a restatement of the fact of breach. For the purpose of this case to fix the first defendant with liability it is only necessary to establish that before he left his employment he took steps to set up a competing business." 33 But in the passage cited from Rabo it is made clear that one of the relevant matters concerning which preliminary discovery can be sought and given is the extent of the breach. This may not be relevant to the establishment of the cause of action, but may be relevant to a decision to sue or not to sue. This question as to the extent of the breach is not coextensive with the question of the quantum of damages. 34 In these circumstances, in my view the Associate Justice was wrong to uphold the Registrar's decision. Both the Associate Justice and the Registrar proceeded on the wrong basis that once material was available that established a cause of action it was not material to proceed to give preliminary discovery concerning the extent of the breaches. In my view Rabo demonstrates that this is wrong in principle. His Honour's decision in this regard will also be set aside. 35 Again, exercising my own discretion, it is my view that there should be preliminary discovery of documents relating to the extent of the breaches by the first defendant and relief should be granted to that extent.

"[4] The plaintiff's principal business was that of supplying and servicing electrical equipment. Its most important customer was the Australian Broadcasting Corporation ('the ABC') with whom it contracted 'to supply, configure and commission' equipment known as Logitek Radio Studio Consoles and accessories. For this purpose the plaintiff acquired the Logitek consoles from Logitek Electronic Systems Inc ('Logitek USA') and in about 2005, the plaintiff contracted with the third defendant to provide services 'involving configuration of the Logitek software and hardware for the consoles.'

[5] The plaintiff employed the first defendant on 23 February 2004 as 'Sales and Marketing Manager, Broadcast Vision.' During 2006 the first defendant was promoted to the position of 'Project Manager - Broadcast.' The first defendant's primary duty was to manage the plaintiff's relationship and dealings with the ABC.

[6] During the course of his employment with the plaintiff, the defendant was given: 'free and open access to the ABC; free and open access to the third defendant; free and open access to Logitek USA; open access to the plaintiff's computer system for files relating to the ABC, the third defendant and Logitek USA'

[7] That information included, inter alia, technical information about Logitek consoles and associated equipment, costs of products, the third defendant's service costs, Logitek USA distribution arrangements and ABC contract documents.

[8] The plaintiff had no exclusive agency agreement with Logitek USA for the acquisition of its products in Australia (a fact known to the first defendant) so that the plaintiff was vulnerable to competition from other suppliers of Logitek equipment. The plaintiff had a contract with the ABC for the supply and installation of the Logitek consoles and during the course of his employment with the plaintiff, the first defendant had the opportunity to foster and develop a relationship with the ABC. The plaintiff did not have in its employment contract with the first defendant any contractual restraint clause.

[9] In 2007 the first defendant applied to the plaintiff for leave to go to a conference at Las Vegas where there were many exhibitions including one by Logitek USA. This application was refused and so on the 28th March 2007, the first defendant took annual leave so that he could go to the conference. On 5 April 2007 the first defendant gave notice of his resignation to the plaintiff to take effect on 4 May 2007.

[10] On 7 April 2007 Logitek USA advised the plaintiff that it would no longer supply Logitek equipment to the plaintiff and that it had appointed the third defendant as its new distributor.

[11] The fourth defendant was incorporated as the company to acquire the distributorship on 12 April 2007. Also on that day, the first defendant told the plaintiff that the third defendant would employ him when his employment with the plaintiff came to an end.

[12] The first defendant was observed at the conference in Las Vegas on 15 April 2007 in the company of Mr Dengate, the principal of the third defendant at the Logitek USA stand.

[13] On 23 April the first defendant returned from annual leave.

[14] On 25 April 2007 the ABC invited the plaintiff to assign its contract for the supply of Logitek consoles to the third defendant. Subsequently, the contract was novated to the third and fourth defendants.

[15] On 4 May the first defendant left the employ of the plaintiff in accordance with his notice."

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