McFarlane as Trustee for the S McFarlane Superannuation Fund v IOOF Holdings Limited

Federal Court of Australia|2018-06-21|Before: Ms J, Mr J, Gleeson J

Each party bear its own costs of the preliminary discovery application.
The prospective applicant pay the prospective respondent's reasonable costs of complying with the order for preliminary discovery made on 18 May 2018. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

GLEESON J: 1 On 18 May 2018, I made an order that the prospective respondent ("IOOF") give preliminary discovery to the prospective applicant ("Mr McFarlane"): McFarlane as Trustee for the S McFarlane Superannuation Fund v IOOF Holdings Limited [2018] FCA 692. 2 Mr McFarlane now seeks the following costs orders: (1) IOOF pay Mr McFarlane's costs of the preliminary discovery application, forthwith; (2) if Mr McFarlane commences proceedings against IOOF within three months of the last day on which documents are discovered and produced in compliance with order 1 made on 18 May 2018, IOOF's reasonable costs and expenses of complying with order 1 will be costs in the cause of those proceedings; and (3) if Mr McFarlane does not commence proceedings against IOOF within three months of the last day on which documents are discovered and produced in compliance with order 1 made on 18 May 2018, Mr McFarlane must pay IOOF's reasonable costs and expenses of complying with order 1. 3 IOOF seeks the following costs orders: (1) Mr McFarlane pay 50% of IOOF's costs of the preliminary discovery application; and (2) Mr McFarlane pay IOOF's costs of complying with the orders for preliminary discovery.

Legal framework 4 By s 43(2) of the Federal Court of Australia Act 1976 (Cth) ("Federal Court Act"), except as provided by any other Act, the award of costs is in the discretion of the Court or Judge. 5 Rule 7.29 of the Federal Court Rules 2011 (Cth) ("Rules") provides: A person against whom an order is sought or made under [Division 7.3, concerning preliminary discovery] may apply to the Court for an order that: (a) the prospective applicant give security for the person's costs and expenses including: (i) the costs of giving discovery and production; and (ii) the costs of complying with an order made under [Division 7.3]; and (b) the prospective applicant pay the person's costs and expenses. 6 Rule 40.04(a) of the Rules provides: If no order for costs is made on an interlocutory application or hearing, the costs of the application or hearing: (a) if an order is made in favour of any party - follow the event; or (b) if no order is made in favour of any party - are taken to be costs in the cause of the successful party to the proceeding.

Costs of application for preliminary discovery 7 In this Court, a successful application for preliminary discovery does not give automatic entitlement to the costs of making that application, and nor does a partially unsuccessful opposition to the orders sought in such an application prevent a party against whom discovery is ordered from recovering its costs of the application: Alstom Power Limited v Eraring Energy [2009] FCA 681 at [33], citing C7 Pty Ltd v Foxtel Management Pty Ltd [2001] FCA 1864 ("C7"). In C7 at [50], Gyles J said: It needs to be borne in mind that this is an extraordinary jurisdiction. It provides for compulsory access to the private affairs of members of the community in order that somebody else can determine if they have a case against that party and the threshold set by O 15A r 6(a) is not very high. There is much to be said for the view that a respondent in these circumstances is entitled to put the applicant to proof except in a clear case. 8 However, if the respondent takes an adversarial approach, it may be appropriate to make a costs order which follows the event: Procter v Kalivis (No 3) [2010] FCA 1194 at [17]. Cases in which a successful applicant for preliminary discovery has obtained a costs order in its favour include Steffen v Australia and New Zealand Banking Group Ltd [2009] NSWSC 883 ("Steffen") at [38] and Andrews Advertising Pty Ltd v David Andrews [2011] NSWSC 244 ("Andrews Advertising") at [55]. 9 In J & A Vaughan Super Pty Ltd v Becton Property Group Ltd [2013] FCA 340 ("Vaughan Super"), Kenny J said (at [16]-[18]): [16] Principle and the authorities indicate that it is not useful to speak of a conventional rule as to costs in cases such as the present: see also Apache Northwest Pty Ltd v Newcrest Mining Ltd [2009] FCAFC 39; (2009) 182 FCR 124 at 146-147 [90] per Flick J. The disposition of costs will depend on the circumstances of the case, including the conduct of the parties, the likely nature of any prospective cause of action and the likely passage of time before any such matter would be resolved at trial. Section 37M of the [Federal Court of Australia Act 1976 (Cth)] should also be borne in mind. [17] … as has been repeatedly affirmed, the jurisdiction to order preliminary discovery is an extraordinary one since an order for preliminary discovery involves an invasion of the prospective respondent's private affairs in order to determine whether or not a case can properly be brought against the prospective respondent. This feature has been said to justify an order that the preliminary discovery applicant pay the respondent's costs of the preliminary discovery application even when the application is successful. [18] … As Besanko J said in Procter [v Kalivis (No 3) [2010] FCA 1194] at [17], "[t]here is a sense in which a respondent is entitled to remain passive until the applicant makes out a case for preliminary discovery". Many matters may legitimately inform a prospective respondent's conduct in this regard… 10 Kenny J ultimately ordered the prospective applicant to pay the prospective respondent's costs of the application for preliminary discovery, having rejected (at [18]) a contention that the prospective respondent acted unreasonably in not providing at an earlier date documents of the type it subsequently agreed to provide. 11 In more recent cases, Courts have made orders for a successful applicant for preliminary discovery to be paid a portion of its costs of the application. For example, in ObjectiVision Pty Limited v Visionsearch Pty Limited (No 3) [2015] FCA 304 ("ObjectiVision") and Cobankara v Australia and New Zealand Banking Group Ltd [2017] FCA 419 ("Cobankara"), the prospective respondents and respondent respectively were ordered to pay 50% of the applicant's costs. 12 In Optivision, at [24], Perry J accepted the reasonableness of the prospective respondents requiring the prospective applicant to prove its case and test that case in a robust fashion. However, her Honour concluded, the proceeding was adversarial and the prospective applicant was largely successful. At [32], Perry J contrasted the case with C7 where, her Honour said, the applicant achieved little more than had been offered by the respondents before the application. At [33], her Honour stated that the respondent's case "went beyond the proper boundaries for an application of this nature". In an earlier judgment in that proceeding (ObjectiVision Pty Ltd v Visionsearch Pty Ltd [2014] FCA 1087), Perry J noted (at [40]) that the prospective respondent had led "extensive evidence", including expert evidence on substantive issues, which took issue with the ultimate merits of ObjectiVision's case and raised factual conflicts which it was not possible to determine on an application for preliminary discovery. 13 In Cobankara, Mortimer J found that the prospective respondent "took something of an unreasonable approach to providing documentation to the prospective applicants" (at [23]), noting that the prospective applicants sought to obtain documents relating to their own bank accounts and documents relating to the uncontested fact that some of their account details had been sent to a third party without their knowledge or consent. 14 In Gooley & Ors v Breda Pty Ltd & Ors (No 2) [2017] NSWSC 1505 ("Gooley"), the prospective defendants were ordered to pay 85% of the plaintiffs costs of the application for preliminary discovery where the proceedings were described by Slattery J as "hard fought" (at [6]) and the costs incurred were substantially the result of the defendants' active opposition in which "every available argument was deployed against the application".

Costs of complying with orders for preliminary discovery 15 IOOF submitted that it is normally appropriate to order that the prospective applicant meet the costs incurred by the prospective respondent in providing discovery and inspection, even where the prospective respondent has adopted an adversarial approach and failed: see, for example, Optivision at [39].

Consideration 16 On behalf of Mr McFarlane, it was submitted that he had enjoyed "substantive success" on the application, while IOOF had unreasonably refused to provide him with the documents sought, or even to engage in constructive negotiations on the matter. IOOF argued that each party had a measure of success.

Parties' degrees of success 17 In my view, each party enjoyed a measure of success. Mr McFarlane was successful in obtaining fairly extensive preliminary discovery. IOOF was successful in limiting the preliminary discovery to the extent of the application's substantial overreach. 18 On the one hand, the extraordinary nature of the jurisdiction to grant preliminary discovery is a factor that weighs in favour of an order that Mr McFarlane pay the costs of the application, particularly where the application was only partially successful. On the other hand, IOOF's adversarial approach weighs in favour of it paying the costs of the application where Mr McFarlane enjoyed a substantial degree of success.

Did IOOF act unreasonably? 19 On behalf of Mr McFarlane, it was submitted that IOOF's conduct was unreasonable in failing to comply with Mr McFarlane's reasonable pre-proceeding requests and in failing to explain until the hearing that it opposed the orders sought on the basis that the published allegations did not support an entitlement to preliminary discovery in relation to any similar conduct in the relevant period. IOOF rejected this contention. 20 It was submitted that Mr McFarlane first requested IOOF to provide him with documents similar to the documents sought in his application on 11 August 2017 by letter sent by ACA Lawyers to IOOF's solicitors, King & Wood Mallesons ("KWM"). The letter set out in detail the matters that had led Mr McFarlane to form the reasonable belief that he may have the right to obtain relief against IOOF and explained that the provision of the information sought would enable him and those advising him to "responsibly continue and conclude investigations into whether or not to commence a proceedings against IOOF". The letter referred to the obligations to take genuine steps to resolve a dispute before commencing or defending certain legal proceedings in the Court, imposed by the Civil Dispute Resolution Act 2011 (Cth) ("CDRA") and noted that "if the applicant were satisfied by a review of such documents that IOOF did have a reasonable basis for not disclosing the alleged corporate misconduct referred to in the Fairfax Media articles, the proposed Part IVA [of the Federal Court Act] proceeding would not be commenced." It was noted that co-operation with the request would avoid for the need for curial intervention. 21 Mr McFarlane's solicitors offered to discuss the most cost effective and efficient way of providing the documentation and undertook to pay IOOF's reasonable photocopying expenses. 22 Mr McFarlane submitted that his reasonable request was not met in the same spirit by IOOF, being rejected by letter from KWM dated 25 August 2017. Mr McFarlane's submissions summarised the reasons given as follows: a. the documents sought overlapped with confidential documents that were stolen by a former employee of IOOF and orders had been made by the Supreme Court of Victoria requiring, inter alia, the delivery up of those documents and restraining Maurice Blackburn and others from using and/or disclosing these documents; b. most if not all of the documents that would respond to the categories were privileged; c. Mr McFarlane's reliance upon the ASIC investigation as providing reasonable grounds for his right to relief was misconceived due to the outcome of that investigation; d. the statements made to the Senate Economics References Committee did not establish the requisite reasonable grounds as the statements relied upon either confirmed that there was no evidence of contravention by IOOF, or were so vague and non-specific as to be incapable of giving rise to such a reasonable belief; and e. the "sensationalist and unsubstantiated material" reported in the newspaper articles and a fall in IOOF share price did not provide an objectively reasonable basis for the requisite belief. 23 Mr McFarlane's submissions noted that none of these reasons were articulated in IOOF's written or oral submissions, while the principal argument articulated at the hearing - that the published allegations did not support an entitlement to preliminary discovery in relation to any similar conduct in the relevant period - was not mentioned. 24 By letter dated 6 September 2017, Mr McFarlane's solicitors responded to KWM's 25 August 2017 letter, addressing matters raised and providing a revised schedule of requested documents which took into account some of the matters that had been raised by KWM. The letter also acknowledged that some of the documents sought were likely to be confidential to IOOF and accordingly offered to provide a suitable confidentiality undertaking. Notice was given that if a response was not received by 22 September 2017 an application for preliminary discovery would be brought. 25 By letter from KWM dated 26 September 2017, IOOF again declined to provide the documents sought. Again, Mr McFarlane's submissions noted, IOOF did not protest on the basis that the published allegations did not support an entitlement to preliminary discovery in relation to any similar conduct in the relevant period. 26 On behalf of Mr McFarlane, it was noted that IOOF filed no evidence on the application. Its written submissions, filed one day before the hearing, failed to communicate IOOF's complaint that the "application did not hang on the information in the articles". Rather, the thrust of the submissions was that Mr McFarlane had failed to articulate a right to relief with sufficient clarity or how any of the categories of documents sought were said to be directly relevant to any right to relief. 27 Mr McFarlane's submissions complained that the first time Mr McFarlane became aware that the true nature of IOOF's concern was that the published allegations did not support an entitlement to preliminary discovery in respect of all the information/documents sought (as there is no reasonable basis to believe in a right to relief in relation to conduct about which there is presently no evidence) was on the morning of the hearing. This resulted in Mr McFarlane having to identify to the Court, somewhat 'on-the-fly', where in the evidence, each of the allegations of specific misconduct were made, but moreover, the belated raising of the issue meant that an opportunity for earlier negotiation and possible resolution of the matter without litigation, had been lost. 28 Finally, on behalf of Mr McFarlane, it was submitted that he and his solicitors have, both prior to the commencement of proceedings and afterwards, acted consistently with their obligations under s 37M and 37N of the Federal Court Act and under the CDRA, conscientiously engaging, by letter dated 6 September 2017, with the objections raised by IOOF in an attempt to resolve the matter without litigation. IOOF did not engage in any kind of constructive discourse that may have seen the issue of preliminary discovery resolved without recourse to litigation. In the circumstances, it was argued, IOOF acted unreasonably in not providing at an earlier date, documents of the type that it has now been ordered to discover. 29 I do not accept that the approach adopted by IOOF, as set out at length above, was unreasonable. Mr McFarlane made a very wide ranging claim for preliminary discovery which encompassed documents raising allegations made over a period of 7.5 years. If successful, it would have involved extensive access to the records of IOOF and a substantive expenditure of resources on the part of IOOF for the purpose of locating and assembling those records. In those circumstances, in my view, IOOF was entitled to require Mr McFarlane to persuade the Court of his entitlement to access to the documents sought. 30 Whether the discovery sought was excessive was an issue that Mr McFarlane's lawyers were capable of identifying for themselves. More significantly, unless the matter was resolved by consent, they had the burden of persuading the Court as to the proper ambit of preliminary discovery. Accordingly, I do not accept that IOOF's conduct should be considered unreasonable because it did not engage Mr McFarlane's lawyers on that issue before the hearing of the application. 31 Further, although IOOF's opposition to the application in correspondence raised issues not pressed at the hearing, it did not serve evidence in support of those matters. It is not suggested that the costs of the application was significantly affected by the manner in which IOOF opposed the application, except that there might have been an opportunity for earlier negotiation and possible resolution without litigation.

Conclusion 32 Taking into account the matters set out above, in my view, each party should bear its own costs of the preliminary discovery application. 33 In this case, there is likely to be a significant passage of time before the conclusion of any proceeding commenced as a result of the provision of preliminary discovery. The costs of compliance are also likely to be significant. Having regard to these matters, in my view, Mr McFarlane should be ordered to pay the costs of compliance with the preliminary discovery order, adopting the approach of the Courts in Optivision, Cobankara and Gooley. 34 I also note that if subsequent proceedings are commenced, depending on their course and outcome, the costs orders made in this proceeding may be affected by orders made in those subsequent proceedings: see Optivision at [39] and Gooley at [15]. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.

Court of Australia Act 1976(Cth)

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