McGoldrick v SportsTG Pty Limited

Judgment

1. HIS HONOUR: Glen McGoldrick ("the plaintiff"), by way of an amended notice of motion filed on 14 February 2019, seeks an order in the nature of a Sabre order against his former employer, SportsTG Pty Ltd, known as STG ("the defendant").

The background to the application

1. On 8 March 2018, the plaintiff filed a statement of claim for damages and certain payments arising from alleged breaches by the defendant of an employment agreement, known as an Executive Services Agreement ("ESA"). The principal contention was a failure to pay the plaintiff a sign-on bonus of USD 2,500,000. The defendant responded with a defence and cross-claim seeking a declaration that the ESA is void, as well as damages and compensation for the plaintiff's alleged breaches of his duties as a director and misleading and deceptive conduct pursuant to the Competition and Consumer Act 2010 (Cth), Sch 2 - Australian Consumer Law ("the ACL"), s 18.
2. The plaintiff alleges that from 13 October 2015, pursuant to a written agreement, he was employed by the defendant as Chief Executive Officer ("CEO"). From that date, the plaintiff was also a director of the defendant. On or about 2 June 2017, Spay Inc ("Spay"), which is a corporation in the United States of America, acquired all shares in the defendant and, through a subsidiary, those held by a related body corporate of the defendant, Real Time Online Pty Limited ("RTO"). Accordingly, since on or around 2 June 2017, Spay has been the parent company of the defendant.
3. In his statement of claim, the plaintiff alleges that on about 31 May 2017, he entered into the ESA with the defendant and Spay, which included a term that it replaced his previous employment agreement with STG. Additional terms provided that, upon the completion of the sale of shares in the defendant and RTO, the defendant would employ the plaintiff as Managing Director and pay him a salary of a set amount, make certain superannuation contributions and pay "a sign-on bonus in the sum of US$2,500,000 (sign-on bonus) in one instalment on the next payroll cycle following Completion" (emphasis in original). By agreement, the payment of the sign-on bonus was deferred until 3 July 2017. However, it was not paid on that date and on 30 August 2017, the plaintiff was advised by Stuart Lodge, the Chief Financial Officer of Spay, that he had been instructed to withhold payment. On 16 October 2017, the plaintiff was advised that his employment was terminated. By letter dated 6 November 2017, the defendant advised that it rejected the plaintiff's claim for payment of the sign-on bonus.
4. The defendant filed a defence to the statement of claim on 15 June 2018, and a further defence to an amended statement of claim on 24 January 2019, in which it alleged that the plaintiff had breached the terms of the ESA, giving rise to an entitlement to terminate the plaintiff's employment pursuant to its terms. As well, the defendant filed a cross-claim on 1 May 2018, claiming that the plaintiff engaged in misleading and deceptive conduct contrary to s 18 of the ACL and that he had breached his duties as a director of the defendant.
5. The defendant pleaded that since October 2016, it had been re-engineering its proprietary sports competition management software products, and intended to thereby position itself as a market leader in data security for community sporting organisations ("the TG Platform project"). It alleged that, since April 2017, the plaintiff was aware of difficulties with the roll-out of the TG Platform project, including serious complaints by a number of the defendant's customers. However, the plaintiff, as a director, failed to inform the board of these complaints. The defendant contends that this failure constituted a representation by the plaintiff that there were no material customer issues. It alleges that this constitutes misleading and deceptive conduct pursuant to s 18 of the ACL, which entitles the defendant to a declaration that the ESA is void pursuant to ss 243 and 243(a) of the ACL.
6. The defendant also pleaded that in June 2017, the plaintiff became aware that the TG Platform project was under-resourced and that its completion would be delayed. In July 2017, the plaintiff was advised that labour costs for the 2016/17 financial year had exceeded budget by $855,626. He was further informed that revenue was $2,378,125 below budget and net profit was $1,823,541 below budget for the same financial year. He had not informed the board of these developments prior to 22 September 2017 and had misrepresented to Mr Lodge that the TG Platform project was "back on track" and "under control". The defendant pleaded that it did not become aware of the serious customer complaints until approximately 22 September 2017.
7. Alternatively, the defendant pleads that the plaintiff breached certain clauses of the ESA by gross negligence and/or wilful misconduct, so that if the sign-on bonus had been paid, the terms of the ESA would have required him to repay it.
8. The plaintiff's case is that the defendant and Spay are seeking to justify the termination of the plaintiff's employment by falsely alleging misconduct, so as to avoid the payment of the sign-on bonus.
9. On 27 August 2018, the plaintiff filed a notice of motion seeking discovery of certain classes of documents relating to the sign-on bonus and the decision to terminate the plaintiff's employment, that included correspondence and documents involving Spay. The motion was opposed, and the subject of a ruling by Registrar Bradford, requiring the discovery of some of the categories of documents by 31 January 2019.
10. On 11 December 2018, the plaintiff filed an amended statement of claim and sought further categories of documents. The defendant agreed to provide discovery of these additional categories as part of the discovery ordered by Registrar Bradford. The defendant filed and served its list of documents on 31 January 2019. The list was deposed to by Alex Alt, in his capacity as a director of the defendant.
11. The plaintiff submits that the discovered documents did not include all documents falling in the additional categories. In a letter dated 8 February 2019, the defendant's solicitors contended: "Documents in the possession of [the defendant's] parent company, Spay Inc, are not in the 'possession' of [the defendant] for the purpose of discovery. See, for example, the decisions of Besanko J in Australian Competition and Consumer Commission v Prysmian Cavi E Sistemi Energia S.R.L. (No 8) [2014] FCA 376 at [22] and Australian Competition and Consumer Commission v Prysmian Cavi E Sistemi Energia S.R.L. (No 11) [2015] FCA 876. [The defendant] has complied with its discovery obligations on this basis. It follows that [the defendant] cannot say whether or not documents of the kind identified in your letter exist."
12. On 12 February 2019, the Court ordered the defendant to make formal discovery of the additional categories of documents.
13. The plaintiff's solicitor, Dominic Macken, in an affidavit sworn on 13 February 2019, stated that he made online inquiries that established that as well as being a director of the defendant, Mr Alt was the President and CEO of Spay. Other inquiries suggested that a majority of the defendant's board is also a majority of the board of Spay, which does business as Stack Sports, formerly known as Blue Star Sports.
14. On 14 February 2019, the plaintiff filed his notice of motion, which seeks orders that: "1. If and to the extent that the Defendant/Cross-claimant identifies that any documents or categories of documents sought for discovery by the Plaintiff and ordered by the Court to be discovered on 9 November 2018 and 12 February 2019 are not within the possession of the Defendant/Cross-claimant but which the Defendant/Cross-claimant reasonably believes are or may be within the possession of Spay Inc (or any other related body corporate of the Defendant/Cross-claimant or Spay Inc) or in the possession of any respective directors, officers or employees of such entities (collectively 'Other Parties'): (a) the Defendant/Cross-claimant must make such requests and do such things as may be reasonably be necessary to obtain from such Other Parties and must thereafter discover all additional documents produced to it by the Other Parties falling within the categories of documents which the Defendant/Cross-claimant has been ordered to discover; and (b) on or before a date to be fixed by the Court, Mr Alex Alt must file and serve an Affidavit deposing to the efforts made by the Defendant/Cross-claimant to obtain the documents or copies of the documents, including details of each of its requests to any of the Other Parties and the responses thereto. 2. That the Defendant/Cross-claimant pay the costs of the Plaintiff/Cross-defendant in respect of this Notice of Motion."
15. On 26 February 2019, Mr Alt, in his capacity as a director of the defendant, wrote to Spay's board of directors, inquiring whether Spay would, if requested by the defendant, "produce documents to [the defendant] that are in their possession and which are responsive to the Discovery Orders". In a letter dated the following day, 27 February 2019, Eli Weiss, writing in his capacity as a director of Spay and describing himself as "an authorised decision-maker" for Spay, responded: "The Other Parties, including the directors of Spay, do not regard it as in their interests including as in the interests of Spay to produce documents to [the defendant] in circumstances where those documents, should they exist in Spay's possession, are perceived by [the plaintiff] as supporting a claim he has filed against one of Spay's subsidiaries, namely [the defendant]. In circumstances where the Other Parties are under no legal obligation to do so, the Other Parties would therefore not comply with any request from [the defendant] to produce documents to [the defendant] that are responsive to the Discovery Orders." Mr Weiss is also a director of the defendant.
16. On 28 February 2019, the defendant served a supplementary list of documents that did not list any additional documents within the further categories it had been formally ordered to discover. The defendant filed an amended cross-claim on 24 February 2019.
17. Andreas Piesiewicz, a partner at Johnson Winter and Slattery ("JWS"), which is the firm representing the defendant, swore an affidavit on 1 March 2019. He deposed that he was advised by another partner that Spay had provided some documents to JWS for the purpose of seeking legal advice and further documents after proceedings commenced for the purpose of preparing the defendant's defence and cross-claim, but none which were relevant to the proceedings since the discovery orders made on 9 November 2018.

Principles

1. The Court's power to order Sabre orders arises from s 61 of the Civil Procedure Act 2005 (NSW) which relevantly provides as follows: "61 Directions as to practice and procedure generally (1) The court may, by order, give such directions as it thinks fit (whether or not inconsistent with rules of court) for the speedy determination of the real issues between the parties to the proceedings. (2) In particular, the court may, by order, do any one or more of the following: (a) it may direct any party to proceedings to take specified steps in relation to the proceedings … …"
2. The relevant principles in relation to Sabre orders were firstly considered in Sabre Corp Pty Ltd v Russ Kalvin's Hair Care Co (1993) 46 FCR 428, where Lockhart J made orders requiring a party to request various documents from an overseas entity and to subsequently produce them to the Court. His Honour considered, at 423, that the Court's power to make such an order under a similar provision in the Federal Court of Australia Act 1976 (Cth): "… may be exercised where there is a real likelihood that the party to the proceeding against whom the order is made would be given access to the documents by the third party upon request."
3. Lockhart J went on to say, at 423: "This is a case where there is a real likelihood that the applicant will be provided access to the relevant documents by [the third party] Joico should it request it. Joico manufactures the products in the United States and the applicant is the exclusive Australian distributor of them in Australia and has held that distributorship since 1985. My view is strengthened by certain of the provisions of the current distributorship agreement between them…"
4. The Court's power to order a Sabre order was considered by Palmer J in Sogelease Australia Limited v Griffin [2003] NSWSC 178 at [37], which was quoted by Ward J (as her Honour then was) with approval in Bova v Avarti [2009] NSWSC 921 at [373]: "This Court has power [pursuant to s 76A of the Supreme Court Act 1970 (NSW)] to give such directions as the Court sees fit, whether or not consistent with the Rules 'for the speedy determination of the real questions between the parties to civil proceedings'. That section has been held to empower the Court to direct a party to take reasonable steps to procure documents from a non-party, even when it was not clear that the party had a presently enforceable legal right to compel production or inspection from the non-party: see eg Palmdale Insurance at 116-117; Burgundy Royale Investments Pty Ltd v Westpac Banking Corp (unrep, Federal Court 21 February 1990 per Foster J; BC9003178); and esp. per Giles J in Aetna Pacific Securities Ltd v Hong Kong Bank of Australia Ltd (unrep., NSWSC 29 April, 1993; BC9301701 at p12)."
5. As a preliminary matter, a Sabre order should only be considered after inter-parties discovery has taken place: Bova v Avati at [371]. As noted, this has occurred.
6. The authorities reveal a number of matters which are relevant to the Court's consideration as to whether to make a Sabre order.
7. Firstly, "there must be a likelihood that the documents sought are in fact in existence in the possession of the third party": SPI Spirits (Cyprus) Ltd v Diageo Australia Ltd (No 2) (2006) 155 FCR 150; [2006] FCA 931 (Edmond J), cited with approval by Ward J in Bova v Avarti at [370]; Gambro Pty Ltd v Fresenius Medical Care Australia Pty Ltd [2002] FCA 58 ("Gambro") at [16].
8. Secondly, there must be a "real likelihood" that the party to the proceedings "would be given access to the documents upon request": supra; Gambro at [17]-[19]. The difference in wording between "likelihood" and "real likelihood" suggests that this element has a higher threshold.
9. Thirdly, the order must be restricted to requiring the person against whom it is made to take all reasonable steps to obtain the documents.
10. Fourthly, the documents must be relevant to the issues in dispute: Gambro at [13].
11. Fifthly, the Court must consider "whether or not the documents are necessary for disposing fairly of the proceedings": Bova v Avarti at [372]. In Lisec Australia Pty Ltd v Saremach Pty Ltd; Saremach Pty Ltd v Lisec Australia Pty Ltd [2017] NSWSC 1127, McDougall J, at [15], dismissed an application seeking a Sabre order on the basis of an "absence of any demonstrated need" for the documents sought, with his Honour stating, at [8], "it is not at all clear to me that production of the documents would assist in clarifying matters".
12. A final consideration is the degree of oppression and hardship which would be occasioned to the third party by the making of such an order: Gambro at [20].
13. In the circumstances of this case, there is an overlap between these considerations, particularly (1) and (4), which are considered together.

(1) the likelihood that the documents sought are in the possession of Spay

(4) the potential relevance of the documents to the issues in dispute

1. As noted above, the defence and cross-claim are to the effect that the defendant is not liable for the sign-on bonus and other aspects of the plaintiff's claim, because of the plaintiff's negligence and misconduct. The defendant alleges that the plaintiff failed to advise the defendant of the serious concerns of its customers, the difficulties with the rolling-out of the TG Platform project and the state of the defendant's revenue, so that the defendant was unaware of these serious problems until about 22 September 2017.
2. The plaintiff notes that this explanation still leaves the issue of why the defendant, if ignorant of these aspects of the company's affairs, did not pay the sign-on bonus on 3 July 2017 as the parties agreed, or thereafter until it learned on about 22 September 2017 of those concerns.
3. The plaintiff relies on certain aspects of discovery and the defendant's pleadings to establish both relevance and the likelihood of the existence of documents in the possession of Spay.
4. The defendant produced on discovery an email chain from Mr Lodge including emails in July 2017, referencing Mr Lodge having "multiple conversations" with a number of persons or entities in relation to securing the payment of the sign-on bonus. No documents relating to those discussions have been produced.
5. The plaintiff points to a document produced by the defendant prepared by Mr Lodge on or about 11 October 2017 on Spay's letterhead, recommending consideration by the Spay board of a range of options available to it, including the termination of the plaintiff's employment. No other documentation explaining why the item was on the agenda for Spay's consideration has been produced on discovery.
6. In its defence to the amended statement of claim, the defendant pleads that a meeting of the board of directors of Blue Star Sports, which the defendant formerly did business as, reviewed STG's July 2016/17 financial year results and instructed Mr Lodge to withhold payment of the sign-on bonus on 30 August 2017.
7. Having access to documentation of the role of Spay over that period has obvious relevance, in order to ascertain what factors, prior to the realisation of the company's situation in September 2017, prompted the defendant to not comply with its obligation to pay the sign-on bonus pursuant to the ESA. Further, this material in combination with the responses by the defendant's solicitors to the plaintiff explaining the extent of its discovery, underscore the likelihood that such documentation exists.
8. I am satisfied that the documents sought are relevant and likely to be in the possession of the defendant.

(2) the real likelihood of the success of the request

1. The question of whether there is a real likelihood of success turns, at least in part, on the relationship and dealings between the party to the proceedings and the third party. In Gambro, Tamberlin J considered the interrelationship between the party to the proceedings and the third party at [12], and later went on to say: "[17] If a request were made for the provision of such documents to the overseas entities I consider that it is likely that they would be provided. The evidence indicates that the Frensenius group is closely integrated and that Fresenius Australia is controlled by its parent company and its subsidiaries. There are common ownerships. There is evidence of information exchanges and of the interest and involvement of the parent company in following these Court proceedings. The documents of the Fresenius entities indicate that they hold themselves out as a group operation and Fresenius Australia is the exclusive Australian distributor for the products which are manufactured abroad. It is obvious from the corporate structure set out earlier in these reasons that the group entities have a significant financial interest in the successful operation of Fresenius Australia. There is also evidence of the sharing of information by the overseas entities with Fresenius Australia. … [19] It cannot be said that if a request were made it would be futile because there is no effective sanctions which could be taken to enforce compliance."
2. The extent of overlap between Spay and the defendant, in terms of its share ownership, the directorships and some of its officeholders, suggests that it is well within the capacity of both the defendant and Spay to work cooperatively and efficiently to comply with a Sabre order. The letter from Mr Weiss to the plaintiff dated 27 February 2019, denying discovery of documents that would come within the motion, expresses reliance on the absence of a legal obligation to do so.
3. The fact of Spay's assistance to the defendant in these proceedings is another relevant factor. The defendant's solicitor, in his affidavit, deposes to his awareness of Spay voluntarily providing the defendant's solicitors with certain documents for the purpose of seeking legal advice, as well as for the purpose of preparing its defence and its statement of cross-claim. In Lisec Australia Pty Ltd v Saremach Pty Ltd, McDougall J noted, at [14]: "It is open to infer, on the evidence, that [the third party] Lisec Austria has given assistance to Lisec Australia in connection with this litigation. Indeed, it would be strange if this were not the case, given the potential for reputational damage that Lisec worldwide might suffer if court findings are made as to the alleged defects in the machines."
4. Although McDougall J ultimately dismissed the application on the basis that the documents sought were not necessary to resolve the proceedings, the above comments suggest that a third party's assistance to a party to the proceedings can be a relevant consideration in applications for Sabre orders.

(3) the order must be restricted to requiring the person against whom it is made to take all reasonable steps to obtain the documents

1. This is satisfied by the terms of the orders sought.

(5) the necessity of discovery of the documents for disposing fairly of the proceedings

1. In light of the relationship between Spay and the defendant, and Spay's apparent role in the decision to terminate the plaintiff's employment, the documents are necessary for disposing fairly of the proceedings.

(6) the degree of hardship or oppression occasioned to the third party

1. The defendant submitted that the likely cost and time of locating the documents sought and producing them to the defendant would be an onerous burden, particularly in light of the definition of "other parties, related companies and officers and directors of related companies and employees". The plaintiff submitted that, although he concedes there will inevitably be a cost involved, there is no evidence from which the Court could draw the inference that these costs would be significant. The defendant conceded that it would be within the Court's power to fashion an order requiring the plaintiff to bear Spay's reasonable costs in relation to fulfilling the request.
2. The plaintiff submits that an order could be framed in such a way as to set out appropriate steps to be taken by Spay to address any oppression or hardship to the defendant.

The form of the orders

1. The defendant objects to the order sought that would require Mr Alt, the CEO of Spay, to file and serve an affidavit deposing to the efforts made by the defendant to obtain the documents or copies of documents, including details of its requests to any other parties and responses.
2. It submits that the Court does not have the power to make an order over a person who is not a party to the proceedings. However, I was informed from the Bar table that, if the Court was minded to make such an order, rewording it to "an affidavit to be provided by a responsible officer of the defendant with knowledge of the relevant facts" would not be opposed.
3. The defendant also takes issue with the wording of order 1(a), namely, that the defendant do what is "reasonably necessary", on the basis that one cannot necessarily know what is reasonably required and in circumstances where a failure to comply would put the defendant at risk of contempt. It submits that, if the Court is minded to make the order, the words "as may be reasonably necessary" should be removed. The plaintiff submits that the orders sought are in the same form as the orders made by Lockhart J in Corp Pty Ltd v Russ Kalvin's Hair Care Co. I have decided to include those words, so as to make it clear that the obligation on the defendant extends to matters incidental to the purpose of the order.

Orders

1. I make the following orders. (1) If and to the extent that the defendant identifies that any documents or categories of documents sought for discovery by the plaintiff and ordered by the Court to be discovered on 9 November 2018 and 12 February 2019 are not within the possession of the defendant but which the defendant reasonably believes are or may be within the possession of Spay Inc (or any other related body corporate of the defendant or Spay Inc) or in the possession of any respective directors, officers or employees of such entities (collectively "Other Parties"): (a) the defendant must request such documents from the Other Parties and thereafter discover all additional documents produced to it by the Other Parties; (b) on or before 5pm on 4 October 2019, the defendant must file and serve an affidavit by a responsible officer of the defendant with knowledge of what steps the defendant has taken to obtain the documents from the Other Parties, deposing to the efforts made by the defendant to obtain the documents or copies of the documents, including details of each of its requests to any of the Other Parties and the responses thereto; and (c) The plaintiff pay the reasonable costs of the Other Parties incurred in searching for and producing the said documents to the defendant.
2. The defendant pay the costs of the plaintiff in respect of this notice of motion.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 06 September 2019