the question of redaction
10 It seems to me that, over a number of years, particularly in complex commercial litigation (although not limited to that) the practice has developed whereby, in the course of giving standard or general discovery, the party giving discovery has taken the liberty of redacting parts of the information in an otherwise relevant document. The parties may make a unilateral decision concerning the relevance or confidentiality of the redacted material, but without having first obtained the agreement of the other party or an order of the Court to make the redaction.
11 It is not necessary for me here to review the background to this practice or the extent to which, under different rules of court in different jurisdictions in this country and elsewhere, the practice is supported. I generally agree, however, with the views of Logan J of this Court, made by reference to the recently superseded FCR 1979, that in discovery a whole document should be produced unless there is some prior agreement to the contrary from the opposing party or some prior dispensation from the Court: Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 4) [2010] FCA 863 (Sunland) at [98]. A question arises whether some different position obtains under the new FCR 2011.
12 I recognise that in some cases - and the minutes of a long meeting of some organisation may provide a good example - a document may contain many parts and many of them may be totally irrelevant to matters in issue in the proceeding such that redaction may easily be agreed by the parties. Ordinarily, however, it is undesirable for a party to go through a whole, apparently integrated document - for example, a letter or email - and make unilateral decisions about the relevance of certain words, sentences or paragraphs or sections. If the other party's sensible agreement to redaction cannot be obtained - bearing in mind the obligation of parties and their lawyers to act co-operatively in litigation under s 37M and s 37N of the Federal Court of Australia Act 1976 (Cth) (FCA) - then an application to the Court to rule on redaction is appropriate. If a party has acted unreasonably, their conduct may be recognised in an adverse costs order.
13 Where a party giving discovery considers that a document or material disclosed in the document in whole or in part is confidential, other considerations arise. If the party considers the material is confidential because it is the subject of the client privilege or legal professional privilege under the Evidence Act 1995 (Cth) or the general law, that status will be claimed on giving discovery and the document might possibly be the subject of redaction in that regard or not made available for inspection. But the document must be disclosed as one held by the party and the claim of privilege made. That process enables the party to whom discovery is being given, the opportunity to contest the claim to privilege.
14 However, where the party giving discovery simply makes a general claim to the confidentiality of the document or material in it - for example, because they consider the document discloses sensitive commercial information - then it seems to me quite inappropriate for that party unilaterally to redact the information or not produce the document at all. Simply to mention the option of not producing the document at all is sufficient to demonstrate the difficulty with that approach. Plainly, the document in such a circumstance is acknowledged to be relevant. All that the discovering party is claiming is that the document should have limited circulation. Not to disclose it in discovery would constitute concealment. In circumstances where this sort of confidentiality claim is asserted then, in my view, there is an obligation on the discovering party to apply early on for an appropriate confidentiality order pursuant to s 50 of the FCA, even if the parties agree that a confidentiality regime is required. This is because it is not open to the parties unilaterally to set the bounds of confidentiality; the Court must be satisfied as to appropriateness of the proposed confidentiality regime under s 50 FCA: Hogan v Australian Crime Commission [2010] HCA 21; (2010) 240 CLR 651 at [32].
15 The parties before me suggest, however, that there may be an argument that R 20.32 of the FCR 2011, which did not have an equivalent in the superseded FCR 1979, alters the principles suggested by Logan J in Sunland, in relation to which I have expressed my general agreement. Rule 20.32 enables the Court to make an order for production from a party in the following terms:
(1) A party (the first party) may apply to the Court for an order that another party (the second party) produce for inspection any document that is included in the second party's list of documents and that is in that party's control.
(2) The Court may order that inspection be given by electronic means.
It is suggested that the fact that the first party may apply to the Court for an order that the second party produce for inspection any document that is included in the second party's list of documents in that party's control, may be construed as tacit recognition of the right of the second party unilaterally to withhold from inspection the whole or parts of a disclosed document.
16 In my view R 20.32 should not be construed as a tacit recognition of a practice that permits a party unilaterally to redact or withhold information. Rule 20.32 is premised, in my view, on an understanding that where a party considers they are not obliged to produce for inspection any relevant document they must disclose that document in their list of documents. The expected reason for not producing a document for inspection would be that there is a justifiable claim for privilege in respect of it. Rule 20.32 recognises the power of the Court to determine the privilege question and, if there is none, order production.
17 Nonetheless, I accept, as in the case now before me, that if a party has given standard discovery under FCR 2011 and produced a document, but has taken the inappropriate step of unilaterally redacting parts of that document, then it is open to the party receiving the discovery to apply for an order for production of the whole of the document pursuant to R 20.32 in order to remedy the deficiency.
18 But I repeat that, in my view, it is inappropriate, as a matter of practice, without prior agreement between the parties or order of the Court, for the discovering party unilaterally to decide not to produce a document because it considers it, or parts of it, are not relevant or because they consider information to be confidential.
19 As to redaction, in my view, the administration of justice is best served first by the parties endeavouring to agree on redaction where one party considers that redaction is appropriate, or, if the parties are unable to come to some agreement about that, to apply to the Court to obtain a ruling on relevance. One can understand that in some circumstances - for example where a party has a diary in which many personal and obviously irrelevant matters are set out, as well as many relevant matters - where, for whatever reason, the parties are incapable of agreeing about what, if any, redaction is appropriate, questions of relevance and redaction will have to be decided by the Court.
20 As to confidential information not said to be privileged, it is also open to parties to come to some agreement about what documents might fall under a confidentiality regime and in respect of which an order of the Court will be required. It seems to me quite feasible for a party, where confidentiality is in issue, to indicate formally or informally to the other party that there are relevant documents but that they fall into the confidential category and that inspection will not be given pending an application to the Court for an appropriate confidentiality order. The application should then be made promptly.
21 Having stated those principles I turn to the particular circumstances of this application for an order for production of the whole of the currently redacted documents.
22 The defendants, pursuant to my order and by consent, have provided the disputed documents in an unredacted form indicating also what was redacted upon production. The defendants say that the redacted material is not relevant or is "confidential" because of commercial sensitivity. My task is to rule first, on relevance, and then, if necessary, on "confidentiality".
23 The particular confidentiality claimed is that redacted information is of a nature that in the hands of Mr Vinciguerra, who is maintaining the derivative action, would give him some unfair competitive advantage in the operation of a competing business. The assumption of the parties is that, if I were to support the claim made on behalf of the defendants, then some confidentiality regime would need to be put in place along the lines of allowing the plaintiff's lawyers to have regard to the documents, but not Mr Vinciguerra. I would then hear further from the parties on the terms of the confidentiality regime.
24 Financial records of Sola-Kleen: the defendants have produced Sola-Kleen's financial statements and income tax returns (as trustee for the Gilmour Family Trust) but only in a redacted form.
25 Having perused the document and the redactions, there can be little doubt that the financial statements and income tax returns of Sola-Kleen are relevant to the proceeding. The materials bear on the trading, income and receipt of management fees at material times by Sola-Kleen, the question of the amount and appropriateness of management fees being a significant issue in the proceeding.
26 Related to that issue is the appropriate apportionment of expenses between the plaintiff and Sola-Kleen, for the services that Sola-Kleen provided to the plaintiff.
27 As the plaintiff contends, an informed assessment of the reasonableness of fees paid to Sola-Kleen and the appropriateness of the apportionment of expenses between the plaintiff and Sola-Kleen most likely cannot sensibly be made without regard to the operations of Sola-Kleen. It would seem appropriate to know exactly what expenses were incurred, for example, in the operation of the business in order to understand whether management fees actually paid out are appropriate or arguably excessive. The document in full bears on these issues.
28 The remaining question is whether the relevant redacted information should be produced under some confidentiality regime. In this regard, the submission of the defendants is that to provide the relevant documents to the plaintiff would be to provide Mr Vinciguerra with commercially sensitive confidential information that he, through his business Capic, would then be able to use to the disadvantage of the defendants' rival business. The defendants submit that allowing Mr Vinciguerra access to the originals of the redacted documents would give him an insight into the manner in which the first defendant's business is conducted, including its inventory and profit margins. He and his business would thereby obtain a competitive advantage. The defendants highlight the fact that Mr Vinciguerra has never been a director of the second defendant and has never been privy to any confidential information of the second defendant, although he was at other material times a director of the plaintiff.
29 The plaintiff submits that the defendants cannot establish any justification for inspection to be limited to redacted documents and submit the defendants have made no attempt to explain how financial records which, at their most recent, are nearly four and a half years old and, at their oldest, are over 10 years old could possibly give a competitive advantage to Mr Vinciguerra.
30 The plaintiff further submits that the Court made findings on Mr Vinciguerra's application for leave to bring the derivative action to the effect that the claim concerns historical conduct that would not involve access to any current records of the defendant and that there is no reason to infer that the existence of litigation would impact in any significant way on the defendant's ongoing commercial affairs: Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763 at [96] (upheld on appeal MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367). Accordingly, the plaintiff says that the Court then rejected the contention that Mr Vinciguerra was in direct competition with the plaintiff through his business Capic and that the grant of leave would give Mr Vinciguerra access to sensitive commercial information of the plaintiff.
31 This is a case where the real question is whether the implied undertaking of a party in court proceedings who receives pre-trial disclosure, not to use the information disclosed for any purpose apart from the litigation unless the Court otherwise sanctions that use, sufficiently ensures the protection of this confidential information.
32 In arguing that the implied undertaking is an insufficient protection, the defendants relies on Mobil Oil Australia Ltd v Guina Developments Pty Ltd [1996] 2 VR 34, a decision of the Supreme Court of Victoria Court of Appeal (Winneke P, Phillips and Hayne JJA). That case recognised, as have many others before it and after it, that confidentiality is not ordinarily a sufficient reason to deny inspection of documents by a party as it is usually protected by the requirement that the documents be used only for the purposes of the litigation. However, it may be different when the party obtaining discovery is a trade rival. Then confidentiality may be destroyed once and for all, at least so far as that rival is concerned, and the obligation not to use the documents except for the purposes of the litigation is impossible to perform.
33 President Winneke and Phillips JA agreed with the judgment of Hayne JA (as his Honour then was). Ultimately Hayne JA found that the primary judge erred by ruling against the defendant's claim that a significant commercial advantage could or would be obtained by the plaintiff if it received certain information, without even considering the terms of the documents in question. For that reason, in this case I requested the provision of the unredacted documents so that I could consider the import of the redacted portions.
34 Having considered the redacted material, which includes round numbers as against income and expenses (in the main) that are some years old, I am unable to identify any risk, let alone real risk, that the provision of this information to the plaintiff and so Mr Vinciguerra in this proceeding, could give Mr Vinciguerra some unfair competitive advantage if he were to misuse the information. In these circumstances I reject the defendants' claim that the confidentiality of the redacted material requires an order of the Court preventing Mr Vinciguerra seeing that information. This is a case in which, in my view, the usual duty on a party, which plainly includes Mr Vinciguerra, to use the information disclosed in discovery only for the purposes of the litigation is sufficient to protect its confidentiality.
35 I would therefore make the following order:
1. The defendants produce for inspection by the plaintiff the financial statements and income tax returns of the second defendant which, to date, have only been provided in a redacted form.
36 Mr Gilmour's personal tax returns for financial years ending 30 June 2001 to 30 June 2007: Mr Gilmour has discovered personal tax returns but has only produced redacted copies which obscure all items other than the management fees he has received. The plaintiff says the financial statements for the years ended 30 June 2006 and 30 June 2007 record that director's fees in the amount of $118,913 and $129,633 respectively were paid. These fees must have been paid to Mr Gilmour as he was the sole director of the plaintiff at the time. Further, the management fee calculations disclosed in other documentation record that the management fees for the year ended 30 June 2005, 2006 and 2007 included amounts of $94,512, $204,776 and $204,776 to Mr Gilmour, presumably representing a portion of what Sola-Kleen paid Mr Gilmour during those years.
37 The plaintiff argues that one should presume that Mr Gilmour has actually been paid more by Sola-Kleen than the portion of payments that are sought to be recovered through the management fees. Thus, the plaintiff contends there is a central issue as the propriety of the payments received by Mr Gilmour and so it is necessary to test what he has actually received by looking at his tax returns in order to see what income he has received.
38 Mr Gilmour rejects the submission that his personal tax returns may be considered relevant to the matter in issue. He says that if the plaintiff wants to establish the amounts paid to Mr Gilmour by the plaintiff, then that is a matter that can be determined by the financial reports of the plaintiff. Any payments made by the second defendant to Mr Gilmour are not relevant as that is a matter between the second defendant and Mr Gilmour which does not involve the plaintiff.
39 When pressed about the relevance of information in Mr Gilmour's personal tax returns concerning income, director's fees and management fees more generally to the plaintiff's claim that excessive management fees were paid to Sola-Kleen and director's fees to Mr Gilmour, counsel for the plaintiff submitted that the plaintiff submissions necessarily were made having seen the records of the second defendant. Only part of the payments to Mr Gilmour with which the plaintiff is concerned are director's fees paid by the plaintiff and recorded in the plaintiff's financial statements. The other payments with which the plaintiff is concerned are those set out in documents purporting to record the calculation of management fees for particular years. The plaintiff does not know if those payments were actually made. If they were actually made, the plaintiff wants to know what portion of the total payments from the second defendant to the first defendant in any given year were, in order to see what portion has actually been incurred by the plaintiff, and how much Mr Gilmour was paid by Sola-Kleen.
40 Counsel contends that the quantum paid to Mr Gilmour by Sola-Kleen is also relevant to the propriety of what was paid, because if Mr Gilmour was paid a fair remuneration for acting as managing director by both the plaintiff and the second defendant, and half of that cost has been passed on by the second defendant to the plaintiff through management fees, an additional six figure director's fee paid by the plaintiff will be quite easy to challenge.
41 Counsel emphasised that without the first defendant's tax returns it is unable to impugne the plaintiff's records.
42 In summary, the plaintiff submits that it is entitled to test by all legitimate means necessary whether Mr Gilmour was actually paid the sums disclosed in the plaintiff's records so far discovered.
43 Counsel for Mr Gilmour contends that the Court must bear in mind that there are two distinct categories of payment: the director's fees and the management fees. To deal with the management fees, the position is that management fees were paid to Sola-Kleen and that those were then paid by Sola-Kleen to Mr Gilmour and the arrangements between Sola-Kleen and Mr Gilmour is not something in issue in the proceeding. Even if it were the case that management fees are relevant in the hands of Mr Gilmour, it does not follow that the proportion then onpaid to him satisfies the test of relevance in that they do not directly go to a matter in issue, that is, bolster one side's case or be detrimental to the other.
44 I was at first, in considering this issue, inclined to accept the submissions made on behalf of Mr Gilmour. However, on closer reflection, I am persuaded that, in this case, Mr Gilmour's tax returns as to what director's fees and management fees he received from Sola-Kleen as disclosed in his tax returns should be the subject of discovery. The circumstances of this case as alleged are that the defendants in effect ran the plaintiff company. Sola-Kleen received management fees for doing so. Mr Gilmour received director's fees for doing so. Sola-Kleen also paid a proportion of management fees, apparently, to Mr Gilmour. It seems to me that, if the payment of these various fees is the central issue in this proceeding, it is directly relevant to know just what director's fees and management fees Mr Gilmour received, and in that regard his personal tax returns disclosing such income are directly relevant.
45 I do not accept, however, a broader contention put on behalf of the plaintiff that the tax returns are also directly relevant because they would enable a line of cross-examination concerning just what activities Mr Gilmour was involved in at material times so that some measure of his availability can be made in order to judge whether or not he was available to do the things on behalf of the plaintiff that justified the director's and management fees in issue. They may be indirectly relevant but that is a matter that can be pursued quite independently of the returns.
46 I would therefore order that:
1. The personal tax returns of the first defendant for the financial years ended 30 June 2001 to 30 June 2007 insofar as they disclose the income received by the first defendant from director's fees from the plaintiff and management fees from the second defendant be produced. Thus, other materials in the income tax returns may be the subject of redaction.