Michael v RJ Chalmers & Co;; Edwards v Causbrook & Associates;; Smidmore v RJ Chalmers & Co

The pleadings

1. Mr Michael's amended statement of claim refers to three plaintiffs: himself, his wife and their superannuation fund. The second defendant, by reference to the firm Causbrook & Associates, is described simply as "Causbrook", but I shall continue to refer to Mr Causbrook in that capacity. The statement of claim pleads Mr Causbrook's qualification not only as chartered accountant but also as a financial and investment planner (pars 72-3) and the plaintiffs' retainer of him in both those capacities (pars 76-7). It pleads his recommendation of investment in the Olive Project through conversations and the provision by Mr Causbrook of a report (pars 78-9).
2. Relevant information provided by Mr Causbrook is pleaded in par 80, as follows: "In recommending the product Causbrook indicated that it had the following characteristics that made it suitable and appropriate for the First, Second and Third Plaintiffs ('the information supplied'): (a) The pre-tax return would be 21.7 percent; (b) It carried minimal or negligible risk; (c) It was a suitable and appropriate means to minimise the First, Second and Third Plaintiffs' taxation liabilities; (d) There was financing for the product offered by Timbercorp; (e) It received a favourable product ruling, PR 2003/24, from the Australian Taxation Office confirming that all product costs are tax deductible when incurred; (f) It had the commercial benefits in that: i. there was opportunity to generate business income in an already established market; ii. as a listed public company with net assets of $197.6 million at 30 September 2002, the Timbercorp group had the market strength to maximise returns; iii. demand for olive oil and olive related products continues to increase; iv. Permanent Trustee Company Limited, one of Australia's largest trustee companies, is appointed as custodian for the product."
3. Paragraph 81 sets out relevant information which was not provided by Mr Causbrook, as follows: "In recommending the product Causbrook did not indicate anything of the following characteristics of the product ('the information not supplied'): (a) The projected pre-tax return was, on proper analysis, 7.31 percent, and not 21.7 percent; (b) Discounts to the projections of expected returns to take into account the significant risks of the product; (c) The investor may be required to continue making payments for the lifetime of the investment (23 years) if expenses exceed income; (d) That as a significant amount of the product may be sold overseas, exchange rate fluctuations can have a large effect on prices and income received; (e) That there was management risk, including the continuity and ability of the responsible entity to meet its obligations as to obtaining finance, marketing the produce, and managing the harvest; (f) The risk of changes to government policies; (g) That with the lifetime risk of an investment of 23 years there are many external factors which could affect the First and Second Plaintiffs over this lengthy period, including but not limited to personal injury, financial hardship and illness; (h) That there was a risk that the project manager, Timbercorp Securities Limited, might fail and cease as project manager. (i) That there was competition risk and market risk. (j) Advice regarding diversification of asset classes to reduce risk; (k) The availability of financial strategies with less risk to minimise the First, Second and Third Plaintiffs' taxation liabilities, and advice in respect of them; (l) The availability of more cost effective methods of borrowing funds to finance the investment;. (m) the precise details of the fees and/or commissions which were payable to Causbrook by Timbercorp regarding the investment product; and (n) The disclosure of the fact that Causbrook, as an authorised representative of Timbercorp Securities Limited, was limited in the investment products he could recommend, and that his advice was not independent."
4. Paragraphs 82-84 plead that the plaintiffs purchased the investment product as a result of Mr Causbrook's recommendation, that they paid him for his services, but that the product "has no current value and will have no value in the future." Paragraph 85 pleads Mr Causbrook's duty of care "to act reasonably in the provision of financial investment services, and recommendations in respect of those services and the product, including a duty of care not to cause economic loss." Paragraph 86 pleads breach of that duty, as follows: "In breach of that duty of care, and negligently, Causbrook recommended, with the purpose that First, Second and Third Plaintiffs follow the recommendation, the product, and in circumstances where Causbrook knew, or ought to have been aware, that the First, Second and Third Plaintiffs would act on the recommendation, and place reliance on it, which resulted in the First, Second and Third Plaintiffs purchasing that product." Breaches of duty are then particularised. One of those particulars is that Mr Causbrook did not act independently when recommending investment in the product: par 86(d)(x). Paragraph 87 pleads and particularises resultant loss and damage. The pleading of the claim in contract and the statutory claims is based upon the same material.
5. Put shortly, Mr Causbrook's defence is that he was not a qualified financial investment planner and did not provide services of that nature to the plaintiffs in relation to the Olive Project or, indeed, at all. He provided accounting, taxation and advisory services only.
6. He acknowledges having arranged and attended a meeting between Mr Michael, Mr Edwards and Mr Smidmore and a representative from Timbercorp, when that representative provided advice to them about Timbercorp products. He also acknowledges having provided Mr Michael with material relating to the Olive Project, including prospectuses, cash flow summaries and "independent research." This material contained information about the project, including its risks, projected returns, ongoing financial commitments and tax deductions. The report referred to in par 79 of the amended statement of claim was a "template document authored and provided by Timbercorp" which, among other things, recommended that persons deciding whether or not to invest in the project should obtain advice from a qualified financial advisor. In effect, he denies having recommended investment in the project, doing no more than advising that it was a "tax effective investment."
7. Generally, Mr Causbrook puts in issue par 80 of the amended statement of claim, concerning the information said to have been supplied by him, and par 81, detailing the information said not to have been supplied. As to par 81, this includes subparagraphs (m) and (n), concerning disclosure of fees and of commissions payable to him by Timbercorp in relation to the product, and the lack of independence and capacity to recommend other investment products occasioned by his status as an authorised representative of Timbercorp.
8. In response to par 85, he denies the particular duty of care alleged. As to par 86, he denies any breach of a duty of care for negligence as alleged. Other matters are raised in defence, but they are not relevant for present purposes.

The motion

1. As I have said, at the hearing of the motion discovery was sought from Mr Causbrook only and the categories of documents sought were narrowed to three: those numbered 5, 6 and 9. Categories 5 and 6 are as follows: "Category 5: Documents in respect of commissions or other financial and non-financial benefits received by the Defendant in respect of the investment products; Category 6: Documents evidencing the disclosure, and acknowledgement of disclosure, of the Defendants' commissions or other financial and non-financial benefits in respect to the investment products." The order sought in the Michael and Smidmore proceedings in respect of those documents embraces documents relating to the investments alleged to have been proposed or recommended by Chalmers & Co, as well as documents which may pertain to clients of Chalmers & Co other than the plaintiffs.
2. Category 9 is as follows: "Category 9: Correspondence, expert reports, file notes, memoranda, emails and all other documents in relation to claims made by other clients of the Defendants who had purchased/invested in the investment products for refund of monies and/or restitution and/or compensation." Here also, the order sought in the Michael and Smidmore proceedings in respect of this category embraces documents relating to investments alleged to have been proposed or recommended by Chalmers & Co.

Some relevant law

1. UCPR Pt 21 deals with discovery. Provision for an order that a party give discovery of documents by reference to particular classes (or "categories", the term used in the present motion) is to be found in r 21.2. An order for discovery may be made only in relation to a document which is relevant to a fact in issue in the proceedings: r 21.2(4). Rule 21.1(2) provides: "For the purposes of this Division, a document or matter is to be taken to be relevant to a fact in issue if it could, or contains material that could, rationally affect the assessment of the probability of the existence of that fact (otherwise than by relating solely to the credibility of a witness), regardless of whether the document or matter would be admissible in evidence." In Ritchie's Uniform Civil Procedure at [21.1.10] it is noted, by reference to authority, that documents sought on discovery need not be admissible or directly probative of a fact in issue, that the test is relevantly wide, and that prima facie everything which would "throw light on the case" is discoverable.
2. It is relevance which is the central issue here. I put to one side documents concerning investments said to have been recommended by Chalmers & Co, to which I shall return. At this stage I shall focus on documents related to the investments said to have been recommended by Mr Causbrook himself. Counsel for Mr Causbrook, Mr Carroll, objected to discovery of documents in category 9, and in category 5 and 6 insofar as they require the production of documents relating to clients of Mr Causbrook other than the plaintiffs, on the basis that they are not relevant to any fact in issue in the proceedings. Mr Romaniuk submitted that the documents could bear upon Mr Causbrook's knowledge of matters relevant to the existence, content and breach of his duty of care, that knowledge being relevant in law on the issue of negligence (and breach of duty for the purpose of the contract claim). Similarly, he argued that that knowledge was relevant to the claims under the Australian Securities Commission Act and the Fair Trading Act.
3. In relation to negligence Mr Romaniuk took me to a considerable body of authority, comprising cases dealing with claims for personal injury and economic loss. In particular, he took me to Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16, 216 CLR 515. This was a case of economic loss which, Mr Romaniuk said, identified the features to be considered on this issue, including the knowledge of the defendant as to the likelihood of damage, notions of assumption of responsibility or known reliance, and the vulnerability of the plaintiff to the risk. To understand his argument on this question, it is sufficient to set out two passages from the judgments in that case.
4. The first is in the plurality judgment (Gleeson CJ, Gummow, Hayne and Heydon JJ) at [22]-[24] (530-1): "22. In Caltex Oil (Australia) Pty Ltd v The Dredge 'Willemstad' the Court held that there were circumstances in which damages for economic loss were recoverable. In Caltex Oil, cases for recovery of economic loss were seen as being exceptions to a general rule, said to have been established in Cattle v Stockton Waterworks, that even if the loss was foreseeable, damages are not recoverable for economic loss which was not consequential upon injury to person or property. In Caltex Oil, Stephen J isolated a number of 'salient features' which combined to constitute a sufficiently close relationship to give rise to a duty of care owed to Caltex for breach of which it might recover its purely economic loss. Chief among those features was the defendant's knowledge that to damage the pipeline which was damaged was inherently likely to produce economic loss. 23. Since Caltex Oil, and most notably in Perre v Apand Pty Ltd, the vulnerability of the plaintiff has emerged as an important requirement in cases where a duty of care to avoid economic loss has been held to have been owed. 'Vulnerability', in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, 'vulnerability' is to be understood as a reference to the plaintiff's inability to protect itself from the consequences of a defendant's want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant. So, in Perre, the plaintiffs could do nothing to protect themselves from the economic consequences to them of the defendant's negligence in sowing a crop which caused the quarantining of the plaintiffs' land. In Hill v Van Erp, the intended beneficiary depended entirely upon the solicitor performing the client's retainer properly and the beneficiary could do nothing to ensure that this was done. But inEsanda Finance Corporation Ltd v Peat Marwick Hungerfords, the financier could itself have made inquiries about the financial position of the company to which it was to lend money, rather than depend upon the auditor's certification of the accounts of the company. 24. In other cases of pure economic loss (Bryan v Maloney is an example) reference has been made to notions of assumption of responsibility and known reliance. The negligent misstatement cases like Mutual Life & Citizens' Assurance Co Ltd v Evatt and Shaddock & Associates Pty Ltd v Parramatta City Council [No 1] can be seen as cases in which a central plank in the plaintiff's allegation that the defendant owed it a duty of care is the contention that the defendant knew that the plaintiff would rely on the accuracy of the information the defendant provided. And it may be, as Professor Stapleton has suggested, that these cases, too, can be explained by reference to notions of vulnerability. (The reference in Caltex Oil to economic loss being 'inherently likely' can also be seen as consistent with the importance of notions of vulnerability.) It is not necessary in this case, however, to attempt to identify or articulate the breadth of any general proposition about the importance of vulnerability. This case can be decided without doing so." (Footnoted case references omitted.)
5. The second passage is from the judgment of McHugh J. His Honour considered the issue of the plaintiff's vulnerability to the risk of injury from the defendant's conduct at [80] ff, and said at [87]: "The case for imposing a duty is always strengthened if the defendant actually knew of the risk. It is strengthened further if the defendant knew the magnitude of the risk. The significance of the defendant's knowledge of the risk of loss and its magnitude will depend on the facts of each case."
6. As to the statutory claims, Mr Romaniuk referred to some decisions relating to s 52 of the Trade Practices Act 1974 (Cth). In Campbell v Backoffice Investments Pty Ltd [2009] HCA 25, 238 CLR 304, French CJ at [26] drew a distinction between the approach to conduct as misleading or deceptive "when the public is involved, on the one hand, and where the conduct occurs in dealings between individuals on the other." In relation to the latter the Chief Justice said: "In the case of an individual it is not necessary that he or she be reconstructed into a hypothetical, 'ordinary' person. Characterisation may proceed by reference to the circumstances and context of the questioned conduct. The state of knowledge of the person to whom the conduct is directed may be relevant, at least in so far as it relates to the content and circumstances of the conduct."
7. In Miller & Associates v BMW Australia [2010] HCA 31, 241 CLR 357, French CJ and Kiefel J said at [14] (368): "In determining whether there has been a contravention of s 52 of the Trade Practices Act, it is necessary to determine 'whether in the light of all relevant circumstances constituted by acts, omissions, statements or silence, there has been conduct which is or is likely to be misleading or deceptive' [a reference to Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 41]."
8. In S & I Publishing Pty Ltd v Australian Surf Lifesaver Pty Ltd (1998) 43 IPR 581, the Full Court of the Federal Court, in a case concerning the alleged taking of the name or trade indicia of a trade rival, stated principles relating to s 52 at 587-588. The Court set out nine propositions, the sixth of which is relevant for present purposes: "Conduct may be misleading or deceptive or likely to mislead or deceive notwithstanding that the corporation said to engage in that conduct acted honestly and reasonably and did not intend to mislead or deceive … . Logically, a finding that conduct had been intentionally engaged upon will be irrelevant in determining whether that conduct is misleading or deceptive. It may perhaps be imagined that conduct engaged upon with the intent to mislead or deceive may fail in its purpose and not be found misleading or deceptive. Nevertheless, where the intention to mislead or deceive is found, it logically would be likely that a court would more easily find that the conduct was misleading or deceptive … ." (References to authority omitted.)
9. In Campomar Socieadad, Limitada v Nike International Limited [2000] HCA 12, 202 CLR 45, also an intellectual property case involving the application of s 52, the Court observed at [33] (63) that "where there is … a finding of intention to deceive, the court may more readily infer that the intention has been or in all probability will be effective."
10. I turn, then, to the categories of documents sought here. At this stage I shall consider documents relating to investments said to have been recommended by Mr Causbrook. It is convenient to deal first with category 9.

Category 9

1. It will be recalled that this category of documents relates to claims by other clients of Mr Causbrook in relation to the subject investments. As I have said, Mr Carroll's position was that those documents are not relevant. However, he interpreted the category to be directed only to complaints made against Mr Causbrook, and conveyed his instructions that there were no such documents. However, Mr Romaniuk explained that the category also extended to documents relating to Mr Causbrook's involvement in disputes on behalf of other clients about deficiencies in the investment products at the time that he was advising the plaintiffs about them. In oral argument Mr Carroll acknowledged that this was so, although he was not able to say whether there were documents of that kind. He did not develop submissions in response to Mr Romaniuk's argument that such documents would be relevant.
2. Clearly, they would be for the reasons articulated by Mr Romaniuk and in the light of the authorities to which he referred. Mr Causbrook's involvement in claims by other clients for refund of money, restitution or compensation arising from their investment in the products could establish that he knew, or ought to have known, that those products were deficient or, at least, that questions arose about their quality. As the authorities establish, this would be relevant to the issues of duty and breach in relation to the Common Law claims, and to misleading or deceptive conduct for the purpose of the statutory claims. It would also be relevant to the issue of the independence of the advice tendered by Mr Causbrook which, as I have said, is one of the breaches of duty particularised in par 86 of the amended statement of claim. It is also raised as a particular of misleading and deceptive conduct for the purpose of the statutory counts: par 93(e)(x).

Categories 5 and 6

1. These categories relate to commissions and other benefits, financial and non-financial, received by Mr Causbrook in relation to the investment products, together with documents relating to the disclosure of those commissions and benefits. As I have said, Mr Carroll questioned the relevance of documents of that kind insofar as they relate to other clients of Mr Causbrook.
2. It was clarified in correspondence and in argument that it is only documents arising at times when Mr Causbrook was advising the plaintiffs about the investments that are sought under these categories. Here also, Mr Romaniuk submitted that these documents would be relevant to the issue of the independence of Mr Causbrook's advice. The measure of commissions and other benefits obtained by Mr Causbrook through the sale of these products to other clients could bear on what Mr Romaniuk described as his motivation or intention in recommending them to the plaintiffs.
3. Mr Carroll's argument in response centred upon par 81(m) and (n) of the amended statement of claim, alleging a failure to disclose details of fees and/or commissions payable to Mr Causbrook by Timbercorp and his status as an authorised representative of that company. He approached the matter on the basis that what is sought by these categories is material suggesting that Mr Causbrook had a practice of not disclosing to his clients information of that kind, indicative of his awareness that he was under an obligation to do so. He argued that Mr Causbrook's state of mind is irrelevant: if he failed to disclose those matters when he was under a duty to do so, he would be in breach of that duty whether he was aware of it or not. Insofar as the material sought might be a foundation for the admission of tendency evidence, pursuant to s 97 of the Evidence Act 1995, he referred me to the decision of Santow J in Mahlo v Westpac Banking Corporation (Unreported, 21 November 1996), in which his Honour refused to order discovery of material which might have fallen into that category and reviewed authorities on that question.
4. However, I am persuaded that the material is relevant on the basis for which Mr Romaniuk contended. No issue of tendency evidence is raised, and it is not necessary to examine the decision of Santow J. Material relating to commissions and other benefits he might receive could bear upon Mr Causbrook's motivation to recommend the investment products to the plaintiffs and call into question the independence of that advice.
5. Investments recommended by Chalmers & Co
6. As noted, the categories of documents sought extends to investments said to have been recommended by Chalmers & Co. Indeed, the motion as it was originally drafted sought such documents in relation to all 9 categories. As I understand it, Mr Causbrook took over the affairs of the plaintiffs from Chalmers & Co. It is here that the part of Mrs Bateman's report relating to Mr Causbrook's advice to Michael to transfer his investments to his superannuation fund, referred to at paragraph 5 above, comes into play.
7. Put shortly, as Mr Romaniuk explained it, that advice amounted to a breach of Mr Causbrook's duty in respects similar to those pleaded in relation to the investments recommended by him. The advice encompassed other investments (in much the same commercial field) which had been earlier recommended by Chalmers & Co. Mr Romaniuk argued that this matter falls within the issues raised by the current pleadings and should be seen as relevant for the purpose of the present motion. Nevertheless, he acknowledged that there may need to be a further amendment of the statement of claim and handed up the amendments proposed.
8. However, I think there is force in Mr Carroll's response that there is no reference to any claim arising from the investments recommended by Mr Chalmers in the amended statement of claim as it stands. Further, while this matter and the proposed amendments were foreshadowed in correspondence, there was no application before me to amend and Mr Carroll told me that he was not in a position to deal with such an application at that time.
9. I think Mr Carroll's point is properly taken. While the foreshadowed claim is related to the current pleadings, it is a new claim which has not been pleaded and in respect of which issue has not been joined. This is a matter which the parties may be able to resolve, but as matters stand it is not appropriate to order discovery of documents sought on this basis.

Order

1. Accordingly, in each of the three proceedings I order the second defendant to provide discovery of the documents in categories 5, 6 & 9 relating to the investments referred to in the current amended statement of claim. I shall deal with any directions which may be required and, if necessary, hear the parties on costs.

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: 07 July 2015