Moffett v Phillips

Judgment 1This is the hearing of two notices of motion in these proceedings. In the plaintiff's notice of motion filed 18 September 2012 the plaintiffs seek to: (i)Set aside a subpoena addressed to Harmony and Balance Pty Ltd, their accountants; (ii)Alternatively, order that inspection of any documents produced by them be limited to legal representatives of the defendants on a suitable undertaking; (iii)Leave to file a further second amended statement of claim which joins Tim Barry Phillips and Donna Phillips in their capacities as trustees of the Phillips Super Fund. 2The defendant cross-claimants' notice of motion seeks: (i) discovery of certain documents referred to in the schedule to the motion (ii) that the plaintiffs give discovery without any masking of those documents which it has discovered to date with masking. 3I will firstly deal with the application to file a further amended statement of claim. The purpose for seeking to file this claim is to join two additional defendants, Tim Barry Phillips and Donna Phillips, who are also trustees of the Phillips Super Fund. 4The need to add them arises because of a claim by the plaintiff seeking to enforce a sales clause contained within a statement of understanding executed by the parties on 30 April 2010. The form of the statement of the understanding is as follows: This statement of Understanding is between Allan Phillips and Mark Moffett and their respective company entities as a concluding agreement for the Supply Stream Partnership (45 452 354 517) which is to be restructured at 30 April 2010. Facilities - Mark shall pass all ownership of the following facilities to Allan Phillips: Supply Stream Business Name Supply Stream Business Logo Supply Stream Business Telephone/Fax/Data Numbers Supply Stream Business Domain/Website/Email Addresses Capital - Attached is the capital list to be split/allocated as agreed Unit Transfer - Allan and associated entities has agreed to pay Mark and associated entities an amount of $270,000 ex GST for full settlement of unit shares - Reliance Trust - 7/1 Reliance Drive, Tuggerah, NSW 2259. Mark and Allan to remain jointly liable for associated and relevant Land Tax amounts payable. Account Split - attached is the client account list to be split/allocated as agreed. It is jointly agreed by both parties that each party shall not approach or accept business from the other party's accounts for a period of 12 months and support shall be given to assisting each other in the transition for all clients to the respective new entities. 5The relevant clause for the sale is what is called the "Unit transfer" to which I have just referred. The plaintiffs suggest that it would extend to a purchase by the Phillips Super Fund of the relevant shares. 6The defendants oppose the joinder, not because of the necessity to add two parties but what they say are difficulties with the proposed statement of claim. 7The first of these is that, of course, that the Phillips Super Fund is not mentioned in the Statement of Understanding. However, it does refer to "Allan and associated entities" in the relevant paragraph, although this is to be noted as different from "Mark Moffett and their respective company entities". I think it is at least arguable for the purposes of pleading that in the sale clause one of the associated entities may be the Phillips Super Fund. 8The other problem foreshadowed by the defendants is that in paragraph 13 of the proposed claim when dealing with entering into the agreement of 30 April 2010, it is pleaded that Mr Phillips on behalf of inter alia the Phillips Super Fund, reached the agreement. Given that he is not the sole trustee plainly there is no proper pleading of the nature of his authority relied upon to bind the Phillips Super Fund in respect of the agreement. Subject to this being properly pleaded, in my view I should give leave to file the amended statement of claim. 9I turn to the additional discovery sought by the defendant against the plaintiff. The documents to be included in respect of which discovery was sought, are set out in the schedule to the notice of motion filed 23 October 2012 which is in the following terms: (a)All financial records (including but not limited to balance sheets, cash flow statements, profit and loss statements, bank account statements, income taxation returns and business activity statements, amended business activity statements, all Zebra financial data and Banklink financial data) in respect of the Second Plaintiff, Lianavale Pty Limited between 1 January 2010 and the present; (b)The asset register and depreciation table for Lianavale Pty Limited for the years 2009, 2010 and 2011; (c)The bank account statements and loan account statements of Lianavale Pty Limited for 1 January 2010 to 20 July 2011; (d)All documents referring, concerned with or relating to invoices issued to CostSmart between 1 May 2010 to present; (e)All documents referring, concerned with or relating to invoices issued by CostSmart to BCS, Bloombergs and Clayton Utz between 1 May 2010 to the present including all covering e-mails for invoices issued in that period. (f)Copies of all communications (including but not limited to draft and final letters, facsimiles, e-mails, reports, diary entries, gift register entries, courier orders and file notes in respect of or relating to communications by with or between any of the Plaintiffs and any of the customers (including but not limited to AON, Fairfax and Wideline Windows and Doors) allocated to Allan Phillips or Raedat Pty Limited under the Terms Sheet between 1 January 2010 and 20 July 2011. 10At the hearing the defendants made an oral application to extend the reach of sub-paragraph (c) above by making the period 1 January 2010 to date. There is no doubt about the general relevance of the documents of Lianavale having regard to the claims made in the amended cross claim. There are limited objections to some of the documents which are referred to in the schedule. In respect of sub-paragraph (a) the first objection is that it is too broad, irrelevant and oppressive to the extent that it relates to the period after 30 April 2011. Given that there is also a claim under s 42 of the Partnership Act 1892 I do not think that this is an appropriate objection. The second objection is that it is said to be inter alia oppressive to the extent that it relates to the customers of Lianavale and the identities where the customers were not customers of the Supply Stream partnership. That was, of course, the partnership which was sought to be dissolved by the agreement of 30 April 2010. It may be that such customers will not be relevant in the calculation of any loss of profit but I think the general nature of the request is not too wide on this account because one of the things that will have to be established are the actual profits made by Lianavale. A subsidiary question later will no doubt be reducing that by something that does not relate to the Supply Stream partnership. Accordingly I have allowed sub-paragraph (a). 11The only objection to sub-paragraph (b) is that it includes the year 2009. I do not see how this is relevant and accordingly 2009 should be deleted from sub-clause (b). 12In respect of sub-clause (c) I note that the objection is that it discloses the identity of Lianavale customers who are not customers of the Supply Stream partnership. I think the source documents are important and I will allow it as amended in the oral application. 13Sub-paragraph (d) is said to be irrelevant as it relates to invoices issued to Costsmart. This is appropriate and accordingly sub-paragraph (d) is not allowed. 14The objection to (e) has been withdrawn. 15The objection to paragraph (f) is that it is oppressive as it relates to all communications rather than documents in respect of the particular topics. Plainly the drafter is intending to pick up documents and I think this paragraph should be allowed with a substitution of documents rather than communications. 16I turn to the defendant's application that the documents be unmasked. As a result of an offer to identify those documents said to be redacted, there was produced a bundle of documents which the defendant submits has been or may have been redacted and that is Exhibit 2 before me. On some documents, such as p 88 of that exhibit, one can clearly see redacting which has occurred by crossing out of financial figures. In other examples, such as p 63, there plainly have been large parts of the documents not disclosed. In their submissions the defendants said the following: "In Nak Australia Pty Ltd v Starkey Consulting Pty Ltd [2008] SC 1136 Brereton J made it clear that a party has a positive right to mask a portion of a document provided for discovery if that portion contains a privileged communication. But there is no such positive right where documents are sought to be withheld on grounds of confidentiality or irrelevance, as distinct from privilege. In that situation, unless there is agreement between the parties, the masking party must obtain the approval of the Court. In the present case, the Plaintiffs did not obtain any such approval and the basis for masking each document is still unknown. See also mcdougall in Westgate Financial v May [2012] NSWSC 806 (13 July 2012) at [23] and [24]. Indeed, McDougall J indicated that irrelevance is usually no basis at all for masking portions of documents." 17Not only is what has been submitted by the defendants correct in terms of obtaining approval, it is also apparent from cross-examination of the solicitor for the plaintiffs. The solicitor for the plaintiff swore that the documents that were redacted related to financial information and that it was sensitive financial information which would be disclosed to the legal representatives if they gave appropriate undertakings. It appeared from the cross-examination of Mr Scroope that in fact he did not supervise or take any part in the redacting of information but merely gave instructions to his client about what could be redacted. It is thus that we have a situation where the client has deleted parts of documents and that those deletions have not been checked by the solicitor before completing discovery. Although Mr Moffett did give some evidence about crossing out numbers it has been suggested that where, for example in pages 60, 61, 62 and 63 there are large parts deleted that it might just simply have been his computer did not print them all out. This seems a very far-fetched explanation. 18While the documents provided as a result of the discovery order were accompanied by a supporting affidavit and a solicitor's certificate of advice, as required by r 21.4 of the Uniform Civil Procedure Rules, it is of concern that the solicitor has taken no part in the discovery process that has gone on to date, and nor has there been sought the approval of the court to redaction. 19In Figtree Developments Ltd v Australian Property Custodian Holdings Ltd [2008] FCA 1041, the plaintiffs had, without a court order, masked out portions of discovered documents. The "masking out" was performed by a solicitor, a graduate and a research clerk. On occasion, advice was sought from a more senior practitioner within the firm. Logan J expressed a concern that it was difficult to form a view as to the quality of the forensic judgments from what was left unmasked. Logan J said, at [55]: "Prime was entitled to expect, having regard to the orders made and the ordinary practice of the Court, that inspection would follow in the ordinary way of complete documents subject, of course, to just claims of privilege. Prime's complaint does not strike me as a precious one; it does not question for one moment the integrity or good faith of those involved in the masking-out exercise. There should not be, as a result of the orders that I propose to make, any inference drawn at all in relation to integrity or good faith. 56 It is submitted that there is no utility demonstrated in requiring the provision for inspection of complete documents; I respectfully disagree. ... 57... At present, it seems to me that Prime has been presented, in a way the nature and extent of which it is not possible, on the materials to hand, fully to judge, with, at least, some and probably many documents which have about them a quality of sterility and depravation of context so far as their meaning is concerned. There is, in my opinion, forensic utility in the ordinary position prevailing. That Fig Tree may incur further expense in the provision of unmasked copies is a consideration, but it is outweighed by the considerations that I have mentioned. 58 A concern also that I have is that, at this stage, one ought not encourage what I regard as a practice which is irregular. Irregular, in the sense that no Court order and, for that matter, no prior agreement was sought." 20Although the plaintiffs' solicitor advised his clients as to their obligations arising under an order for discovery, the fact that he did not review the documents before they were redacted raises doubts as to the process of decision-making in relation to what parts of the documents were redacted. In the circumstances I am not satisfied that the plaintiff has given discovery of the appropriate documents. 21This raises the other matters which were debated before me, namely the subpoena addressed to the parties' accountant and the claim to restrict access of those documents to the defendants' legal advisers. The subpoena to Harmony and Balance Pty Ltd, which provides accounting services to Lianavale Pty Ltd, sought the following documents. "1. All financial records and copies of financial records in respect of Lianavale Pty Ltd ACN 110 278 496 created, sent or received since 30 June 2009 including but not limited to: (a) Balance sheets; (b) Cash flow Statements (c) Profit and loss statements; (d) Income taxation returns; (e) Business activity statements; and (g) Amended Business Activity Statements 2. All correspondence with Lianavale Pty Ltd and/or Mark Moffett created, sent or received since 30 June 2009." 22So far as the terms of the subpoena are concerned they object to paragraph 1 in that it is not relevant to facts in issue and is impermissible fishing. Objections are also taken to documents prior to 1 February 2010 as the breach of fiduciary claim relates to conduct in that year. They also suggest that documents after 30 April 2011 should not be produced and suggest that it might involve the clients who are not clients of the Supply Stream partnership. Given that the financial documents sought obviously relate to annual years I do not think that the commencement date "since 30 June 2009" is too early. Given the decision earlier I do not think it should be limited to 30 April 2011 and because of the nature of the documents it should not be limited to particular clients. Accordingly I would allow paragraph 1. Paragraph 2 seems to me, given the width of it and it being in relation to no specified subject matter, is nothing more than a fishing expedition and I would set aside paragraph 2 of the subpoena. I do not think at this stage in the proceedings that the issue of a subpoena is an abuse of process designed to usurp the effect of clauses 4, 5 and 6 of Practice Note SC Equity 11. 23I turn to the alternative claim of the plaintiffs that the court order that inspection and disclosure by the defendants of any documents produced in answer to the subpoena be restricted to the legal representatives of the defendants, subject to them first providing suitable written undertakings to the court not to disclose to the defendants the contents of documents produced until further order of the court. This claim for confidentiality is also made in respect of the documents produced on discovery. 24Given the allegations in the pleadings I think it is clear that the parties are trade rivals. In this circumstance there clearly can be some basis. For example, in Mobile Oil Australia Ltd v Guina Developments Pty Ltd (1996) 2 VR 34, Hayne JA said: "While it may readily be accepted that a party is ordinarily entitled to discovery and inspection of all discoverable documents in the possession or control of the opposite party (save those for which a valid claim for privilege from production is claimed) it is important to bear steadily in mind that discovery is but a tool to be used in the pursuit of justice and that the right to discovery and inspection is not without its limits. The first and most obvious limit is that a party does not have a right to inspect documents that are discovered if there is a valid claim to privilege from production (as eg on the grounds of legal professional privilege). Secondly, because the law recognises that the assertion of compulsive power requiring production must be balanced against the needs of justice, a party inspecting the documents of the opposite party may not use them except for the purposes of the action in which discovery is made. Where it is said that the documents are confidential, it may be accepted that the fact that the documents are confidential will not ordinarily be a sufficient reason to deny inspection by the opposite party. In most cases, the fact that the documents may not be used except for the purposes of the litigation concerned will be sufficient protection to the party producing them. But where, as here, the party obtaining discovery is a trade rival of the person whose secrets it is proposed should be revealed by discovery and inspection, other considerations arise. Once the documents are inspected by the principals of the trade rival the information which is revealed is known to the trade rival and cannot be forgotten. Confidentiality is destroyed once and for all (at least so far as the particular trade rival is concerned). To say that the trade rival is bound not to use the documents except for the purposes of the action concerned is, in a case such as this, to impose upon that trade rival an obligation that is impossible of performance by him and impossible of enforcement by the party whose secrets have been revealed. How is the trade rival to forget what internal rate of return the competitor seeks to achieve on a new investment of the kind in question? How is the party whose hurdle rate has been revealed to know whether the rival has used the information in framing a tender? Thus, if the trade rival may inspect the documents concerned, the confidentiality of the information in them is at once destroyed. Is that necessary for the attainment of justice in the particular case? ... It is only upon consideration of exactly what is in the documents that a decision can be made about what orders should be made for inspection by or on behalf of the plaintiff. Hitherto, I have spoken generally of 'the plaintiff' without seeking to distinguish between its officers, its legal advisers or experts that it may retain for the purposes of the litigation. Where, as here, the problem is one of balancing the needs of a party to the litigation and the legitimate concern of a trade rival to retain secrecy of commercially sensitive information, it may well be necessary to mould orders that will distinguish between the plaintiff, its officers, its legal advisers and experts. Again it may be accepted that generally a party is entitled to inspect the documents of an opposite party by itself its servants or its agents. But in the present kind of case, is it necessary to destroy the legitimate claim to confidentiality from trade rivals by permitting the principal of that rival to look at the documents? Is it sufficient to permit counsel and solicitors (and nominated experts) to do so? It is now commonplace in the courts for material to be made available only to the legal advisers of the parties and nominated experts. Of course such arrangements bring with them their own difficulties and are arrangements that should be adopted only where there is a need to do so; of course they are arrangements that may need to be reviewed as the matter progresses towards trial or as the trial itself proceeds. But they are arrangements that are made and should be made when doing so would strike a fair balance between the competing interests of the party seeking inspection and the party claiming confidentiality. No more specific rule can be laid down - each case will fall for determination according to its own facts. In particular the nature and the content of the disputed documents is a matter that will usually, if not invariably, be of great importance in forming a conclusion and, if that is so, it will be appropriate for the judge to inspect the documents concerned." 25I also note that in Lenark Pty Ltd v The Chairmen 1 Pty Ltd (No 2) 2012 NSWSC 415 Black J stated the following propositions: "11. The principles applicable for orders in respect of confidentiality or restrictions on access, in proceedings involving trade rivals and potential trade rivals, were not substantially disputed by the parties and I referred to those principles in my earlier judgment. Once trade rivalry is established, then the Court must be conscious of the risk that, once the principals of the trade rival inspect confidential information, then that information cannot be forgotten and it may be impossible for the trade rival not thereafter to use that information except for the purposes of the proceedings: Mobil Oil Australia Ltd v Guina Developments Pty Ltd [1996] 2 VR 34 at 38. It will often be appropriate where confidentiality is claimed for the Court to inspect the relevant documents since '[i]t is only upon consideration of exactly what is in the documents that a decision can be made about what orders should be made for inspection by or on behalf' of the other party, and arrangements as to confidentiality should 'strike a fair balance between the competing interests of the party seeking inspection and the party claiming confidentiality' and the nature and content of the disputed documents will be an important relevant matter: Mobil Oil v Guina at 39-40. 12. These principles have been adopted in subsequent decisions including Reebok International Ltd v Sydney Organising Committee for the Olympic Games [2000] NSWSC 295, affirmed Sydney Organising Committee for the Olympic Games v Reebok International Ltd [2000] NSWCA 185. The applicable principles were summarised and applied in Cadbury Pty Ltd v Amcor Ltd (No 2) [2009] FCA 663 at [6] and [7], where Gordon J pointed to the need, in litigation between trade rivals, to strike a fair balance between the needs of the party seeking discovery and the legitimate concern of the trade rival to retain the secrecy of its commercially sensitive information; pointed to the importance of inspection of the nature and contents of the documents in issue to resolve such a dispute; and noted that it was for the party seeking an order limiting inspection of discoverable documents to establish the character of each such document that warranted protection additional to that granted by the implied undertaking. 13. In Portal Software International Pty Ltd v Bodsworth [2005] NSWSC 1115 at [41]- [42] and Drivetime Radio Australia Pty Ltd v Pivotal Creative Solutions Pty Ltd [2010] NSWSC 763, Brereton J emphasised that the Courts are reluctant to exclude the parties to the litigation from knowledge of relevant material by limiting access to their advisers, although the Court may sometimes need to take that approach. In NAK Australia Pty Ltd v Starkey Consulting Pty Ltd [2008] NSWSC 1136 at [8]- [9], Brereton J referred to his decision in Portal Software International Pty Ltd v Bodsworth above and observed that: 'it has long been the practice that restrictions be imposed on the access of a party to documents produced on discovery, or on subpoena, particularly in cases concerning patents and trade secrets. Although that is less so when documents are sought from parties to litigation than from third parties, and particularly where it is a plaintiff who asserts confidentiality against a defendant (because, the plaintiff having invoked the jurisdiction of the Court, a still stronger case is required to deny a defendant access to relevant confidential documents), the position of a defendant brought to a court by a plaintiff is in an intermediate position. Protective limitations are sometimes introduced at the time of the production or inspection - such as orders for inspection by an independent solicitor or expert, or limiting access (for example) to the plaintiff's expert but not the plaintiff, or inspection by the plaintiff's solicitor but not by the plaintiff. In more recent times it has become rarer that a person is excluded from knowledge, because courts take the view that decisions such as whether to continue or abandon litigation should be made by the party personally on advice, rather than by the advisors. Imposing restrictions on the ability of lawyers to speak to their clients and disclose to their clients information produced to them is undesirable. It places those lawyers in a position of difficulty vis-a-vis their client and even in the conduct of the litigation. But, despite these difficulties, courts do nonetheless still make such orders as the best compromise that can be achieved between preserving the interests of the defendant's confidentiality, and allowing the plaintiff reasonably to conduct its case.' 14. In accepting a regime that limits access to external solicitors and counsel, the Court must be conscious that, as was noted in ICAP Australia v Forrest Moebes [2010] NSWSC 738 at [11]: 'Those solicitors and counsel must act on the instructions of someone; and normally the person or persons giving those instructions should be entitled to see all the documents available to their advisers so that they can understand the basis of any advice given to them'. 15. A party who seeks protection additional to that given by the implied undertaking generally bears the onus of establishing that each document in relation to which additional protection is sought warrants that protection: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 1024; Betfair Pty Ltd v Racing New South Wales (No 5); ICAP Australia v Forrest Moebes above. Although documents are not protected from discovery by reason of confidentiality alone, the obligation to give discovery should not place upon the litigant (or third parties) any more oppressive burden than is required to permit justice to be done and that Courts will more closely scrutinise the discovery sought to ensure that it truly is material and not oppressive where giving discovery would involve the loss of trade secrets or confidences: Science Research Council v Nasse [1979] UKHL 9; [1980] AC 1028 at 1065; NAK Australia Pty Ltd v Starkey Consulting Pty Ltd above at [4], [10]." 26Thus, in Lenark, the court looked through a bundle of documents and assessed whether each one needed a confidentiality regime See also Portal Software v Bodsworth [2005] NSWSC 1115 (14 October 2005). 27Further, in NAK Australia Pty Ltd v Starkey Consulting Pty Ltd [2008] NSWSC 1136 at [10], Brereton J said that: "Ultimately, the fact that giving discovery would involve the loss of a party's own trade secrets or confidences is of itself no objection to discovery, but courts more closely scrutinise the discovery sought to ensure that it truly is material and no oppressive in such a case [Great Western Colliery Co v Tucker (1874) LR 9 Ch App 376; Moore v Craven (1870) LR 7 Ch App 94; Carver v Pinto Leite (1871) LR 7 Ch App 90; Aktiebolaget Hassle v Pacific Pharmaceuticals Ltd [1991] 3 NZLR 186; Matthews & Malek, Discovery, (1992) Sweet & Maxwell, [6.23]]" 28In my view, the present application is premature because the plaintiffs need to firstly discover the relevant documents and then make an application for access to particular documents to be restricted. This will allow the Court to assess the documents on some later application in order to see whether the confidentiality ought to be protected in the usual way by giving an undertaking and restricting access to legal advisers. Accordingly at this stage I will reserve a further application as to whether production be subject to particular restrictions to legal advisors. 29So far as the production of the redacted documents are concerned I think that it is appropriate that the plaintiff's solicitor carry out the exercise of checking the presently discovered documents to see what has been redacted and then if necessary making application to the Court to redact particular documents in respect of particularly sensitive financial information. 30I direct the parties to bring in short minutes. I certify that this and the preceding 14 pages are a true copy of the reasons for judgment herein of the Honourable Associate Justice Macready. Dated: 7 December 2012 Associate Tania Waterhouse 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 December 2012