O'Connor v O'Connor

Issues for determination

1. The application for preliminary discovery is made pursuant to Uniform Civil Procedures Rules 2005 (NSW) ("UCPR"), r 5.3(1) which provides: 5.3 Discovery of documents from prospective defendant (1) If it appears to the court that: (a) the applicant may be entitled to make a claim for relief from the court against a person (the prospective defendant) but, having made reasonable inquiries, is unable to obtain sufficient information to decide whether or not to commence proceedings against the prospective defendant, and (b) the prospective defendant may have or have had possession of a document or thing that can assist in determining whether or not the applicant is entitled to make such a claim for relief, and (c) inspection of such a document would assist the applicant to make the decision concerned, the court may order that the prospective defendant must give discovery to the applicant of all documents that are or have been in the person's possession and that relate to the question of whether or not the applicant is entitled to make a claim for relief.
2. The first defendant resists the application for preliminary discovery on the ground that the requirements of UCPR r 5.3(1) are not satisfied, and that the foreshadowed claims against him cannot succeed. As a fall-back, he contends that the discovery sought is too broad.
3. Diona and Calibre were represented separately to the first defendant. They are party to a confidentiality agreement with the first defendant which prevents them from complying with the plaintiffs' request for documents without the first defendant's consent, which has been withheld. They also resist the application, and contend by way of fall-back that the discovery sought from them is too wide.

Claims against first defendant

1. Diona was incorporated in May 1980. Its business was, and remains, the provision of construction services, particularly in utility and infrastructure works. It appears that, following its incorporation, four shares were issued in Diona, three to the first defendant and one to his wife. The first defendant was a director of Diona from its incorporation until its sale to Calibre.
2. The first plaintiff is the brother of the first defendant and the second plaintiff is a former family friend. In 2005, each plaintiff contributed (to use a neutral term) $150,000 to Diona (the first plaintiff's contribution was made in October and the second plaintiff's in December, according to the evidence on this application). The plaintiffs were appointed as directors of Diona in early 2006. The plaintiffs claim that it was orally agreed that they would each receive a one-twelfth share of Diona. No shares were ever issued in compliance with the agreement alleged by the plaintiffs. But there is evidence that the plaintiffs were represented in dealings with other parties to be shareholders of Diona.
3. From time to time draft shareholder agreements were discussed. In late February 2013 David Charles O'Connor, who was then the managing director of Diona and is the son of the first defendant, circulated a further proposal which involved the issue of preference shares to each of the plaintiffs. In April 2013, solicitors acting for the first plaintiff wrote to the first defendant and his wife, as shareholders of Diona, complaining that the proposal did not reflect the understanding on which the first plaintiff had contributed his $150,000 and that the rights attached to the preference shares did not reflect the first plaintiff's entitlements. Further discussions and correspondence between solicitors for the parties ensued but without agreement. In July 2013 the plaintiffs were removed as directors of Diona.
4. The second plaintiff commenced proceedings to seek to enforce the alleged agreement in November 2014. The first plaintiff did not himself bring any proceedings, but it appears to have been recognised by the parties that if the second plaintiff was successful, the first plaintiff would have equivalent entitlements.
5. The claims by the plaintiffs to a shareholding in Diona, together with other claims involving the plaintiffs and the first defendant and related corporate entities which were the subject of separate proceedings, were the subject of negotiations between the parties (who were represented by solicitors) during the first half of 2015. In July 2015, the parties reached a settlement of all of the disputes and executed a deed styled "Deed of Settlement and Mutual Release". The Deed recited, among other things, that each of the plaintiffs alleged that he was a one-twelfth equity shareholder in Diona. The Deed provided that Diona would make payments of $1.38 million to the first plaintiff and $1.68 million to the second plaintiff "in full and final settlement of the Diona Proceedings" which were defined as the proceedings commenced in November 2014 by the second plaintiff.
6. Clause 8.1 of the Deed provided: Each Party and, where applicable, their nominated entity, will forever release and discharge each other in respect of … the Diona Proceedings … and any Claim that they might have been able to bring, make or claim against each other or otherwise concerning or incidental to or in connection with or arising out of the Disputes and/or the Proceedings and/or any subject matters of this Deed, whether directly or indirectly.
7. The Deed provided that the term "Claim": Includes, without limitation, any claim, action, suit, cause of action, proceeding, liabilities, demand, notice, litigation, costs claims, disputes or assessments of whatever nature, including but not limited to, the legal costs of DRS, allegation, investigation or complaint, including in connection with any Law and whether arising from statute, common law or equity, including any statutory procedure for the recovery of money under any jurisdiction within or outside Australia; past, present and future.
8. As mentioned, in October 2015 the shares in Diona were sold to Calibre. The vendors were the first defendant and his wife. Between the settlement and the date of sale, the first defendant had transferred one of his three shares to his wife. The consideration for the sale was $45 million; there is said also to be an earn-out provision which may entitle the first defendant and his wife to a further amount of up to $45 million.
9. Counsel for the plaintiffs drew attention to publicly disclosed information about the transaction which suggested that it had been in the wings for some time before it was announced at the end of October 2015. The transaction took effect from 1 July 2015, before the settlement. I think that it is reasonable to suppose that the first defendant may have been aware of the potential for such a sale before the settlement took place.
10. The plaintiffs' complaint is that they were told nothing about any such potential sale before the settlement. They claim that if they had been told, they would not have settled for the amounts in question. There seems no doubt that, had the plaintiffs succeeded in establishing their claimed entitlements to part ownership of Diona, they would have received significantly more (several million dollars more each) from the sale to Calibre than they received from the settlement. The plaintiffs do not seek to have the Deed of Settlement or the transaction with Calibre set aside; rather, they seek an account of profits (being the difference in the case of each plaintiff between the amount received under the settlement and a one-twelfth share of the purchase price under the sale to Calibre).
11. The plaintiffs seek discovery of documents which would show the nature of the dealings between the first defendant, Diona and Calibre, which culminated in the sale. They also seek discovery of financial information which would disclose the likely earn-out figure. The purpose of this is to determine how much the plaintiffs might be able to claim should they be successful.
12. In argument before me, both parties accepted McColl JA's statement of key principles for preliminary discovery applications in Hatfield v TCN Channel Nine Pty Ltd (2010) 77 NSWLR 506 at 520-521 [46]-[52]. In particular, it is not necessary for the applicant to show a prima facie or pleadable case and the Court does not need to reach a firm view that there is a right to relief. It will be sufficient if (at [48]): … there is reasonable cause to believe that the applicant may have a right of action against the respondent resting on some recognised legal ground. But (at [49]): … belief requires more than mere assertion and more than suspicion or conjecture. [It] is an inclination of the mind towards assenting to, rather than rejecting a proposition. Thus it is not sufficient to point to a mere possibility. The evidence must incline the mind towards the matter or fact in question. If there is no reasonable cause to believe that one of the necessary elements of a potential cause of action exists, that would dispose of the application insofar as it is based on that cause of action.
13. In Pacific Equity Partners Pty Ltd v Kerwick [2017] NSWSC 1302, I noted that the expression "reasonable cause to believe" comes from an earlier version of the Federal Court Rules relating to preliminary discovery and the word "believe" is not found in UCPR r 5.3(1). I nevertheless accepted that the Court of Appeal appeared to have adopted the "reasonable cause to believe" and "inclination of mind" tests for the purpose of determining whether the applicant "may be entitled to make" a claim for the purposes of UCPR r 5.3(1): see at [40], [53]. No contrary submission was made in this case.
14. As mentioned, the plaintiffs contend that the first defendant owed fiduciary obligations to them as shareholders, or as persons entitled to be shareholders. In this regard, the plaintiffs rely upon the decision of the Court of Appeal in Brunninghausen v Glavanics (1999) 46 NSWLR 538. If there was indeed a fiduciary relationship between the first defendant and the plaintiffs, it is clear that the first defendant would not have been entitled to enter into the settlement without first disclosing matters of which he was aware which might affect the value of the shares.
15. The plaintiffs' claim could only succeed if the possibility of a sale to Calibre was known to the first defendant before the settlement. I think that there is sufficient cause to believe that it may have been, and I accept that the plaintiffs do not know, and cannot otherwise find out, whether that was in fact the case. The critical question, as it seems to me, is whether the plaintiffs have established a sufficiently plausible case that they were entitled to disclosure of such dealings at the time they entered into the settlement. If they were, and they can prove their alleged entitlements to part ownership of Diona, they will have a good case for an account of profits.
16. As I have mentioned, it is not necessary in a preliminary discovery application to establish a prima face entitlement to relief, and such an application should not turn into a preliminary hearing on the merits of the case: Age Company Ltd v Liu (2013) 82 NSWLR 268 at 291 [102]-[104]. Questions as to whether, in particular circumstances, a fiduciary duty is owed, and the scope of that duty, are quintessentially questions of fact: Coomber v Coomber [1911] 1 Ch 723 at 728-729. These points both favour the plaintiffs.
17. It is equally clear, however, that a company director does not automatically owe fiduciary obligations to the company's shareholders in purchasing their shares. Brunninghausen v Glavanics shows that a fiduciary relationship only arises if there are "special facts" which entitled the shareholders to expect that the director will act in their interests: see at 558 [100]-[102], 559 [110].
18. If a fiduciary relationship of this type arises, it arises out of the "special facts" which define the relationship between the parties at the relevant time. In Brunninghausen v Glavanics the trial judge characterised the fiduciary duty as one limited to the disclosure of the particular offer rather than a "comprehensive" one, and the Court of Appeal appears to have accepted that analysis: see at 549 [55]. The question is, therefore, whether, at the point at which the settlement was entered into, the first defendant owed fiduciary obligations of disclosure to the plaintiffs.
19. The plaintiffs sought to characterise the situation as one where, as a result of prior dealings, the first defendant (or Diona) held one-twelfth of the shares in Diona in trust for each of them. Even if this is the correct analysis (rather than the plaintiffs having the right to the issue of sufficient shares to give them one-twelfth each), I think it makes no difference. On any analysis, the plaintiffs gave up their claims with respect to Diona in the settlement and need to show that in the circumstances of the settlement there was a duty of disclosure of factors affecting the value of those claims.
20. The plaintiffs' evidence on this application contains very little detail about the negotiations leading up to the Deed of Settlement. The first plaintiff's affidavit merely refers to the existence of "discussions" from "early 2015 to in or around the middle of 2015" which culminated in the execution of the Deed. The second plaintiff's affidavit contained a paragraph in almost the same terms. No details were provided of the "discussions" and it is unclear whether the plaintiffs and the first defendant ever participated in any face to face meetings or whether it was left entirely to the lawyers.
21. The existence or scope of fiduciary obligations depends upon an objective analysis of the relationship between the parties. The plaintiffs know what dealings they had with the first defendant, going back to 2005, and, in particular, in the lead up to the execution of the Deed. The production of the documents which are the subject of the application for preliminary discovery would not make any difference.
22. The plaintiffs, of course, were not actually shareholders in Diona at the time of settlement. The first defendant had denied that the plaintiffs were shareholders and by his conduct had repudiated any obligations to them as shareholders. At the time the settlement was entered into, the plaintiffs (assuming, as I do, that they were working together) had been in dispute with the first defendant about Diona for more than two years. The dispute had escalated into litigation. However strong the plaintiffs may have thought their case to be, they were still only claiming shareholder status.
23. During the settlement negotiations, the parties were in an adversarial relationship with each other, represented on each side by lawyers. It must have been obvious on the plaintiffs' side that they were being asked to surrender all of their rights and claims over Diona for the future, and that they had had no information concerning Diona's trading position or business prospects since their removal as directors almost two years before. In these circumstances, the plaintiffs cannot, in my opinion, be seen as having been "vulnerable" or "at the mercy" of the first defendant in any relevant sense: cf Brunninghausen v Glavanics at 558 [99].
24. Should the plaintiffs succeed in establishing grounds in equity to have the settlement set aside for non-disclosure, they would still need to go on and establish that they were entitled to be shareholders in Diona. This would involve the determination of the very issues which they agreed to compromise in the settlement. To my mind, this emphasises that what the plaintiffs are really seeking to do is to overturn an arm's length settlement without alleging any mistake, misrepresentation or other allegedly unfair feature of the settlement process which would justify curial intervention.
25. In these circumstances, I do not think that the plaintiffs have established that there is reasonable cause to believe that the first defendant was obliged to disclose any approaches from Calibre before entering into the Deed of Settlement with them. The plaintiffs' application for preliminary discovery against the first defendant thus fails.
26. In case I am wrong in this, I go on to consider the other issues which were debated before me.
27. Had I been of a different view, I would have ordered that the first defendant provide discovery relating to any negotiations he might have had with Calibre prior to the date of the settlement. The orders as framed in the Summons seek disclosure of documents for all negotiations up to 30 November 2015, including the contract with Calibre, but I do not think this would have been justified. On any view, negotiations after the settlement took place would be irrelevant to establishing breach of duty.
28. The request for documents going to the earn-out component of the purchase consideration gives rise to separate questions. UCPR r 5.3(1)(b) refers to documents which "can assist in determining whether or not the applicant is entitled to make" the claim for relief in question. The chaussure gives the Court power to order discovery of documents "that relate to the question of whether or not the applicant is entitled to make" the claim for relief.
29. I asked counsel for the plaintiffs whether these elements of UCPR r 5.3(1) mean that the Court's power is confined to ordering the discovery of documents which go to whether or not the applicant "is entitled to make" the claim for relief in question, rather than the wider question of whether the pursuit of such a claim would be worthwhile for the applicant. On this view, once it is established that the applicant "is entitled to make" the claim in question, further discovery directed towards the quantum of damages recoverable would not be permissible under the rule.
30. In response, counsel referred to the following statement by White J (as his Honour then was) in Morton v Nylex Ltd [2007] NSWSC 562 at [33]: The question is whether the applicant has insufficient information to be able to decide whether to institute proceedings; not merely to establish a cause of action. Hence, an applicant may be entitled to preliminary discovery of documents relevant to available defences, or the extent of apprehended breaches, or the likely quantum of damages, as well as of documents which may establish whether there is a cause of action.
31. In Garth Barnett Interior Design Pty Ltd v Ellis [2009] NSWCA 193, this statement was quoted by Young JA who agreed with it: at [17]. It was also cited with approval by McColl JA in Hatfield: at 521 [51].
32. Counsel argued that these statements of authority required me to accept that discovery of documents going to the quantum of potential claims were discoverable under UCPR r 5.3(1). In my view, however, it is necessary to understand the statements in context.
33. In Morton v Nylex, White J was considering the application of subparagraph (a). His Honour pointed out that subparagraph (a) has three components. The first is that it appears to the Court that the applicant "may be entitled to make a claim": at [25]. The second is that the applicant has made reasonable enquiries. The third requirement is that the applicant has insufficient information to decide whether to commence proceedings: at [32]. The plaintiffs in that case had already been provided with some documents. His Honour concluded that the plaintiffs had failed to demonstrate that they had insufficient information and, accordingly, the third requirement was not satisfied. His Honour did not need to consider the requirements of subparagraph (b) or of the chaussure.
34. The argument presented in support of the application for leave to appeal in Garth Barnett v Ellis is not easy to discern from the decision. But from what Giles JA said at [20]-[21], it appears that the debate before the Court of Appeal focussed on whether the respondents (in whose favour an order for preliminary discovery had been made) already had sufficient information to be able to bring proceedings. Again, therefore, the case concerned only the requirements of subparagraph (a).
35. The statement in Hatfield was clearly obiter and the effects of subparagraph (b) and the chaussure were not addressed.
36. In my opinion, the language of UCPR r 5.3(1) makes it clear that each of subparagraphs (a), (b) and (c) must be satisfied. And, even if they are, the Court's power is limited to discovery of the documents specified in the chaussure. I cannot accept that the decisions of White J and the Court of Appeal should be treated as having decided that these limitations do not exist. In this regard, UCPR r 5.3(1) is in narrower terms than those of the comparable rules in the Federal Court, and Federal Court authorities do not automatically carry over to UCPR r 5.3(1). It may be that the language of UCPR r 5.3(1) is undesirably narrow but the solution to that, in my opinion, must be an amendment, or, at least, a decision at an appellate level which addresses and overcomes the apparent limitations inherent in the language of the rule.
37. It may be that the concept of being "entitled to make a claim" is broad enough to encompass the availability of defences. But I do not think it can extend to questions of quantum. Accordingly, even if I had granted relief to the plaintiffs, I would not have ordered discovery of documents going to the earn-out figure.
38. By way of supplementary order in the Summons, the plaintiffs sought the following orders: 4. That Division 1 of Part 21 of the UCPR applies to and in respect of discovery and inspection of documents the subject of Orders 1 - 3 in the same way as it applies to the discovery and inspection of documents the subject of an order for discovery under that division, save that the reference in Part 21 to the proceedings shall be taken to be a reference to the proceedings referred to in Order 5. 5. Unless and to the extent that the Court otherwise orders, or the parties otherwise agree, the Plaintiffs, or either of them, be at liberty to use the documents disclosed by any or all the Defendants, in compliance with Orders 1, 2 and/or 3, only for the purpose of any proceedings to be commenced by the Plaintiffs or either of them in the Supreme Court of New South Wales with respect to any one or more of the following entities or persons: 5.1. the Defendants; and 5.2. Margaret O'Connor; and 5.3. David O'Connor.
39. Division 1 of UCPR Pt 21 relates to discovery ordered by the Court (including preliminary discovery). It appears that the plaintiffs were concerned in particular because of r 21.7(1) which provides: 21.7 Discovered documents not to be disclosed (1) No copy of a document, or information from a document, obtained by party A as a result of discovery by party B is to be disclosed or used otherwise than for the purposes of the conduct of the proceedings, except by leave of the court, unless the document has been received into evidence in open court.
40. I was informed that if subsequent proceedings were brought, they would be allocated a different matter number and a different file would be opened. I was told that the supplementary orders were sought so as to ensure that documents attained in these proceedings could be used for the purposes of such subsequent proceedings without contravening r 21.7(1).
41. The purpose of the preliminary discovery procedure is to allow the applicant, if he or she obtains documents which confirm the existence of a potential claim for relief, to proceed with that claim. I think it would be somewhat surprising if UCPR r 21.7(1) had the result of preventing the applicant from doing the very thing which the procedure contemplates. It may be that, as a matter of construction, "the proceedings" in the rule includes proceedings which are commenced as a result of obtaining documents in the preliminary discovery proceedings, even if those subsequent proceedings are conducted under a different matter number. In any event, the question would not need to be considered until, and unless, documents were produced. For this reason, I indicated in the course of the hearing that even if I ordered preliminary discovery, I would not make this order at the current stage of the proceedings.
42. Counsel for the first defendant argued that the request to dispense with r 21.7(1), insofar as it might have restricted the use of documents to bring proceedings against them, provided a further reason why relief should be refused. Neither Mrs O'Connor nor Mr David O'Connor is a party to these proceedings. Counsel argued that the application was being made with a view to bringing claims against persons other than those already party to the proceedings, and that this made it an abuse of process.
43. In Dowling v Colonial Mutual Life Assurance Society Limited (1915) 20 CLR 509, some pamphlets had been produced by Dowling which were highly defamatory of the Society. The pamphlets were in the custody of a third party, Tate, who handed them over to the Society. Dowling brought proceedings against Tate and the Society for return of the pamphlets or alternatively damages. The proceedings failed and judgment was given against Dowling for both Tate's and the Society's costs. Subsequently, the Society took an assignment of the costs judgment in favour of Tate and sought to use the two costs judgments to bankrupt Dowling. The Society's motive in doing so was not to obtain recovery of any money but rather to try to use the examination process which would follow Dowling's bankruptcy to find out who was behind him. It was argued the bankruptcy proceedings were an abuse of process but this was rejected by the High Court (Isaacs J and Powers J, Griffith CJ dissenting). The majority held that the examination of Dowling was a lawful consequence of the relief the Society was seeking to obtain and the Society's motivation was irrelevant. In the joint judgment of four members of the High Court in Williams v Spautz (1992) 174 CLR 509, the majority approach in Dowling was approved as a necessary control mechanism for keeping the concept of abuse of process within reasonable bounds: at 526-527.
44. In my opinion, this principle applies in the present case. The plaintiffs may contemplate that if they obtain the documents sought, those documents may enable them to make a claim against Mrs O'Connor and Mr David O'Connor. But that is merely a consequence of obtaining the relief which they seek, namely, the discovery of relevant documents. It does not mean the plaintiffs are not genuine in seeking production of the documents in contemplation of a claim against the first defendant. Accordingly, I reject counsel's argument that the proceedings involve an abuse of process.

Claims against second and third defendants

1. I have rejected the application for preliminary discovery as against the first defendant, and the same reasoning applies to the application against the second and third defendants. I will, however, consider what would have happened if I had upheld the application against the first defendant. In that event, preliminary discovery orders would only be available against Diona or Calibre, as separate parties, in aid of claims that might potentially be made against them. It would not be open to obtain orders for preliminary discovery against them in aid of potential claims against the first defendant: Morton v Nylex at [27].
2. As mentioned, the plaintiffs seek to obtain an account of profits made on the sale of "their" shares in Diona to Calibre. The profit in question was derived by the shareholders in Diona, namely the first defendant (and possibly also his wife). None of it was received by Diona or Calibre. Accordingly, no claim against Diona or Calibre can be made by way of analogy with knowing receipt of trust property; any claim would have to be made by way of analogy with knowing participation in a breach of trust.
3. It is by no means clear to me that an accessorial claim of this type can be made against an accessory for an account of the profit made by some other party to the impugned transaction. If such a claim could be made at all, it would require the plaintiffs to demonstrate a high level of knowing involvement in the transaction, amounting to dishonesty or something similar: see Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 162-164 [171]-[177]. I see no basis for such a claim in the present case. The substance of the potentially impugned transaction was one between Calibre on the one hand, and the first defendant and his wife as shareholders on the other hand. Neither Diona nor Calibre would have had any occasion to consider whether the first defendant or his wife owed fiduciary obligations with respect to the sale to anyone else. Nor would either of them have had any responsibility to see to compliance with any such obligations. There is no reason whatever to suppose that either Calibre or Diona concerned itself with such matters. In my opinion, there is, on any view, an insufficiently plausible case against them to justify orders for preliminary discovery.
4. This is, in my view, supported by further practical considerations. Even if there were some form of accessorial liability, it would, as between the shareholders and the accessories, be the shareholders who would ultimately have to pay (if solvent). The sale of shares appears to have netted a very large amount of money which would be ample to cover the plaintiffs' claims. If those claims are pursued, the appropriate defendant would appear to be the first defendant (and possibly also the first defendant's wife). If there is any concern about dissipation of the proceeds of the sale, that could be met by an asset preservation order if a sufficient case was made for it.
5. Thus, there is at the moment no demonstrated need to join Diona and Calibre to any proceedings which might subsequently be brought against the first defendant or his wife seeking an account of profits. If any issue did later arise as to tracing the proceeds of the sale to Calibre, orders could be made for joining recipients or other appropriate parties at that stage. Accordingly, even if I had been of the view that there was a sufficiently plausible case against Diona and Calibre, I would in the exercise of my discretion have declined to make any order against them.

Conclusion and orders

1. For these reasons, I have concluded that the plaintiffs are not entitled to an order for preliminary discovery from any of the defendants. I see no reason why costs (on the ordinary basis) should not follow the event, but I will hear any party who contends for a different order.
2. The orders of the Court are:
3. Order that the Summons be dismissed.
4. Order that the plaintiffs pay the costs of each of the defendants.
5. Grant liberty to apply to vary order 2, such liberty to be exercised within 14 days of today's date.

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: 30 November 2017