Owners of Strata Plan 64622 v Australand Corporation Pty Ltd & anor [2009] NSWSC 614 | Case summary

1 HIS HONOUR: Pursuant to UCPR r 20.20(1), I direct that the defendants not be entitled to adduce in the reference the affidavit of Michael Newsom, sworn 1 May 2009. This direction is not intended to preclude the defendants from tendering separately evidence of a matter covered by that affidavit which is not inadmissible in accordance with the reasons I am about to give, nor the correspondence to which I refer as the "open offers", if otherwise considered by the Referee to be relevant and admissible. 2 These are proceedings in the Technology and Construction List between an Owners Corporation and a builder in connection with a residential development at 3 Kings Cross Road, Rushcutters Bay, in respect of which the defendant/builder is said to be liable for defects pursuant to (NSW) Home Building Act 1989, s 18(b). Having been commenced in 2006, the proceedings were, by order of McDougall J made on 16 February 2007, referred to a Referee, Mr Barry A Tozer, for inquiry and report on all questions of liability and quantum, in respect of the summons, and the cross-claims that ensued. 3 The Referee has produced two interim reports and a final report on questions of liability, and there remain outstanding before him questions of quantification. The inquiry before the Referee as to quantification had been set down for hearing, to be determined upon a conclave of experts to be held last Monday, 25 May 2009 and a five-day hearing to commence on 13 July 2009. The conclave has been suspended pending the outcome of the present application. 4 In connection with the inquiry as to quantum before the Referee, the defendants have served an affidavit of their general counsel Michael Newsom, a solicitor, sworn 1 May 2009. The burden of that affidavit, though not its whole content, is to show that, subsequent to the Referee's determination on questions of liability, the defendants have made a number of offers to the plaintiff to carry out rectification works, said to be in accordance with the Referee's recommendations or findings. The purpose of adducing that evidence appears at least to include, first, to support a defence of failure to mitigate damages, by asserting that the plaintiff has failed to accept reasonable offers made to it; secondly, to show that there are means of carrying out the rectification works less expensive than those advanced by the plaintiff, so as to reduce the quantum of damages; and thirdly, to show that some of the works need not be carried out or provided for in any award of damages, because they have already been performed. 5 By Notice of Motion filed on 19 May 2009 and subsequently amended, the plaintiff seeks an order, said to be pursuant to UCPR r 20.14, 20.17(1)(c), 20.20(1) or 20.21, that the whole of Mr Newsom's affidavit, or such parts of it as the Court considers fit, not be part of the evidence or information in the reference. The defendants contend, first, that the Court should not entertain the application, but leave the matter to be determined, at least in the first instance, by the Referee; and, secondly, that the Motion should be dismissed on the merits. 6 UCPR, r 20.20, relevantly provides as follows: 20.20 Conduct of proceedings under the reference (1) The court may give directions with respect to the conduct of proceedings under the reference. (2) Subject to any direction under subrule (1): (a) the referee may conduct the proceedings under the reference in such manner as the referee thinks fit, and (b) in conducting proceedings under the reference, the referee is not bound by the rules of evidence but may inform himself or herself in relation to any matter in such manner as the referee thinks fit.

8 Rule 20.21 provides as follows: 20.21 Interlocutory directions The court may, at any time and from time to time, on application of the referee or of a party, give directions with respect to any matter arising in proceedings under the reference. 9 These rules plainly give the Court a supervisory jurisdiction in respect of the conduct of the proceedings before a Referee, and in particular envisage that the Court may make directions that the rules of evidence apply, or to give effect to the rules of evidence, or - under r 20.21 - with respect to any matter arising in proceedings under the reference. It may be, as Mr Kerr has powerfully submitted, that it is the ordinary practice of the Court, once having entrusted a matter to a Referee, to leave its conduct to the Referee unimpeded until the report returns to the Court for adoption or rejection. But while that may be a usual practice, the rules plainly envisage the Court may intervene, and may do so at any time. The question is whether this is an appropriate case in which that undoubted power of intervention and supervision should be exercised. 10 In this respect, the nature of the relevant issue is a material consideration. Here, the substantive issue on the present application pertains to the admissibility of correspondence which is not seriously disputed to be without prejudice. (Certain of the offers, of which the defendant wishes to adduce evidence, were fairly plainly expressed to be open, but many were expressed to be without prejudice). Thus the issue which arises is one of the admissibility of those communications, having regard to the terms of (NSW) Evidence Act 1995, s 131. 11 Questions of privilege, whether they be legal professional privilege or without prejudice privilege, involve important legal rights of parties. The Referee, though an experienced construction engineer Referee and arbitrator, is not a lawyer. The issues that arise on this application are fundamentally legal issues. Referees and arbitrators, it is true, often have to decide legal issues, even if they are not lawyers. But a court is more suited to deciding such an issue than a non-legally qualified referee. 12 In this case the position is accentuated by the circumstance that there would be put before the Referee, evidence of offers that have been made in the course of proceedings. It may well be that the supposedly superior ability of judges to put out of their minds, by reason of their training and experience inadmissible material - when compared to a jury of a lay referee - is exaggerated, but even judges avoid having put before themselves evidence of offers that have been made in the course of proceedings. It is for that reason that the rules provide that the offers of compromise must be sealed and not provided to the Court; and that judges take extensive steps to avoid having to consider whether offers have been made and proceedings to be heard by them have been settled as a result of those offers. To allow this dispute to be resolved by the Referee would involve exposing the Referee to the offers that have been made, apparently without prejudice, in connection with the dispute he will be required to resolve; and unlike a judge who can refer the matter to another judge for determination, the Referee would not be in a position to do so. In that respect, there is a significant risk that the reference could be "tainted", to borrow the word used by counsel for the plaintiff. 13 Moreover, before the Referee it might well be argued that, under r 20.20(2)(b), even if the material was privileged, that did not render it inadmissible before him because he was not bound by the rules of evidence. I do not need to decide that argument, and at first sight I would be surprised if that were in truth the position; but it is better that that issue not have to be decided at all by the Referee, if it can be averted by a decision in this Court that preempts it. 14 For all those reasons, it seems to me most appropriate that this Court entertain and determine this application, rather than leaving it to be made to the Referee. 15 That then brings me to the merits of the application. The principal basis upon which objection is taken to the affidavit is that the correspondence and communications on which it relies were without prejudice communications. Amongst the communications relied on are some letters which are said to be "open" offers, and others which are admitted, or at least not seriously disputed, to have been without prejudice communications. 16 The plaintiff disputed that the open correspondence was in truth open and not without prejudice. 17 For the purposes of the law nowadays, what is meant by "open" correspondence in this respect is an offer in connection with an attempt to negotiate a settlement of the dispute in circumstances covered by the exception in s 131(2)(d), namely, that the communication or document included a statement to the effect that it was not to be treated as confidential. The communications contained in the documents which comprise MN11, MN17, MN19 and MN21 each expressly conclude in the following terms: "This is an open offer and will be referred to in court". The fact that one or more of those offers might not have been capable of immediate acceptance does not eradicate the effect of that statement. Nor does the circumstance that the offer contained in one or more of them was expressed to be inclusive of costs, or on the basis that each party bear their own costs. Such a term might deprive the offer of effect for the purposes of the rules in respect of offers of compromise, but it does not deprive it of the quality of being an offer which included a statement to the effect that it was not to be treated as confidential. I cannot think of any clearer statement to that effect than the statement: "This is an open offer and will be referred to in Court". The argument that these communications were without prejudice is misconceived. 18 However, those communications do not lie at the heart of Mr Newson's affidavit. The evidence which the plaintiff fundamentally wishes to adduce is that contained in MN6, MN7, MN8 and MN9, all of which are expressly stated to be without prejudice, or without prejudice save as to costs. 19 For the defendants, it was argued that in respect of these documents, various of the exceptions referred to in s 131(2) applied. First, it was contended that the exception in 131(2)(a) - that the persons in dispute consented to the evidence being adduced - was satisfied. It is plain that, consistent with the common law, this exception requires the consent of all parties to the relevant dispute, to the tender of the without prejudice communication. The plaintiff does not consent to it being tendered. The fact that in Mr Newsom's affidavit the defendants claim to waive the "without prejudice" privilege attached to those communications does not avail the defendants unless the plaintiff also waives that privilege, which it does not. 20 Although it was suggested that the rationale of s 131 was to exclude evidence only if it might found a submission that the party making an offer had thereby made an admission against interest; that is not the effect of s 131(2)(a), which, like the common law, requires the consent of both parties if a without prejudice communication is to be admitted. The submission that that exception is satisfied fails. 21 Next, it was submitted that the substance of the evidence was disclosed with the express or implied consent of the persons in dispute, within s 131(2)(b). In this connection, it was pointed out that some of the offers in question had been referred to in the Referee's report, and therefore disclosed to the Referee at an earlier stage. However, no instance in which any of the "without prejudice" offers - as distinct from the "open" offers - had been so disclosed was identified. It was argued that the open offers disclosed the substance of the without prejudice offers because, and I shall assume it to be the case without deciding - that the without prejudice offers were on substantially similar terms to the open offers. However, when s 131(2)(b) speaks of the "substance of the evidence", one must look back at s 131(1) to see that the relevant evidence is evidence of a communication or of a document. The question is whether evidence of the without prejudice communication or the document has been, in substance, disclosed. There is nothing before me to indicate that evidence of the without prejudice communications or documents has been disclosed or without consent. Similarly, for the purposes of s 131(2)(c) there is nothing to indicate that the without prejudice correspondence has been partly disclosed, with or without consent, let alone that full disclosure is necessary for a proper understanding of any part that has been disclosed. 22 Next, it was submitted that, under 131(2)(g), evidence adduced, or an inference from evidence adduced, was likely to mislead the Court unless evidence of the without prejudice communications was admitted to contradict or qualify it. In my view, this provision is addressed to circumstances in which, without evidence of the without prejudice communication, the Court would likely be misled in assuming that no relevant communication had taken place. It was put that in circumstances where the plaintiff claims damages of $6 million, this requirement could be satisfied if the without prejudice correspondence demonstrated that the work could be done for $2 million. I do not think that is what s 131(2)(g) is directed to: in such a case it would not be the absence of evidence of the without prejudice communication that might mislead. 23 For those reasons, in my view the "without prejudice" communications -in particular MN6, MN7, MN8 and MN9 - are not admissible, pursuant to s 131 of the Evidence Act. 24 That then leaves for consideration whether there is any purpose in allowing any part of Mr Newsom's affidavit to stand. Read as a whole, it is clear that MN6, MN7, MN8 and MN9 are right at its heart, and that if reference to them is removed, very little if any of the affidavit survives. 25 That view is fortified by several other factors. First, it is said that his evidence is relevant to establishing the actual costs of rectification, in particular by showing that there are alternative ways of carrying out the rectification work which are less expensive than those assumed by the plaintiff in calculating the quantum of damages. But if that is so, I do not see why without prejudice offers to carry out work in such a way are a necessary or even relevant way of proving the defendants' case: one would have thought that the conventional way of doing it would be for the defendants to adduce evidence of how the rectification works could be carried out less expensively than the plaintiff's experts contend, rather than by tendering offers made by the defendants to carry out the works in a particular way. 26 Next, it is (or may be) said that Mr Newsom's evidence is relevant to a defence of failure to mitigate damages. This encounters a number of difficulties. First, no defence of failure to mitigate is pleaded, so far as I can tell: Mr Hicks made a submission to that effect, and I do not understand Mr Kerr to have traversed it. Secondly, it is doubtful that a "failure to mitigate" by accepting an offer made after the Referee had given a decision on liability would be a relevant defence in any event, although I do not want to foreclose forever argument on that issue. Thirdly, it is said that Mr Newsom's affidavit goes in part to show that some rectification works have already been carried out, and therefore provision does not need to be made in any award of damages in respect of them. If that be so, it is only a very small fraction of the affidavit that touches on that question, and it is a matter which could be proved quite independently of Mr Newsom's affidavit. Indeed, it is difficult to see how, as a solicitor and general counsel, he would be the appropriate deponent to such matters in any event. 27 For those reasons, I conclude that, even if there are some aspects of Mr Newsom's affidavit which might, strictly speaking, be relevant or admissible, overwhelmingly it is inadmissible: principally because it is essentially depended on MN6 to MN9 inclusive, and they are without prejudice communication which ought not be admitted before the Referee or anywhere else. 28 It is for those reasons that I made the orders, which I have already pronounced. However, those orders are not intended to preclude the defendants from tendering, independently of Mr Newsom's affidavit, evidence of the open correspondence, if the Referee considers it otherwise relevant and admissible, and evidence that certain works have been completed, also if the Referee considers that evidence to be otherwise relevant and admissible. 29 In substance, the plaintiff has succeeded in having the whole of Mr Newsom's evidence excluded, and I therefore order that the defendants pay the plaintiff's costs of the Motion. **********

Owners of Strata Plan 64622 v Australand Corporation Pty Ltd & anor

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