Parsons v CB Richard Ellis

651 Discovery to identify right to claim relief

(SCR o 34A r 5, r 6 (2) and r 7; NSW r 5.3; Vic r 32.05)

(1) This rule applies if--

(a) a person (the applicant ) has, or is likely to have, a cause of action against someone (the potential defendant ); and

(b) ...

(i) the applicant, after making reasonable inquiries, cannot obtain sufficient information to decide whether to start a proceeding in the court against the potential defendant for the cause of action;

...and

(c) the applicant has reasonable grounds for believing that the potential defendant has or has had possession of a document or thing that can assist in deciding whether to start the proceeding, or make the claim for relief, against the potential defendant; and

(d) inspection of the document or thing by the applicant would help in making the decision.

(2) If subrule (1) (b) (i) applies, the applicant may apply to the court by originating application for an order under this rule (and, if relevant, an order under rule 715 (Inspection, detention, custody and preservation of property--orders etc)) against the potential defendant.

...

(4) The application must be supported by an affidavit stating the facts on which the applicant relies, and stating the kinds of documents or things in relation to which the application is made.

(5) The court may order the potential defendant to produce the document or thing to the applicant.

3. On 24 July 1998, the plaintiff entered into a contract to purchase Unit 66, Block 4, Section 19, Braddon off the plan. On completion, the unit became known as Apartment 513, Holiday Inn Madison Suites, 84 Northbourne Avenue, Braddon. The Holiday Inn Madison Suites are now known as the Saville Park Suites. The unit was, and continues to be, operated as a serviced apartment.

4. On 15 October 1998, prior to completion of the plaintiff's purchase, the developer and owner of the units, Scott Brothers Pty Ltd, entered into a lease arrangement with Stockland Hotel Group Pty Ltd whereby Stockland would manage the unit as a serviced apartment, the owner being essentially a silent investor. The plaintiff purchased the unit subject to the lease to Stockland. The rent for the units for each of the first three years was set out in the lease. Subsequent rent reviews were to be conducted in accordance with clause 5.4 of the Schedule.

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6. A rental review for the plaintiff's property was conducted in 2004. He received a notice dated 15 July 2004 in this regard. In the letter, Mr Paull English, General Manager of the Saville Park Suites Canberra, wrote "as a result of our review... we propose that the Reviewed Rent to apply from 19 October 2004 remain the same at $13,052.00 per annum".

7. On 12 August 2004, the plaintiff sent a letter to Saville Park Suites rejecting the offer. He requested that a valuer be appointed as contemplated by clause 5.4 of the lease.

8. On 20 October 2004, Mr English advised that Saville Park Suites had instructed the defendant to include the plaintiff's apartment in a rental review, and formally appointed the defendant as the Approved Valuer in accordance with clause 5.4 of the lease.

9. On 25 October 2004, the defendant sent a letter to the plaintiff advising that it had been appointed to determine the fair market rent for his apartment pursuant to clause 5.4(d) of the lease. The property had been inspected on 28 September 2004, at which time apartments of similar design to that owned by the plaintiff had also been inspected. The plaintiff was given four weeks to make any submissions.

10. On 3 December 2004 the defendant determined the fair market rental for the plaintiff's apartment as at 19 October 2004 at $12,157.00 per annum. Clause 5.4(k) of the lease provides that if the valuer determines a reviewed rent not greater than 105% of that offered by the lessee, the costs of the determination are to be borne by the lessor, in this case the plaintiff.

11. In the letter advising of its decision, the defendant set out various matters which it had taken into consideration. In its summary of the details of the lease, under the heading "Lessee Obligations", appeared the words "Pay 7.5% of rental into the Fund for Replacement". Under the heading "Serviced Apartment Market Overview" was set out a table drawn from information compiled by the Australian Bureau of Statistics in relation to the wider Canberra market. The statistics covered three-star to five-star premises, including serviced apartments, and showed a downturn of 5.28% in the average daily rental rate for rooms in this category over the period under review. The letter said that Stockland had provided "detailed trading information" as part of its submission to the valuer, but that this information could not be divulged in the determination because the lease agreement provided no entitlement for the owners, including the plaintiff, to obtain trading information from the tenant. The defendant commented that information supplied in the tenant's submission suggested that the Saville Park Suites business had generally traded in concert with the overall Canberra market "in terms of seasonality". Under the heading "Trading Projections" they set out a three-year trading forecast. For the first year (2005) they predicted an average daily rate of $119.78; for 2006, $122.17; and for 2007, $125.23. The defendant considered that having regard to the Canberra tourism market these outcomes were achievable and represented a fair basis for market rental assessment for Saville Park Suites.

12. On 25 January 2005, Mr English wrote to the plaintiff to say that he had received the rental determination of the Appointed Valuer (the defendant), effective from 19 October 2004. The rent determined was $12,157.00 per annum. The new rent would be payable from January 2005, and Saville Park Suites had elected not to seek reimbursement of the overpaid rent since 19 October 2004. The cost of the valuation, $334.78, was the plaintiff's responsibility by virtue of clause 5.4(k) of the lease, and would be deducted from the January rent payment.

13. All correspondence from Mr English was signed "Yours faithfully, Stockland Hotel Group Pty Ltd, Paull English, General Manager, Saville Park Suites Canberra". The letterhead was headed "Saville Park Suites", and at the foot contained the printed words "A division of Stockland".

14. Extracts from Stockland's annual reports for 2003 and 2004 are in evidence. The 2003 report included the following passage:

For the Australian hotel industry, the 2003 financial year was exceptionally challenging.

Nevertheless, we worked hard to ensure that we met our performance targets, holding occupancy above 2002 levels (73%) and marginally higher average room rates.

15. Counsel for the plaintiff placed considerable weight on a portion of the 2004 Report which read: "Saville Park Suites Canberra achieved its strongest financial results, with increases in both rate and occupancy".

16. On 3 May 2006 the solicitors for the plaintiff wrote to the defendant. They advised that they acted for one Jason Newham "together with a number of other owners of the Saville Park Suites in Units Plan 1704, 84 Northbourne Avenue, Braddon". They requested that the defendant provide within 28 days "a copy of all documentation in your possession in relation to the rental determination". They foreshadowed that if the defendant did not provide the documents an application would be made to the Court for preliminary discovery. Peter Grieve, an officer of the defendant, replied by letter dated 8 May 2006. He drew the solicitors' attention to clause 5.4(i) of the lease, which stated that the decision of the valuer was final and binding. He refused to provide any documents.

17. The defendant's evidence was confined to an affidavit by the solicitor with carriage of the matter. He had been informed by Mr Grieve that the Stockland trading information was submitted on a commercial-in-confidence basis and that Mr Grieve had given an undertaking to Mr English that the confidentiality of the information would not be compromised.

18. The applicant must satisfy the Court that he has, or is likely to have, a cause of action against the potential defendant: r 651(1)(a). Counsel for the plaintiff applicant submits that the available cause of action against the defendant is a suit for a declaration that the valuation is of no effect by reason of mistake. In his initial submissions, he conceded that he could not make out a cause of action in negligence at this stage. If his client was successful on the application, the further documentation might contain material capable of supporting an action in negligence.

19. I am satisfied that the respondent has in its possession the trading information referred to in the valuation; that inspection of the documents comprising that information would help the applicant in deciding whether to start a proceeding against the respondent (and perhaps against Stockland); and that the plaintiff has made reasonable enquiries to obtain the information contained in the documents.

20. Rule 651 makes an applicant's task more difficult than it was under the old O 34A r 5. The test under the old rule was whether it was reasonable to believe that the applicant had, or might have, the right to obtain relief. The new test requires the applicant to have, or to be likely to have, a cause of action.

21. "Likely" is defined in the Encyclopaedic Australian Legal Dictionary as having a degree of probability greater than merely possible, but less than certain. Its precise meaning may vary according to the context: in competition law it has been held to mean probably in the sense of more probable than not; more than a 50% chance: Australian Telecommunications Commission v Kreig Enterprises Pty Ltd (1976) 14 SASR 303; Tillmanns Butcheries Pty Ltd v Australasian Meat Industries Employees' Union [1979] FCA 85; (1979) 42 FLR 331.

22. Discovery before action is now permitted in most Australian jurisdictions, although it is a relatively recent innovation. There are variations in the wording of the equivalent rule in other courts, but most impose on the applicant the comparatively lower threshold which existed under the previous rules of this court. Hence the caselaw should be treated with some caution. In an early decision on the equivalent Federal Court rule, Burchett J in Paxus Services Ltd v People Bank Pty Ltd [1990] FCA 500; (1990) 99 ALR 728 expressed the view that the rule should be interpreted beneficially, and given the fullest scope its language would reasonably allow. His Honour noted that it was unnecessary for the applicant to show a good cause of action.

23. The Supreme Court of Victoria (Phillips CJ, Crockett and Southwell JJ) in Scarletti Pty Ltd v Millwood Printing Co Pty Ltd (28 July 1994, unreported) referred to Burchett J's observations in Paxus with apparent approval. The Victorian rule in force at the relevant time (r 32.05) was in similar terms to the Federal Court rule and to the previous rule of this Court.

24. Lindgren J in the Federal Court observed in Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd (24 May 1996, unreported) that the test for whether the application came within the rule was an objective one, and that the rule required the exercise of a discretion by the court in each case. His Honour noted that in the context of an adversary system of forensic contest, a proposed respondent is ordinarily entitled to withhold its evidence, certainly prior to the commencement of proceedings. An order under the rule therefore involves a significant infringement of the ordinary rights of the respondent.

25. More recently, Simpson J in the Supreme Court of NSW in Papaconstuntinos v Holmes a Court and Anor [2006] NSWSC 945 referred to the discretionary nature of the relief available, and said that the power was not to be exercised lightly. (The threshold under the relevant NSW rule, UCPR r 5.3(1), is even less demanding than in the Federal Court, requiring an applicant to establish merely that he or she may be entitled to make a claim for relief from the court.)

26. It seems to me that I am obliged to construe r 651 in such as way as to give effect to the apparent intention of the rule-making committee to depart from the previous test. The words of r 651(1)(a) must, it seems to me, be given their ordinary meaning, so that an applicant, to be in a position to take advantage of the rule, must satisfy the Court that he or she has a cause of action against the respondent, or is likely to have a cause of action against the respondent. This requires the applicant to identify the cause of action he says he has or is likely to have, and to identify at least in general terms the factual background which supports the cause of action. It is unnecessary for the applicant to satisfy the Court that the prospects of success of the identified cause of action are strong, but, it seems to me, the applicant should at least be able to persuade the Court that the fundamentals are in place to support a cause of action. It might be, in some cases, necessary for the Court to consider the nature and the likely contents of the documents which the applicant believes that the respondent possesses. The words of r 651(1)(a) in my opinion remove the entitlement arguably available to an applicant under the previous rules to embark on a fishing expedition, a course approved by Burchett J in Paxus, relying on a decision of the Full Court of the Federal Court a few days earlier: Caltex Refining Co Pty Ltd v Amalgamated Metal Workers Union [1990] 51 IR 113.

27. I need scarcely add that it is clear that r 651 deals only with the situation where the entity from whom the documents are sought and the potential defendant are identical. The applicant has not sought an order for production of documents by Stockland, or suggested that he has or is likely to have a cause of action against Stockland. I must therefore consider only the suggested cause of action against the respondent.

28. Counsel for the applicant does not suggest that on the material presently available, his client has or is likely to have an action against the respondent in negligence, although he makes the point that it is possible that documents produced pursuant to the order he seeks would reveal evidence of negligence. Simpson J in Papaconstuntinos expressed the tentative view at paragraph 31 that discovery before action was not available for the purpose of identifying causes of action additional to that which provided the foundation for the application made to the court. With respect, I adopt her Honour's analysis, which seems to me to apply with equal force to r 651.

29. I set out earlier the terms of clause 5.4 of the lease between the plaintiff and Stockland. The plaintiff purchased his unit subject to the lease, the terms of which had been negotiated by the developer and Stockland. But the lease must be construed as a contract between the plaintiff and Stockland, under which they agreed on a mechanism to resolve disputes about rent. By clauses 5.4(h) to (l) the plaintiff and Stockland are taken to have agreed, in the event of a dispute, to appoint a valuer to determine the rent. They agreed that the valuer was to act as an expert and not as an arbitrator, and that the valuer's decision was to be final and binding on both parties. The valuer was to determine the fair market rent which a competent operator would pay for the use of the unit as a serviced apartment, having regard to likely room rates, room occupancies and operating expenses of a competent operator. The valuer was to exclude, that is not to have regard to, the value of any goodwill attributable to Stockland's business.

30. The availability of a challenge to a valuation under such a clause was considered by the NSW Court of Appeal (Mahoney, Priestley and McHugh JJA) in Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314. McHugh JA undertook a historical analysis of the law relating to such clauses. The appellant was the lessor and the respondent the lessee of commercial premises. The lease contained a rental revision clause which provided, in default of agreement, for the appointment of a qualified valuer acting as an expert to determine the market rent. The valuer's decision was to be final and binding. The valuer prepared a valuation which was found at first instance to have contained an error. The lessee was granted a declaration that the valuation was not binding. The Court of Appeal unanimously allowed the appeal. McHugh JA accepted for the purpose of argument that the valuer had made a mistake in the process of the valuation. This left open the question as to whether the mistake was one which invalidated the valuation. At page 335, his Honour said:

In my opinion the question whether a valuation is binding upon the parties depends in the first instance upon the terms of the contract, express or implied... it is easy to imply a term that a valuation must be made honestly and impartially. It will be difficult, and usually impossible, however, to imply a term that a valuation can be set aside on the ground of the valuer's mistake or because the valuation is unreasonable. The terms of the contract usually provide, as the lease in the present case does, that the decision of the valuer is `final and binding on the parties'. By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision. It is now settled that an action for damages for negligence will lie against a valuer to whom the parties have referred the question of valuation if one of them suffers loss as the result of his negligent valuation... But as between the parties to the main agreement the valuation can stand even though it was made negligently. While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case, the critical question must always be: was the valuation made in accordance with the terms of the contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract.

31. His Honour went on to find that the mistake which had been identified was one made in the process of valuation, but was not a departure from the terms of the contract and did not enable the Court to set aside the valuation.

32. The judgment of McHugh JA in Legal and General Life has been accepted in the Supreme Court of Victoria as correctly stating the law: Commonwealth of Australia v Wawbe Pty Ltd and Anor per Gillard J [1999] V Conv R 67, 191 (54-599) and I accept that it is a correct statement of the law for this Territory.

33. Both Legal and General Life and Commonwealth v Wawbe were actions brought by a lessee seeking a declaration that a valuation was vitiated by mistake and hence not binding on the parties. In neither action was the valuer a party. The present application is brought by a lessor against the valuer. The lessee is not a party. It is common ground that r 651 provides for discovery before action from the proposed defendant, not from a non-party. The applicant has chosen to pursue the application only against the valuer and not against the lessee. The lessee would be a necessary party, and probably the only appropriate party, to an action seeking a declaration that the valuation is vitiated by mistake and hence not binding. It seems to me that the only cause of action which might be available to the applicant against the valuer would be one in negligence. Counsel for the applicant concedes that he is unable to make out a cause of action in negligence at the present, although he submits that the basis for such an action might emerge from an inspection of the documents the applicant seeks.

34. The applicant has not established to my satisfaction that he has, or is likely to have, a cause of action against the respondent.

35. In case I am found to be mistaken about this, I should deal briefly with one further issue. The power under r 651 is a discretionary one. The respondent in correspondence before the application was brought made reference to the fact that it had been provided with some documentation and information from Stockland on a commercial-in-confidence basis. There are circumstances where a court will decline to exercise its discretion to order discovery and inspection of documents where to do so would disclose commercially sensitive information to a trade rival. The principles were considered at some length by Hayne JA in the Court of Appeal of the Supreme Court of Victoria in Mobil Oil Australia Ltd & Anor v Guina Developments Pty Ltd & Anor [1996] VicRp 54; [1996] 2 VR 34. His Honour in that case was dealing with a dispute about discovery in the course of an action, rather than discovery before suit, but it seems to me that the same principles are applicable. In my opinion it is enough in the present case to make the point that the applicant is not a trade rival of Stockland, and would not, through inspection of documents, come into possession of commercially sensitive information which he would be likely to, or indeed able to, use for his own benefit against Stockland's interests. It appears to me that the implied undertaking to the court on discovery, that documents inspected will not be used for any purpose other than the action in which they are produced, applies with equal force to discovery before action under r 651. The applicant would be under an obligation, on pain of contempt, not to use information emerging from discovered documents for a collateral purpose. Thus if I had been persuaded that the applicant had, or was likely to have, a cause of action against the respondent, I would not have been minded to refuse to order the respondent to produce the documents sought by reason of their commercial sensitivity.

I certify that the preceding thirty-six (36) numbered paragraphs are

a true copy of the Reasons for Judgment herein of the Master.