Plaintiff/ Defendant by Counterclaim v Second Defendant

2 Relevantly and in broad summary, the operating agreement provides that:

(1) The operations for recovery and production of petroleum and gas, which are described as the "Joint Undertaking", shall be conducted by Esso as "the Operator". BHP is described in the operating agreement as "the Non-Operator";

(2) Esso's conduct as operator is subject to the supervision of a supervisory committee comprised of one member nominated by each of BHP and Esso. All decisions of the supervisory committee must be unanimous.

(3) Each of Esso and BHP is entitled to take one-half of the petroleum and gas produced and recovered from the operations of the joint undertaking;

"shall direct the Joint Undertaking in a good and workmanlike manner and consistent with good oilfield practice, and shall ensure compliance with all applicable laws and regulations and with the provisions of this Agreement."[1]

Esso contends that, on a proper construction, the operating agreement provides that it shall not be liable to BHP for any loss or damage caused by it as a result of a breach of this provision unless that loss or damage was caused by its wilful misconduct, or alternatively gross negligence;

(5) Expenditures made for the joint undertaking shall be borne equally by BHP and Esso.[2] By Article 8.03, the parties have agreed that:

"Included in expenditures made for the Joint Undertaking shall be those incurred in disposing of claims for injury to any person or loss or damage to the property of any person (including loss or damage to property of a Party) in the conduct of the Joint Undertaking and those incurred in repairing or replacing losses or damage to the Joint Property, in the conduct of the Joint Undertaking, the provisions of Section 4.02 notwithstanding, unless such injury, loss or damage is caused by the gross negligence or wilful misconduct of the Operator in directing or supervising the Joint Undertaking. Such included expenditures shall include costs of litigation or arbitration, reasonable outside counsel fees, and payments made in settlement or satisfaction of any such claim, provided that any out-of-court settlement in excess of the equivalent of A£5,000 shall first be approved by the Supervisory Committee."[3]

3 Pursuant to the operating agreement, Esso has constructed gas processing facilities and a crude oil stabilisation plant at Longford in Victoria, and has also established processing and storage facilities at Long Island Point in Victoria. Gas liquids and stabilised crude oil are transferred by a pipeline from the Longford facilities to the Long Island Point facilities. The Longford facilities, the Long Island Point facilities and the pipelines all formed part of the joint undertaking and were maintained and used by Esso at all relevant times as operator of the joint undertaking.

4 On 25 September 1998, there was a series of explosions and a fire at the Longford facility. As a result, the Longford facility was shut down and no natural gas, crude oil, liquid petroleum gas or ethane was produced from the joint undertaking facilities for some time. When production recommenced, it was at reduced levels until completion of necessary repairs and rebuilding of the facilities.

5 BHP claims that the explosion and fire were caused by Esso's failure, in breach of Article 4.02 of the operating agreement, to:

(1) Direct the operations of the Longford facility in a good and workmanlike manner;

(2) Direct the operations of the Longford facility consistently with good oilfield practice; and

(3) Comply, and ensure compliance by the second defendant as its subcontractor, with all laws and regulations that applied to the Longford facility at the time of the explosion and fire.

6 In this proceeding, BHP makes claims against Esso for breach of contract and in negligence. The particulars of loss and damage make a claim for over $400 million. To the extent that any part of BHP's claim includes expenditure by it for the joint undertaking, BHP alleges in its reply that this expenditure is recoverable from Esso because it was caused by the gross negligence of Esso.

7 Soon after this proceeding was commenced, Esso commenced its own proceeding against BHP, seeking to recover one-half of its expenditures incurred as a result of the explosion and fire, which BHP has refused to pay. The claim includes a claim for one-half of Esso's legal costs associated with the explosion and fire, including the legal costs of defending itself at the Royal Commission of Inquiry into the explosion and fire, defending itself against criminal charges arising out of the explosion and fire and defending itself against civil claims made against it as a result of the explosion and fire.

8 Following a joint directions hearing in both BHP's proceeding and Esso's proceeding, it was ordered that the two proceedings be consolidated, with BHP as plaintiff and Esso and a related company as defendants. Esso was provided with an opportunity to object to the consolidation, but did not avail itself of that opportunity. Esso was ordered to, and did, replicate its claims for one-half of unpaid expenditures, including legal costs, as a counterclaim in the consolidated proceedings. Further, in its defence, Esso pleaded its claim for reimbursement of one-half of its expenditures as a set-off against BHP's claim if it is established.

9 The amount of Esso's claim and set-off, excluding contractual interest under the operating agreement, is approximately $54 million. This claim includes approximately $31 million for one-half of Esso's legal costs arising from the explosion and fire.

10 In its reply and defence to counterclaim, BHP alleges that the expenditures claimed by Esso, or part thereof, were not expenditures made for the joint undertaking because:

(1) They resulted from Esso's breaches of the operating agreement;

(2) They were expenditures caused by the gross negligence of Esso in directing or supervising the joint undertaking;

(3) To the extent that the expenditures comprised "outside counsel fees", they were not reasonably incurred;

(4) To the extent that the expenditures were in respect of the defence of lawsuits arising out of the joint undertaking, there was no consultation with the supervisory committee as required by Article 4.04(e) of the operating agreement.[4]

11 From the above, it can be seen that a common question arises for determination in both BHP's claim and Esso's counterclaim: If the explosion and fire was caused by Esso's conduct in breach of the operating agreement, was this the result of gross negligence by Esso in directing or supervising the Joint Undertaking? This common question is of particular relevance to the issue concerning waiver of legal professional privilege which arises for determination.

12 Discovery is not yet complete. The task is a massive one and is not due to be completed for another six months. Each of BHP and Esso has already discovered tens of thousands of documents. An issue has arisen as to whether Esso has waived legal professional privilege in respect of documents in its possession or power which record or evidence the legal work in respect of which it claims one-half of its total expenditure from BHP, or which may otherwise relate to the causes of the explosion and fire. For convenience, I will refer to these documents as the "privileged documents". Esso has yet to list its privileged documents or to specify the grounds upon which it claims privilege, including any possible joint privilege held by it and the second defendant, a related company which performed many of Esso's tasks as operator on a sub-contract basis. However, Esso readily acknowledges that there are a vast number of relevant privileged documents in its possession and that it intends to claim privilege for them.

13 It was submitted on behalf of Esso that, in the absence of it listing its privileged documents and articulating its claims for privilege, the issue of whether it has waived privilege is hypothetical and should not be determined at this stage. I do not accept this submission. The existence of vast numbers of privileged documents is not in issue. Accordingly, the dispute about waiver of privilege is ripe for determination. There are also good practical grounds for determining the dispute in advance of Esso being required to undertake the massive task of making discovery of its privileged documents. Indeed, Esso has a separate application before the Court to be excused from discovering its privileged documents on the ground that it would be oppressive to require it to do so, in circumstances where it contends that the documents are privileged and will not be available for inspection by BHP in any event. Further, it is necessary to determine whether Esso has waived legal professional privilege in the context of an application by Esso for an order that all further proceedings in its counterclaim be stayed until the hearing and determination of BHP's claims against it. The basis of Esso's application for a stay is that if it has waived its legal professional privilege, which Esso denies, then it will suffer prejudice if BHP is able to use its privileged documents at a joint trial of both claim and counterclaim.

14 Esso accepts that a high proportion, if not all, of its privileged documents are relevant to both BHP's claim and Esso's counterclaim. Obviously, the privileged documents are relevant to BHP's allegations of breaches of contract or duty by Esso, whether or not the requisite standard requires proof of gross negligence. For the same reason, the privileged documents are relevant to the counterclaim and set-off pleaded by Esso, where the issue of gross negligence must be determined.

15 The privileged documents are also relevant to the counterclaim because Esso can only prove its case for one-half of its expenditures on legal costs relating to the explosion and fire if it can establish that the costs were in fact expended "for the Joint Undertaking". Further, the privileged documents are relevant to other issues raised by BHP in its defence to counterclaim, concerning the reasonableness of outside counsel fees and whether there was any necessary consultation with the supervising committee.

16 The relevance of the privileged documents is recognised in the statement in the written submissions by Esso's counsel, in relation to the issues arising on Esso's counterclaim, that -

"[72] Resolution of these issues by the Court may require examination of documents demonstrating that the claimed expenditures were incurred by Esso as well as examination of documents evidencing the reasons for the expenditures, the nature of the expenditures and the reasonableness of the expenditures. A substantial part of the expenditures the subject of [Esso's] counterclaim comprise Esso's legal costs of the previous proceedings. The best, and possibly the only, evidence available to Esso by which Esso may demonstrate the reasons for, the nature of and the reasonableness of those legal costs are the privileged documents."[5]

17 BHP submits that, by mounting its claim to recover one-half of its legal fees relating to the explosion and fire, Esso impliedly waived legal professional privilege over all of the privileged documents, because it thereby laid the contents of those documents open to scrutiny in relation to that claim. BHP contends that Esso waived privilege at the time Esso commenced its proceeding seeking to recover one-half of its legal costs, or at least when Esso pleaded that claim as a counterclaim or set-off in defence to BHP's claim in the consolidated proceedings. In support of this submission, BHP relied upon the decision of the High Court in Mann v Carnell,[6] the decision of the Full Court of the Federal Court in Commissioner of Taxation v Rio Tinto Ltd[7] and the decision of the Court of Appeal of this Court in Secretary to the Department of Justice v Osland.[8]

18 In Mann v Carnell Gleeson CJ, Gaudron, Gummow and Callinan JJ stated the common law principles applicable to waiver of legal professional privilege in the following terms:

"Legal professional privilege exists to protect the confidentiality of communications between lawyer and client. It is the client who is entitled to the benefit of such confidentiality, and who may relinquish that entitlement. It is inconsistency between the conduct of the client and maintenance of the confidentiality which effects a waiver of the privilege ...

Waiver may be express or implied. Disputes as to implied waiver usually arise from the need to decide whether particular conduct is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect. When an affirmative answer is given to such a question, it is sometimes said that waiver is 'imputed by operation of law'. This means that the law recognises the inconsistency and determines its consequences, even though such consequences may not reflect the subjective intention of the party who has lost the privilege ... What brings about the waiver is the inconsistency, which the courts, when necessary informed by considerations of fairness, perceive, between the conduct of the client and maintenance of the confidentiality; not some overriding principle of fairness operating at large."[9]

19 In Commissioner of Taxation v Rio Tinto Ltd the Full Court of the Federal Court (Kenny, Stone and Edmonds JJ) considered whether the Commissioner of Taxation had waived legal professional privilege in respect of documents referred to in a response to a request for further and better particulars of the matters taken into consideration in reaching a conclusion that Rio Tinto had been involved in dividend stripping. The Commissioner chose to respond to the request for particulars by stating that the matters taken into account by the decision-maker were evidenced by certain documents, including documents recording confidential legal advice. The Full Court held that, because of the particular way in which the Commissioner had chosen to respond to the request for particulars, there had been an implied waiver of legal professional privilege in the documents referred to in the response.

20 The Full Court considered a number of cases where the concept of "issue waiver" has been considered.[10] The Full Court emphasised that, in considering a particular case, earlier cases of issue waiver should be treated with caution, because each case must turn on its own particular facts.[11] The Full Court summarised the principles arising from the issue waiver cases in the following way:

"These authorities show that, where issue or implied waiver is made out, the privilege holder has expressly or impliedly made an assertion about the contents of an otherwise privileged communication for the purpose of mounting a case or substantiating a defence. Where the privilege holder has put the contents of the otherwise privileged communication in issue, such an act can be regarded as inconsistent with the confidentiality that would otherwise pertain to the communication."[12]

21 This summary of the principles arising from the issue waiver cases demonstrates that questions of issue waiver are to be determined by an application of the general test of inconsistency expressed in Mann v Carnell. The Full Court recognised this[13] and continued:

"waiver comes about because the privilege holder's conduct is inconsistent with the continued confidentiality of the communication because he or she has put in issue the character or contents of the communication in pursuing a right or claim, or has created a situation where another party must reasonably do so by way of defence."[14]

22 On the question of issue waiver, the Full Court expressed agreement with the statement by Allsop J in DSE (Holdings) Pty Ltd v Intertan Inc[15] that issue waiver arises when:

"the party entitled to the privilege makes an assertion (express or implied), or brings a case, which is either about the contents of the confidential communication or which necessarily lays open the confidential communication to scrutiny and, by such conduct, an inconsistency arises between the acts and the maintenance of the confidence, informed partly by the forensic unfairness of allowing the claim to proceed without disclosure of the communication."[16]

23 The Full Court concluded that the assertion by the Commissioner in his particulars, that the basis of the relevant decision was evidenced by the privileged documents, had necessarily laid the contents of those documents open to scrutiny, with the consequence that an inconsistency arose between the making of the assertion and the maintenance of the privilege.[17]

24 The approach of the Full Court in Commissioner v Rio Tinto, including its acceptance and adaption of the statement by Allsop J in DSE, was referred to with approval by Maxwell P in Secretary v Osland,[18] although Osland was not an issue waiver case.

25 On the basis of these clear statements of principle, and recognising that each case must depend upon its own facts, BHP submitted that it was inconsistent for Esso to mount its claim for one-half of the expenditures incurred by it in respect of legal costs arising from the explosion and fire, thereby lay open the contents of its privileged documents to scrutiny and still maintain confidentiality for the privileged documents. It was submitted that this inconsistency was compounded by the defences reasonably raised by BHP to the counterclaim.

26 Esso did not challenge the correctness of the general principles stated in the cases referred to above. It was submitted on behalf of Esso that, on the particular facts of this case, there had been no waiver of legal professional privilege by it. It was contended that there had been no waiver because Esso's claim, insofar as it raises the contents of the privileged documents, raises issues "analogous to a massive taxation" of legal costs. In this regard, reliance was placed upon the decision of McHugh J in Giannarelli v Wraith (No 2).[19] In that case, McHugh J considered a number of questions concerning legal professional privilege in the context of a taxation of costs. The High Court rules do not require a party submitting a bill of costs for taxation to make discovery. However, the taxing officer has power to require the production of documents for the purpose of taxation. McHugh J held that the party propounding the bill of costs could refuse to produce documents requested by the taxing officer on the ground that the documents are subject to the benefit of legal professional privilege.[20] Accordingly, it was for the party propounding the bill of costs to elect whether or not to waive privilege.[21] Whether or not privilege is waived, the taxing officer is required to proceed and tax the bill on the available evidence.[22]

27 I do not accept that Giannarelli v Wraith supports an argument that there has been no waiver of privilege in this case. The case contains no statement of principle which is capable of ousting or qualifying the general statements of principle contained in Mann v Carnell or Commissioner v Rio Tinto. It is implicit from the reasoning of McHugh J in Giannarelli v Wraith that his Honour was of the view that the mere lodging of a bill of costs for taxation does not create a waiver of privilege, by putting the contents of the privileged documents which are the subject of the bill of costs in issue. The taxation of costs cases are entirely distinguishable from the mounting of a substantive case, such as the counterclaim by Esso. Further, there is no inconsistency between a party who propounds a bill of costs maintaining legal professional privilege over relevant documents and insisting that the taxing officer tax the bill of costs on the otherwise available evidence. This is the very situation envisaged by McHugh J in Giannarelli v Wraith.[23]

28 In the circumstances of this case, Esso's conduct in mounting its counterclaim and set-off is inconsistent with the maintenance by it of confidentiality in its privileged documents. Esso has laid the contents of the privileged documents open to scrutiny, both in respect of proof of its counterclaim and in respect of defences reasonably raised by BHP.

29 In order to meet this result, Esso raised another argument. It was submitted on behalf of Esso that any waiver of privilege should be confined to the counterclaim as a separate proceeding, with the result that BHP should not be able to use the privileged documents, which are the subject of the waiver, for the purpose of prosecuting its claims against Esso. It was submitted that the waiver should be so confined because it would be unfair to give BHP the forensic advantage of having access to the privileged documents for the purposes of prosecuting its claim. Accordingly, it was submitted that, informed by fairness, it was not inconsistent for Esso to mount its counterclaim and then assert that BHP ought not gain access to the privileged documents for the purpose in prosecuting its claim.

30 I do not accept this submission. The conduct of Esso is inconsistent with limiting any waiver of privilege to the confines of the counterclaim. I am of this view for the following reasons.

31 First, the conduct of Esso in mounting its claim for reimbursement of one-half of its expenditure on legal costs exposes the content of the privileged documents to scrutiny.

32 Second, the mounting of Esso's claim for expenditure on legal costs created the situation where BHP, acting reasonably, could be expected to raise the defences that the expenditures were caused by the gross negligence of Esso or were outside counsel fees which were not reasonably incurred. BHP has in fact raised those defences, each of which also lays the content of the privileged documents open to scrutiny.

33 Third, although given the opportunity to object to an order for consolidation of its claim with the BHP proceeding, Esso raised no objection and thereafter re-pleaded its claim as a counter-claim in the consolidated proceeding. Further, Esso also pleaded its claim as a set-off in defence of BHP's claim. By pleading the set-off, Esso laid the contents of its privileged documents open to scrutiny in respect of BHP's claim.

34 Fourth, r 10.04[24] provides that a counterclaim "shall be tried at the trial of the claim of the plaintiff unless the Court otherwise orders." Whether or not the court exercises its discretion to order that the counterclaim be tried separately from the claim, there is in any event a common question to be determined on both claim and counterclaim in the consolidated proceeding: If the explosion and fire was caused by Esso's conduct in breach of the operating agreement, was this the result of gross negligence by Esso in directing or supervising the Joint Undertaking? This common question arises out of the same contract between BHP and Esso (the operating agreement) and the same events (the explosion and fire).

35 Fifth, if the waiver is confined to the counterclaim only, this would mean that evidence of the contents of the privileged documents would not be admissible to determine the common question of gross negligence in the BHP proceeding, but would be admissible to determine that question in the counterclaim. This could give rise to inconsistent decisions on the same question. Counsel for Esso submitted that this risk would not eventuate if the Court ordered that the trial of the counterclaim take place after the hearing and determination of the plaintiff's claim, because an issue estoppel on the common question of gross negligence would arise from a determination of that issue on the plaintiff's claim. In other words, Esso submits that the gross negligence issue should be determined once, and for all purposes, in the absence of the privileged documents, with the result that BHP will be unable to effectively use the privileged documents to support its gross negligence defence to the counterclaim. In circumstances where the mounting of that counterclaim has given rise to the waiver of privilege, this would be an obviously unfair result. This reinforces my view that it is inconsistent for Esso to mount its claim and continue to insist on the maintenance of its privilege in relation to BHP's claims against it.

36 For the above reasons, I find that Esso has waived privilege in respect of the privileged documents. That waiver applies to the proceeding generally. It follows that Esso's discovery in the proceeding should include the privileged documents. If Esso wishes to maintain a claim for privilege in respect of any document which it contends is not covered by the waiver arising from its conduct, such as the claim for joint privilege because another privilege holder has not also waived privilege, the onus is on Esso to articulate that claim for privilege at the time it makes discovery of those documents. The Court will then determine any such claim.

37 In order to meet the result that the Court found that it had waived privilege for the purposes of both claim and counterclaim, Esso seeks an order that all aspects of the counterclaim be stayed until the hearing and final determination of BHP's claim against it, including the determination of all rights of appeal. Senior counsel for Esso informed the Court that, if such a stay is granted, Esso will withdraw its set-off defence and undertake that it will not seek a stay on the execution of any judgment obtained against it by BHP, pending the hearing and determination of its counterclaim.

38 The articulated purpose of the stay application is to avoid the prejudice which Esso will suffer if BHP is allowed to have discovery and inspection of the otherwise privileged documents for the purpose of prosecuting its claim against Esso. It was submitted on behalf of Esso that it would be prejudiced because, in the absence of a stay, BHP will obtain an unfair advantage by gaining access to the otherwise privileged documents for the purpose of prosecuting its claim. For the reasons which I have given in rejecting the submission made on behalf of Esso that the waiver of privilege should be confined to the counterclaim, I reject the application for a stay. The common question concerning Esso's gross negligence should be determined in the one trial of both claim and counterclaim. Further, the granting of a stay would defer the complete and final determination of the disputes between the parties, perhaps for many years depending upon the results of appeals and applications for special leave to appeal. The granting of a stay would also result in a multiplicity of proceedings. This should be avoided if at all possible.[25]

39 Nothing I have said should be taken as excluding the need, at the appropriate time when interlocutory steps are nearer to completion, to consider whether all issues in the proceeding, including the counterclaim, should be tried at the one time. Having regard to the size and nature of the proceeding, the Court and the parties will need to work together in a creative fashion to limit the areas of dispute to be determined at trial, including giving consideration to exercising the Court's powers under O 50 to refer any question to a special referee, to refer the proceeding for mediation or to refer a question to arbitration with the consent of the parties.

40 It was submitted on behalf of Esso that it should not, in any event and notwithstanding any finding of the Court as to waiver of legal professional privilege, be required to make discovery of the privileged documents. It was submitted on behalf of Esso that there are tens of thousands of privileged documents and that it would be unduly oppressive for Esso to make discovery of them. In these circumstances, it was submitted that the Court should make an order under r 29.05 limiting the obligation of Esso to make discovery. Rule 29.05 provides:

"In order to prevent unnecessary discovery, the court may, before or after any party is required to make discovery, order that discovery by any party shall not be required or shall be limited ...".

41 It was submitted on behalf of Esso that discovery of its privileged documents is within this rule for two principal reasons. First, because it is an unnecessary task in circumstances where the documents are prima facie subject to legal professional privilege. Second, because the documents are likely to be of relatively limited evidentiary value in any event, because they were created after the explosion and fire and comprise "secondary" evidence in the form of opinion and commentary by lawyers and experts.

42 I reject Esso's submissions in this regard. I have found that the legal professional privilege in these documents has been waived. Accordingly it cannot be said that discovery of the privileged documents is unnecessary. Nor do I accept that the documents are likely to be of relatively limited evidentiary value. I infer that there are many privileged documents which may be highly relevant. For example, draft and final witness statements, instructions to external lawyers and instructions to experts.

43 It was submitted that discovery by Esso of the privileged documents would be enormously expensive and could significantly delay the trial of BHP's claim. I accept that the task will be an enormously expensive one and will be time-consuming. However, Esso is part of an extremely large group of companies and there is no suggestion that there are any limits upon its ability to fund the discovery exercise. In order to limit the cost and delay arising from discovery of the privileged documents, BHP has offered to excuse Esso from the obligation to list the documents and is prepared to inspect the documents in whatever form they are presently maintained. Esso has rejected this suggestion, and insists that it have control of the discovery process if it is ordered to discover the privileged documents. That is Esso's choice.

44 As to the delay which could be caused by discovery of the privileged documents, that is a question of human and financial resources. The Court expects a litigant such as Esso to employ whatever resources are necessary to ensure that its orders are complied with in a reasonable time. I will hear the parties as to the time within which Esso should make discovery of its privileged documents.

45 I will hear the parties as to the appropriate form of orders to give effect to these reasons, and as to costs.

[1] Article 4.02 of the operating agreement.

[2] Article 8.01 of the operating agreement.

[4] Article 4.04(e) gives Esso the specific power: "To engage legal counsel and, subject to consultation with the Supervisory Committee, prosecute and defend lawsuits arising out of the Joint Undertaking."

[6] [1999] HCA 66; (1999) 201 CLR 1.

[7] [2006] FCAFC 86; (2006) 151 FCR 341.

[8] [2007] VSCA 96.

[9] Ibid, [28]-[29] (citations omitted).

[15] [2003] FCA 384; (2003) 127 FCR 499, [58].

[16] [2006] FCAFC 86; (2006) 151 FCR 341, [61], (emphasis in original).

[18] [2007] VSCA 96, [26].

[19] [1991] HCA 2; (1991) 171 CLR 592.

[24] Supreme Court (General Civil Procedure) Rules 2005 (Vic).

[25] See Section 29(2) of the Supreme Court Act 1986 (Vic).