Plaintiff v Defendant

2 The first contract, entered into in October 2013, was referred to as an "Enterprise Resource Planning Contract" ("the Planning Contract"). Pursuant to the Planning Contract, the State engaged ASG Group to provide the "Re-Implementation Project" for the purpose of developing and delivering a finance, human relations/payroll and reporting software system ("the System") that complied with certain specifications.

3 The second contract, entered into in June 2014, was referred to as the "Contract Management System Contract" ("the Management Contract"). Pursuant to the Management Contract, the State engaged ASG Group to implement a further system that integrated with the System and complied with certain specifications which, once completed, would provide software necessary for the provision of certain services.

4 Both contracts contained a term entitling "the Customer" to terminate the contract by written notice; but this entitlement was coupled with the obligation to indemnify ASG Group "against any liabilities or expenses (but not damages for loss of profit) which are substantiated and are properly incurred ... to the extent that those liabilities or expenses cannot be further mitigated".

5 ASG Group performed certain services under both contracts on an ongoing basis.

6 On 3 December 2014, ASG Group submitted an incomplete draft change order, entitled "R12 Re-Implementation Project Go-Live Extension" ("the Change Order"). By the Change Order, ASG Group sought to vary the fixed price of the Planning Contract, by way of additional payment of at least $1,351,831.

7 The summary to the Change Order noted that implementation had been deferred to May 2015. It was suggested the revised implementation schedule had been prepared independently of commercial considerations. It was also stated:

This Change Order details reasons for this delay with a view to varying the fixed price contract to offset the associated financial impact to ASG [Group] resulting from this deferral.

The reference to the deferral was to the first stage of the functional scope under the Planning Contract, which had been due for delivery on 17 November 2014.

8 On 14 April 2015, ASG Group submitted 2 invoices, totalling $1,374,417.24 ("the Invoices"), which related to the Change Order ("the Change Order Claim").

9 On 14 May 2015, the State informed ASG Group it disputed the full amount of the Invoices.

10 On 27 October 2015, the State gave notice of termination of the Planning Contract and required ASG Group to substantiate any claim it might have by way of indemnity. The next day, notice of termination was given in relation to the Management Contract, with the same requirement of substantiation.

11 In this proceeding, ASG Group makes claims pursuant to each indemnity, totalling $6,173,434. This amount includes at least some of the amounts the subject of the Invoices. For various reasons set out in the defence, the State alleges that the amounts claimed by ASG Group have not been substantiated and are not payable.

12 Recently, the court received an email from ASG Group's solicitors, noting this proceeding was to be the subject of a mediation on 1 December 2017. The email raised an issue concerning a document discovered by the State. That email stated that the State had produced a redacted version of the document, subject to a confidentiality regime, with a claim for privilege over the non-disclosed contents.[1]

13 The email stated it was desirable that any dispute concerning production of the document for inspection be heard and determined before the mediation to be held this Friday. Accordingly, the court was invited to list the application as a matter of urgency.

14 There has been extensive discovery in this proceeding. By consent, orders were made on 19 October 2017 requiring discovery of 103 categories of documents, many of them with sub-categories. The last of those categories was as follows:

All documents evidencing investigations by ASG [Group] or the State in relation to the delay in delivery of the System by the Delivery Date, including, without limitation:

(1) Any communication between the State and:

(a) Tam Vu of Vitae Partners.

(b) KPMG.

(2) Copies of any statements obtained, or reports prepared, by those entities or individuals.

15 The present interlocutory dispute concerns a single report from KPMG provided in June 2015[2] to the Department of Environment, Land, Water and Planning ("the Department") entitled "ERP Replacement Project Review" ("the Report").[3] The Report was discovered on the basis it came within the category referred to above. Accordingly, there is no issue that the contents of the document are relevant to the issues in the proceeding.

16 Notwithstanding this, the State has only made part of the document available for inspection. Substantial parts of the document have been redacted on the grounds that they are privilege because, the State submits, they were prepared in connection with discussions attempting to negotiate a settlement of the dispute the subject of this proceeding.

17 The State relies upon s 131 of the Evidence Act 2008 (Vic), which provides as follows:

(1) Evidence is not to be adduced of -

(a) a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute; or

(b) a document[4] (whether delivered or not) that has been prepared in connection with an attempt to negotiate a settlement of a dispute.

...

(5) In this section:

(a) a reference to a dispute is a reference to a dispute of a kind in respect of which relief may be given in an Australian or overseas proceeding; and

...

18 The State filed 2 affidavits in support of its claim for privilege. Both of them were sworn by a solicitor responsible for the day-to-day conduct of the proceeding.

19 In addition to giving the background to each of the Planning Contract and the Management Contract, details were given of alleged delays by ASG Group, and by contractors, and the ramifications of such delays. The State's position was that, by at least 19 September 2014, it had become clear that ASG Group could not meet certain proposed "Go-Live" dates. According to the evidence, the State advised ASG Group that liquidated damages would apply from 15 December 2014.

20 Further, evidence was tendered concerning the State's conduct after this time.

21 As part of addressing the issues concerning ASG Group's alleged non-performance, on 2 February 2015, the State issued a request for tender to KPMG to advise on various matters relating to the Re-Implementation Project. The request for tender provided some background with respect to the Re-Implementation Project. Having done so, the project specification stated that the Department "is now seeking a suitably qualified organisation to review the current status of the ERP Replacement project and to provide options on the future direction of the project".

22 On 9 February 2015, KPMG responded. It suffices for present purposes to state that nothing in KPMG's response suggested KPMG saw it as part of its role to advise or assist the State in resolving any disputes the Department may have had with ASG Group, or that any report would include such a purpose.

23 Upon KPMG being chosen to provide the advice, the State provided a proposed outline of approach. The proposed outline, forwarded to KPMG on 3 March 2015, stipulated the work to be performed under the following headings:

Remediation Approach - development of a new delivery approach to address the current gaps.

Future Proofing - how would [the Department] manage the solution moving forward?

Various matters were listed under each heading. None of them referred to giving any advice with respect to any current or future dispute with ASG Group, or suggested that any report might be used for such a purpose.

24 On 13 May 2015, the State informed ASG Group that it had engaged an external consultant, Lexton Gerbert ("Gerbert"), to assist it with its negotiations regarding the Change Order Claim.

25 On 11 June 2015, the State emailed a "without prejudice" offer to ASG Group in relation to the Change Order Claim.

26 Subsequently, the State and ASG Group engaged in negotiations in an attempt to settle the Change Order Claim.[5] However, there is no suggestion in the evidence that the Report was relied upon for the purpose of these negotiations.

27 The State's solicitor also gave evidence that Gerbert had discussions with various representatives of KPMG before the Report was finalised. Gerbert, not the KPMG representatives, was the source of this hearsay evidence. The evidence did not disclose any details as to the nature of these discussions. Further, there was no evidence to the effect that, ultimately, Gerbert was provided with a copy of the Report for use in any without prejudice negotiations. In short, the mere fact that Gerbert spoke to representatives of KPMG before the Report existed provides little, if any, probative evidence to establish that the Report had been prepared in connection with an attempt to negotiate a settlement.

28 In my view, it is also of particular moment that there is no evidence from anyone representing the Department, on a hearsay basis or otherwise, providing a basis for concluding that the preparation of the Report had a purpose which included the necessary connection with settlement negotiations. It would have been a very simple thing for such evidence to be led in circumstances where the Department was directly involved in giving instructions for the preparation of the Report. The only proper inference to be drawn is that there was no one capable of giving a legitimate basis for such evidence.[6]

29 That same inference must be drawn from the absence of any evidence from a KPMG representative involved in the preparation of the Report.

30 The State submits the Report was incidental to the negotiations which were anticipated prior to, and took place on a without prejudice basis on or after, 11 June 2015. Therefore, it submits, the Report is a document prepared in connection with an attempt to negotiate a settlement within the meaning of s 131(1)(b) of the Evidence Act.[7]

31 In seeking to establish this, the State relies not only upon the background set out above, but also upon the contents of the Report itself. In particular, reliance was placed upon the unredacted introduction to the Report, which included the following:

This document has been prepared by KPMG to address the status of the ERP Replacement project and to provide analysis and recommendations as to the options available to [the Department] to complete the project.

We have alluded in this report on the performance to date of the Department's vendor, ASG [Group], and the nature of some unresolved commercial issues which the Department will need to resolve with ASG [Group] as the project moves forward. We have not commented on the merits of these commercial issues. Note that our estimate-to-complete assumes a prompt resolution of these issues.

Given this KPGM (sic) recommends that this document be considered Commercial in Confidence, in anticipation that the Department will not wish to share the document with ASG [Group].

(Emphasis added.)

32 ASG Group contends the State has failed to establish the necessary connection between the Report and any attempt to negotiate a settlement. It submits that, at the time of its preparation, there was limited dispute between the parties. Further, ASG Group relies upon the fact that the State engaged Gerbert to assist in connection with its attempts to settle the dispute, rather than KPMG. Finally, ASG Group contends that the evidence of a without prejudice offer on 11 June 2015 does not establish any connection between those discussions and the Report, let alone the necessary connection.

33 Turning to the Report itself, ASG Group submits that both the briefing materials and the contents of the Report demonstrate KPMG were engaged to assess the then current situation of the project, to make suggestions for a new delivery approach and to "future proof" the project.

34 Finally, ASG Group submits the reference in the Report to "unresolved commercial issues which the Department will need to resolve"[8] does not demonstrate the necessary connection between the subject matter of the Report and the identified dispute. In particular, ASG Group relies upon the fact that there is no evidence that KPMG was ever provided with the Change Order or the Invoices.

35 The object of s 131(1) of the Evidence Act is to allow parties to engage in genuine attempts to settle a dispute without the risk of exposure of the relevant communications or documents. This is consistent with the public policy objectives of the common law.[9]

36 However, not every document brought into existence during the process of negotiation is covered by the privilege.

37 In the context of considering the scope of privilege under s 131 of the Evidence Act, Judd J, in Biovision 2020 Pty Ltd v CGU Insurance Ltd, referred to the common law position as stated by the High Court in Field v Commissioner for Railways (NSW), including as follows:[10]

As a matter of policy the law has long excluded from evidence admissions by words or conduct made by parties in the course of negotiations to settle litigation. The purpose is to enable parties engaged in an attempt to compromise litigation to communicate with one another freely and without the embarrassment which the liability of their communications to be put in evidence subsequently might impose upon them ...

The question, however, does not depend altogether upon the expectations of the parties. It depends upon what formed part of the negotiations for the settlement of the action and what was reasonably incidental thereto.

(Emphasis added.)

38 The same concept of a "connection" between the settlement of a proceeding and the evidence in question has been embraced within the terms of s 131 of the Evidence Act.[11] To be protected, a document must be prepared "in connection" with an attempt to negotiate a settlement. Although "in connection" is a very broad expression,[12] there must be a "direct" connection for the provision to apply; a tenuous connection does not suffice.[13]

39 Essentially, the issue before the court is a question of fact as to whether or not the necessary connection can be established between the redacted parts of the Report and the settlement of the dispute concerning the Invoices.

40 With respect to the instructions to KPMG which gave rise to the Report, there is nothing to suggest that the Report was to be considered for the purpose, or to include the purpose, of being used to attempt to negotiate a settlement with ASG Group. On the contrary, the instructions confined the scope of any report to providing options on the future direction of the project itself. There is no suggestion, implicitly or otherwise, to which the court was taken which suggested that the proposed report would be used in any settlement discussions with ASG Group relating to the Change Order Claim or otherwise.

41 Further, the contents of the Report do not establish the necessary connection. On the contrary, KPMG expressly stated that it had refrained from commenting on the merits of the "unresolved commercial issues".[14]

42 Further, in a part of the Report already disclosed to ASG Group, reference was made to conversations between KPMG and ASG Group representatives. This was referred to in the context of the Report provided timing estimates concerning delivery responsibilities, which had been "shared with and confirmed by" ASG Group. The Report recorded that KPMG understood the Invoices had been submitted and that issues relating to the Invoices had been raised repeatedly during discussions with ASG Group. KPMG stated this was despite "KPMG giving our assurances that we have no role in assessing or adjudicating the matter". In this section of the Report, KPMG repeated that they had not sought to assess the merits of the claim "apart from to recognise the matter as a potential threshold condition for ASG [Group] to commit fully to delivery". Reference was also made to potential disruption or delay to the project if the matter was not resolved with ASG Group.

43 These disclosed parts of the Report reinforce the absence of a connection between the preparation of the Report and any attempt to negotiate a settlement of the dispute. On the contrary, KPMG expressly disavowed giving any advice with respect to any assessment in that regard.

44 Notwithstanding this, the State submits, by reference to both the disclosed and non-disclosed parts of the Report, that KPMG's advice with respect to future options was relevant to any negotiations to settle the claims referred to in the Invoice. Whilst it may be accepted that such relevance exists, the Report was prepared for the purpose of advising the Department on the completion of the project. In these circumstances, the relevance which exists now in relation to the numerous matters in dispute does not provide the necessary connection in relation to the preparation of the Report in the first half of 2015.

45 Further, having read each of the redacted parts of the Report, it is plain that the Report is directed to the completion of the project. Whilst KPMG refers on a number of occasions to its expectation that the State would want to keep the Report confidential, particularly in light of the dispute, that does not suggest the necessary connection exists. Furthermore, in line with ASG Group's submission,[15] there is nothing in the Report to suggest that KPMG was provided with the Invoices, or had any briefing in relation to matters relevant to that dispute.

46 For completeness, there are 2 further things to mention.

47 First, during the course of argument the State was invited to make submissions with respect to each redacted part of the Report. As part of that process, the State conceded its claim for privilege could not be pressed in relation to various matters. Accordingly, this ruling applies only to those parts of the Report for which the privilege claim was maintained.

48 Secondly, there was an inconsistency in the State's approach as to what was redacted. Objections were taken to disclosure of some aspects of the Report on the ground that it provided relevant background, and yet other parts of the Report were disclosed notwithstanding they also provided relevant background to redacted sections of the Report. Although it has not been necessary to consider individual parts of the Report that were redacted, this inconsistency of approach would have undermined much of the claim for privilege in any event.

49 For the reasons stated, the State will be ordered to produce for inspection an unredacted copy of the Report.

[1] With respect to the contents that have been disclosed, the confidentiality regime agreed between the parties no longer applies. A notice of dispute was provided under that regime by ASG Group, and the State has made no application to establish confidentiality within 7 days as required under the confidentiality regime if confidentiality were to be maintained.

[2] Beyond identifying the month and year of the Report, the precise date of the Report is not apparent.

[3] ERP is an acronym for Enterprise Resource Planning.

[4] A document includes part of a document: Evidence Act, Dictionary, Part 2, s 8.

[5] This evidence was given on the basis of the State's solicitor's belief, having been informed by Gerbert of this fact. ASG Group objected to evidence being led in this form. As the source of the hearsay evidence was identified, the evidence is admissible on this interlocutory application: Evidence Act, s 75.

[6] Androvitsaneas v Members First Broker Network Pty Ltd [2013] VSCA 212, [30] (Redlich and Priest JJA and Macaulay AJA); Jones v Dunkel (1959) 101 CLR 298, 308.5 (Kitto J), 312.6 (Menzies J), 320.8-321.8 (Windeyer J).

[7] No reliance is placed upon s 131(1)(a).

[9] Biovision 2020 Pty Ltd v CGU Insurance Ltd [2010] VSC 589, [32] (Judd J).

[10] [1957] HCA 92; (1957) 99 CLR 285, 291.6-292.3 (Dixon CJ, Webb, Kitto and Taylor JJ).

[11] Biovision 2020 Pty Ltd v CGU Insurance Ltd [2010] VSC 589, [35], citing Korean Airlines Co Ltd v Australian Competition and Consumer Commission (No 3) [2008] FCA 701; (2008) 247 ALR 781, 789 [72] (Jacobson J).

[12] Ibid, [38], citing First Capital Partners Pty Ltd v Sylvatech Ltd [2004] NSWSC 846; (2004) 186 FLR 266, 272 [37] (Campbell J).

[13] Ibid, [49], citing Seven Network Ltd v News Ltd [2006] FCA 343; (2006) 151 FCR 450, 461-462 [50] (Graham J).

[14] See par 31 above.

[15] See par 34 above. Counsel for ASG Group only had access to the redacted version of the Report at the hearing of the application.