Practice and procedure - Application for pre-action discovery - Turns on own facts

Cohen v Walthamstow Pty Ltd & Ors, unreported; SCt of WA; Library No 980148; 30 March 1998

Davis v Sagar Pty Ltd, unreported; SCt of WA; Library No 980443; 10 August 1998

Malouf v Malouf [1999] FCA 710

Rexha v Curtin University of Technology [2002] WASC 152

Zorzi Builders Pty Ltd v Saeedi & Anor [2003] WASC 74

1 MASTER SANDERSON: This is the plaintiff's application for pre-action discovery. The application is brought under O 26A r 4 of the Rules of the Supreme Court 1971 (WA) which is in the following terms:

(1) This Rule applies if a person who may have a cause of action against a person whose description has been ascertained (the 'potential party') wants 

(a) to commence proceedings against the potential party; or

(b) to take proceedings against the potential party in the course of an action to which the person is a party,

but the person, after reasonable enquiries, has not been able to obtain sufficient information to enable a decision to be made as to whether to commence or take the proceedings.

(2) If there are reasonable grounds for believing that the potential party had, has, or is likely to have had or to have, possession of documents that may assist in making the decision, the person may apply for an order under this Rule.

(3) The application shall be supported by an affidavit and a copy of both shall be served on the potential party.

(4) On the application the Court may order the potential party to give discovery of all documents that are or have been in the potential party's possession and that may assist the applicant in making the decision."

2 The facts, so far as they are relevant to this application, can be shortly stated. The plaintiff is a trustee company and trades under a variety of names. Its business is the sale of motor vehicles, both new and used. The defendant is a firm of accountants who, in May 2000, were engaged to provide audit and taxation compliance services for the plaintiff. The defendant did provide these services for the financial years ending 30 June 2000, 30 June 2001 and 30 June 2002. It is common ground between the parties that during the period covered by these audits, a fraud was committed on the plaintiff by one or more of its employees. The exact amount of the fraud is not directly relevant but it is very significant. The plaintiff estimates the amount it has lost to be in the region of $1,850,000: see affidavit of Stephen Lloyd Strack, sworn 4 June 2003, par 17. It is also common ground between the parties that the audits conducted by the defendant did not result in the fraud being discovered. The plaintiff now says it may have a cause of action against the defendant either in negligence or breach of contract. The documents it seeks by way of pre-action discovery (taken from the schedule attached to the originating summons) are:

"... all documents (including any documents stored electronically) which concern or are connected to the audits performed by the respondent on the accounts of the applicant for the following financial years:

1. 1 July 1999 to 30 June 2000;

2. 1 July 2000 to 30 June 2001; and

3. 1 July 2001 to 30 June 2002."

3 To fall within the provisions of O 26A r 4, a plaintiff must satisfy a number of criteria. They are:

(1) The plaintiff must establish that it "may have a cause of action".

(2) This prospect must be established against a person whose description has been ascertained.

(a) that it "wants" to commence proceedings against the potential party, or

(b) that it "wants" to take proceedings against a potential party in the course of an action to which the plaintiff is a party.

(4) The plaintiff must establish that after "reasonable enquiries" it has not been able to obtain sufficient information to decide whether or not to commence proceedings.

(5) As a necessary concomitant to (4), at the time of making the application it has not reached a decision about whether or not to take proceedings.

(6) It must establish that there are reasonable grounds for believing that the potential party has in its possession documents which may assist in making the decision.

(7) The application must be supported by affidavit which is served on the potential party.

4 Reduced to its essentials, the defendant's opposition to this application rests on two points. First, it is said that the plaintiff has not made "reasonable enquiries" to ascertain whether a cause of action against the defendant is available. Second, it is said that on any reasonable view of the evidence and the position the plaintiff finds itself in, it has decided to proceed against the defendant and there is no need for discovery before action to allow a final decision to be made.

5 I am not satisfied that there is any substance in either of these two objections. Dealing first with the question of reasonable enquiries, the starting point is to ask what the plaintiff's cause of action against the defendant might be. The answer is simple. The plaintiff will allege against the defendant that it failed in its duty, contractual or tortious, to properly audit the plaintiff's accounts. It will be alleged that if the audit was undertaken properly the fraud would have been discovered and the plaintiff would not have suffered loss and damage. That being so, the question is what enquiries is it reasonable for the plaintiff to make to determine whether it should proceed against the defendant? The answer has to be that the plaintiff should ask to see the defendant's working papers and records relating to the audit to see how the audit was conducted. That is what it has done and access to these documents has been refused.

6 For its part the defendant says that the enquiries made have not been sufficient. It was suggested in the course of submissions that as the plaintiff is receiving advice from another firm of accountants, Deloitte Touche Tohmatsu, that is sufficient. But to my mind, on this issue, advice the plaintiff may be receiving from elsewhere is largely irrelevant. What it needs to see are the defendant's working papers. That is the relevant enquiry. It has asked and been refused; it has done all it can and therefore it must be said that its efforts are reasonable. The plaintiff has satisfied the requirements of the rule.

7 On the question of whether or not the plaintiff has already made a decision to proceed, the evidence relied upon by the plaintiff is, I think, conclusive. In particular, in his affidavit sworn 23 August 2003, John Joseph Hughes says that a final decision has not been made: see par 7. There is no basis upon which that evidence can be doubted. There may be cases where it is clear from all of the evidence that a decision to proceed has been taken. In such cases the requirements of the rule are not satisfied: see, for example, Hill v National Australia Bank Ltd, unreported; SCt of WA; Library No 980676; 24 November 1998. But this is not such a case. Again, I am not satisfied there is any substance to the defendant's objection.

8 It is, then, appropriate to make an order for pre-action discovery. The question then is the scope of the order to be made. This was a matter considered by the Full Court in McCarthy & Ors v Dolpag Pty Ltd [2000] WASCA 106. The Full Court (Anderson and Scott JJ) said (at 13):

"... There is no doubt that caution must be exercised before making an order and that such orders should not be made as a matter of course. They should only be made when reasonably necessary to achieve the proper administration of justice: Tipperary Developments Pty Ltd v Western Australia [1999] WASC 62; (1999) 21 WAR 250, per Parker J at 24; O'Sullivan v Herdmans Ltd [1987] 3 All ER 129 at 135 - 6. It must be remembered that discovery 'constitutes a very serious invasion of privacy and confidentiality [and] the process should not be allowed to place upon a litigant any harsher or more oppressive burden than is strictly required': Harman v Secretary of State for the Home Department [1983] 1 AC 280 at 308 per Lord Keith of Kinkel; and this is a fortiori the position where the discovery is sought before action and is for the purpose of determining whether or not there is an issue to litigate. ..."

9 Counsel for the defendant pointed out that the order sought by the plaintiff is broad in scope and ill-defined. Further, Glyn Donald O'Brien ("Mr O'Brien"), a partner in the defendant firm, in an affidavit sworn 24 July 2003, points out that there are some 1500 documents in total. These are kept in lever arch files: see par 7 of Mr O'Brien's affidavit. Although it is not directly stated, it appears implicit in what Mr O'Brien says in his affidavit and from submissions made by counsel, that ordering discovery of such a number of documents is oppressive.

10 While bearing in mind the need to confine discovery as tightly as possible, I am nonetheless satisfied that the discovery sought by the plaintiff ought be ordered. The phrase used by the plaintiff in the schedule to the summons refers to documents which "concern or are connected to" the audits. In fact, what the plaintiff is entitled to are documents which "relate" to the audits. But it seems to me once that adjustment is made to the schedule, an order in the terms sought by the plaintiff ought be made. The plaintiff should have the opportunity to consider all of the documents and make a decision as to whether or not it will proceed with an action.

11 Although it was not directly put in argument, this does seem to me to be a case where, for present purposes, discovery in bundles would be appropriate. Subject to hearing further from the parties on this question, I would be minded to order that discovery could be in bundles as broadly described as "audit papers for the period to 30 June 2000", "audit papers for the period to 30 June 2001" and "audit papers to 30 June 2002". However, as I have said, I have not heard argument on this issue and I will allow the parties to make further submissions before making an order.

12 I will also hear the parties with respect to costs.