Sprayworx Pty Ltd v Homag Pty Ltd

Background 5On 8 July 2006, Mr Pinto and Mr Kanios entered into a contract with Homag Australia to purchase a Buetfering Optimat SCO313/QCH Diamond Wide Belt Sanding Machine ("the sanding machine") for the price of $223,600 plus GST. The contract was partly express, oral and written, and partly implied. Sprayworx alleges that Homag Australia supplied it with a defective sanding machine and seeks damages [amended statement of claim ("ASC") filed on 3 July 2012]. It alleges that Homag Australia engaged in misleading or deceptive conduct and was negligent. 6Homag Australia denies liability and alleges that Sprayworx's employees did not properly operate the sanding machine.

Notice to produce 7UCPR 21.11 reads: "21.11 Production under notice to produce (cf SCR Part 23, rule 2 (3) and (4); DCR Part 22, rule 2 (3) and (4)) (1) Unless the court orders otherwise, party B must, within a reasonable time after being served with a notice to produce: (a) produce for party A's inspection such of the documents or things referred to in the notice (other than privileged documents) as are in party B's possession, and (b) serve on party A, in respect of any document that is not produced, a notice stating: (i) that the document is a privileged document, or (ii) that the document is, to the best of party B's knowledge, information and belief, in the possession of a person identified in the notice, or (iii) that party B has no knowledge, information or belief as to the existence or whereabouts of the document. ..." 8Sprayworx has produced a list of documents that have not been produced [CB 93-96] pursuant to UCPR 21.11(1)(b)(i). 9The parties agreed that this Court could inspect the documents that are said to be privileged to consider whether a document has influenced the contents of the report itself in a way that requires disclosure. The bundle of confidential documents has been provided to this Court.

The Evidence Act 1995 10I shall briefly set out the relevant sections of the Evidence Act 1995 (NSW) ("the Act"). 11Part 3.10 of the Act covers confidential communications and client legal privilege. This Part runs from ss 117 to 134 inclusive. Division 1 under the heading "Client legal privilege" contains ss 117 to 126. Sections 117, 118, 119, 122 and 126 are relevant here. 12Section 117(1) relevantly reads: "... confidential communication means a communication made in such circumstances that, when it was made: (a) the person who made it, or (b) the person to whom it was made, was under an express or implied obligation not to disclose its contents, whether or not the obligation arises under law. ..." 13Client legal privilege arises under ss 118 and 119. These sections read: "118 Legal advice Evidence is not to be adduced if, on objection by a client, the court finds that adducing the evidence would result in disclosure of: (a) a confidential communication made between the client and a lawyer, or (b) a confidential communication made between 2 or more lawyers acting for the client, or (c) the contents of a confidential document (whether delivered or not) prepared by the client, lawyer or another person, for the dominant purpose of the lawyer, or one or more of the lawyers, providing legal advice to the client. 119 Litigation Evidence is not to be adduced if, on objection by a client, the court finds that adducing the evidence would result in disclosure of: (a) a confidential communication between the client and another person, or between a lawyer acting for the client and another person, that was made, or (b) the contents of a confidential document (whether delivered or not) that was prepared, for the dominant purpose of the client being provided with professional legal services relating to an Australian or overseas proceeding (including the proceeding before the court), or an anticipated or pending Australian or overseas proceeding, in which the client is or may be, or was or might have been, a party." 14Homag Australia accepted that the documents they seek are the subject of client legal privilege as they were produced for the dominant purpose of the client being provided with legal services (s 119). However, Homag Australia submitted that the client legal privilege that attaches to the documents has been waived by Sprayworx. This is because the privileged material has been used in such a way that it could be said to have influenced the content of the reports and that is inconsistent with maintaining the privilege and it would be unfair for Sprayworx to rely on the report without disclosure of those materials. Homag Australia also submitted that these documents are reasonably necessary to understand the experts' reports. 15Client legal privilege and the loss of such privilege is covered in ss 122 and 126 of the Act. They relevantly read: "122 Loss of client legal privilege: consent and related matters (1) This Division does not prevent the adducing of evidence given with the consent of the client or party concerned. (2) Subject to subsection (5), this Division does not prevent the adducing of evidence if the client or party concerned has acted in a way that is inconsistent with the client or party objecting to the adducing of the evidence because it would result in a disclosure of a kind referred to in section 118, 119 or 120. (3) Without limiting subsection (2), a client or party is taken to have so acted if: (a) the client or party knowingly and voluntarily disclosed the substance of the evidence to another person, or (b) the substance of the evidence has been disclosed with the express or implied consent of the client or party. (4) The reference in subsection (3) (a) to a knowing and voluntary disclosure does not include a reference to a disclosure by a person who was, at the time of the disclosure, an employee or agent of the client or party, or of a lawyer of the client or party, unless the employee or agent was authorised by the client, party or lawyer to make the disclosure. (5) A client or party is not taken to have acted in a manner inconsistent with the client or party objecting to the adducing of the evidence merely because: (a) the substance of the evidence has been disclosed: ... 126 Loss of client legal privilege: related communications and documents If, because of the application of section 121, 122, 123, 124 or 125, this Division does not prevent the adducing of evidence of a communication or the contents of a document, those sections do not prevent the adducing of evidence of another communication or document if it is reasonably necessary to enable a proper understanding of the communication or document." 16Section 131A(2) of the Act defines "disclosure requirement" as including pre-trial discovery.

Professor Farhad Shafaghi 17Professor Farhad Shafaghi is an engineer. He has provided a final expert report, dated 15 July 2013, in relation to the operation of the sanding machine. This report and his letter of instruction have been served on the solicitors acting for Homag Australia. 18Categories 2 and 4 of the notice to produce are directed to documents concerning Professor Shafaghi. Category 2 of the notice to produce seeks all draft reports prepared by Professor Shafaghi arising from or incidental to the instructions given to him by Sprayworx in relation to the present proceedings, whether produced to Sprayworx's solicitors or otherwise. The draft reports dated 22 April 2013 and 31 May 2013, respectively, have been produced by Professor Shafaghi [CB 93]. Category 4 of the notice to produce seeks all correspondence and communications between Professor Shafaghi and Sprayworx and/or their solicitors in relation to the contents of the expert report dated 15 July 2013. 19The starting point is Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 where Heydon JA at [79] sets out the duties and responsibilities of expert witnesses in civil cases. They are: "[79] In National Justice Compania Naviera SA v Prudential Assurance Co Ltd (The 'Ikarian Reefer') [1993] 2 Lloyd's Rep 68 at 81-82, Cresswell J set out a list of duties and responsibilities of expert witnesses in civil cases as follows: '1 Expert evidence presented to the Court should be, and should be seen to be, the independent product of the expert uninfluenced as to form or content by the exigencies of litigation ... 2 An expert witness should provide independent assistance to the Court by way of objective unbiased opinion in relation to matters within his expertise ... An expert witness in the High Court should never assume the role of an advocate. 3 An expert witness should state the facts or assumption upon which his opinion is based. He should not omit to consider material facts which could detract from his concluded opinion. 4 An expert witness should make it clear when a particular question or issue falls outside his expertise. 5 If an expert's opinion is not properly researched because he considers that insufficient data is available, then this must be stated with an indication that the opinion is no more than a provisional one ... In cases where an expert witness who has prepared a report could not assert that the report contained the truth, the whole truth and nothing but the truth without some qualification, that qualification should be stated in the report ... 6 If, after exchange of reports, an expert witness changes his view on a material matter having read the other side's expert's report or for any other reason, such change of view should be communicated (through legal representatives) to the other side without delay and when appropriate to the Court. 7 Where expert evidence refers to photographs, plans, calculations, analyses, measurements, survey reports or other similar documents, these must be provided to the opposite party at the same time as the exchange of reports'." 20UCPR Sch 7, the Expert witness code of conduct, requires experts to specify the materials used in support of their opinion.

The solicitor's May letter and Professor Shafaghi's reports 21Counsel for Homag Australia referred to a letter by the solicitor acting for Sprayworx addressed to Professor Shafaghi dated 22 May 2013 ("solicitor's May letter"). This letter is included in Professor Shafaghi's final report dated 15 July 2013 [CB 212]. 22Before I refer to the contents of the solicitor's May letter, it is convenient that I briefly refer to the layout of Professor Shafaghi's report. The first section contains the "executive summary and introduction"; the second section contains "my instructions"; the third section contains "assumptions"; the fourth section contains "material relied on for preparing this report"; and the final section contains "concluding remarks". 23The first question Professor Shafaghi was asked to answer in his final report is "Whether the machine is operating correctly." His response in short form is at [14]. It reads: "[14] The short answer is 'NO' this machine as it stands is incapable of working correctly. Judging by the records of maintenance from when the machine was first commissioned, it never has." 24Sprayworx's solicitor's May letter relevantly commences: "We refer to your draft report. We ask that you consider the following comments and issues and amend your report to the extent you believe it is warranted. We apologise for the extra work involved, however this matter is governed by the Expert Code of Conduct, Evidence Act and NSW Civil Procedure Rules and must be set out and expressed in a certain way for legal admissibility. A lot of money is riding on the successful completion of expert evidence. New documents We enclose* some new material from recent discovery given by the defendants, categorised into · Email evidence; · Job sheets; and · Service history logs. We also enclose* translated material not previously available. ..." [I interpose here, to explain that these new documents and translated material (referred to above) have been provided to Homage's solicitors]. 25The solicitor's May letter continues: "Please refer to any of these that might be of use. As you are aware, the Code requires you to identify the material on which you relied, so please ensure anything relied upon is identified and listed (or copied and annexed) at a suitable place in the report. Mark up changes We also enclose* our barrister's suggested changes by way of a mark up, most of which are chiefly stylistic. Again we ask that you review and make those changes where appropriate." 26Counsel for Homag Australia drew attention to an item that appears in the solicitor's May letter under the heading "General Matters". It reads: "(ii) The draft report makes no reference to the quantity of sandpaper discs required for use on the faces of panels in the manual face sanding stage. Only a fraction of this number of discs would be required if the wide belt sander could be used to adequately perform the face sanding stage. Please mention this if relevant. This may be relevant to a damages claim for the extra costs incurred for sandpaper over the last six years (including the amount used and down time taken to change the sanding discs)." 27I have carefully read the final report of Professor Shafaghi and it appears that he does not specifically address the issue of the quantity of the sandpaper discs required. Hence, Professor Shafaghi did not add anything to his report in light of the solicitor's comments referred to above. 28Counsel for Homag Australia then referred to a number of specific matters contained in the solicitor's May letter. The solicitor's May letter is referenced by paragraph numbers that correspond with the paragraph numbers in the draft expert report. That draft expert report has not been provided to Homag Australia. I shall refer to the solicitor's comments in relation to the specific paragraphs in the solicitor's May letter and then for ease of reference, the corresponding paragraph in Professor Shafaghi's final report in order to examine how the solicitor's comments have been treated by Professor Shafaghi. 29The paragraphs that appear below are directed to what occurred when Professor Shafaghi tested the sanding machine. 30The solicitor's May letter states: "[16] This is not correct in that the machine did not keep functioning at all. The only way the machine could be coaxed to work was by the plaintiff switching heads off and back on again in your presence. Only a few sample pieces were done with all three heads, as is indicated by writing on the back of the samples. The remote tool mentioned did not work at all, but other parts worked only intermittently." 31Professor Shafaghi in his final report at [15] and [16] says: "[15] I have tested this machine over a whole day making/coaxing it to, at times, for a short period of time operate all its three heads with the help of the plaintiff, and managed to keep all machine functions such as belt tracking function for a test periods before they failed again. This is apart from the remote work piece thickness measuring hand control tool that never worked and if used could only set the gap to zero, hence damage the feed table. [16] The photocell sensors had to be cleaned, but once cleaned they managed to keep the belts tracking reasonably during the test periods, only before the belts went off track and the machine stopped. A new set of (two wide and one narrow cross) belts were used for the tests but only a few times during the test period could all three belts be used (functioned) simultaneously." 32The solicitor's May letter states: "[17] This is not correct. The machine belts did not track reasonably well. The machine consistently shut down due to a continual overload to one or more different heads. It is not clear what was causing the 'overload' being registered by the machine, however we did not overload it by excessive throughput. It is also odd that the overload was registered when the machine was underperforming in terms of insufficient (no excessive) surface contact being made. This suggests overload was due to faulty machine and not operator misuse. ... "[19] This is not correct in that the engagement was not reasonable. To get ANY noticeable engagement for an 18mm thickness, we had to set it at 17.1mm, and even then, the results were unacceptable as can be seen from the photographs of test 8. If the machine setting for measuring was accurate, setting it at 17.1mm, it should damage the board beyond repair as it would remove too much surface. The inconsistent operation included a situation where one would touch a number on the touch screen (eg '7', and a totally different number would be engaged, eg '2'. This couldn't be fixed by other methods, such as the up and down arrows)." 33Professor Shafaghi in his final report at [17] and [18] says: "[17] The functional problems, it seems were caused by the control PLC unit not responding to the commands on the touch screen control panel. The gap dimensions set on the touch screen were not even close to the height obtained by the sanded test pieces. [18] Having accepted the fact that on this machine the height had to be set by trial and error, (the touch control panel operated inconsistently) it was found that to make a reasonable engagement between the three functioning sanding belts and the test pieces, the gap had to be set at 17.1 mm for an 18 mm thick work piece. This indicated that the gap measuring function of the machine was inaccurate and could not be relied on in a real production run scenario." 34Professor Shafaghi in his final report sets out (with photographs) the results of his testing of the sanding machine at [20] to [36]. 35The solicitor's May letter at [61] also states: "[61] This is incorrect. The three heads did not all operate (although this was not relevant to this test which concerned speed. This test occurred on the second visit when one head had been switched off). The machine was set to run at half speed, ie 7 m/min, by way of a simulation, and was a conservative speed. The machine is usually run at 14m/min initially, and then is slowed as the belts wear." 36Professor Shafaghi in his final report states at [79] to [81]: "[79] The same batch size test batch was used with exactly the same dimensions as that used in test 3 above for stage 3.1 machine sanding. Relatively slow feed rate of 7 meter/minute was used and one wide sanding belt was operating at the time of the test. [80] Using two operators and feeding one piece at the time a single pass was completed in 9 minutes and 22 seconds. (Paying no attention to the quality of the sanded surface obtained). [Professor Shafaghi's emphasis]. [81] Assuming two passes and there were two operators at this stage, the operation could have been completed if the machine could deliver an acceptable performance in less than 20 minutes." 37Counsel for Homag Australia submitted that [81] of the final expert's report refers to an assumption that he says has not been disclosed in the Shafaghi report. Counsel for Homag Australia drew this Court's attention to the heading "Assumptions" at [112]. Under this heading Professor Shafaghi states that there are no specific assumptions in this case and that material made available to him had been copied and provided as appendices to his report. Homag Australia submitted that this assertion is inconsistent with the nature of Professor Shafaghi's findings as well as his reasoning stated in [81] and [112] of his report. In relation to [81], it is my view that this assumption appears to have been drawn from the process of reasoning by Professor Shafaghi from what he stated in the two preceding paragraphs. So far as Homag Australia asserted that Professor Shafaghi at [112] did not set out the assumptions and material he was provided with, section 5 of the report sets out the facts he was given.

The law 38UCPR 31.27 reads: "31.27 Experts' reports (cf SCR Part 36, rule 13C; DCR Part 28, rule 9C; LCR Part 23, rule 1D) (1) An expert's report must (in the body of the report or in an annexure to it) include the following: (a) the expert's qualifications as an expert on the issue the subject of the report, (b) the facts, and assumptions of fact, on which the opinions in the report are based (a letter of instructions may be annexed), (c) the expert's reasons for each opinion expressed, (d) if applicable, that a particular issue falls outside the expert's field of expertise, (e) any literature or other materials utilised in support of the opinions, (f) any examinations, tests or other investigations on which the expert has relied, including details of the qualifications of the person who carried them out, (g) in the case of a report that is lengthy or complex, a brief summary of the report (to be located at the beginning of the report). (2) If an expert witness who prepares an expert's report believes that it may be incomplete or inaccurate without some qualification, the qualification must be stated in the report. (3) If an expert witness considers that his or her opinion is not a concluded opinion because of insufficient research or insufficient data or for any other reason, this must be stated when the opinion is expressed. (4) If an expert witness changes his or her opinion on a material matter after providing an expert's report to the party engaging him or her (or that party's legal representative), the expert witness must forthwith provide the engaging party (or that party's legal representative) with a supplementary report to that effect containing such of the information referred to in subrule (1) as is appropriate." 39The parties referred to Australian Securities and Investments Commission v Southcorp Ltd [2003] FCA 804; (2003) 46 ACSR 438, New Cap Reinsurance Corporation Ltd (In Liq) v Renaissance Reinsurance Ltd [2007] NSWSC 258 and Shea v TruEnergy Services Pty Ltd (No 5) [2013] FCA 937; (2013) 303 ALR 230. 40In Southcorp, Lindgren J sets out some principles in relation to experts reports at [21]: "[21] I will apply the following principles which I did not understand to be in dispute: ... (3) Documents generated unilaterally by the expert witness, such as working notes, field notes, and the witness's own drafts of his or her report, do not attract privilege because they are not in the nature of, and would not expose, communications... (4) Ordinarily disclosure of the expert's report for the purpose of reliance on it in the litigation will result in an implied waiver of the privilege in respect of the brief or instructions or documents referred to in (1) and (2) above, at least if the appropriate inference to be drawn is that they were used in a way that could be said to influence the content of the report, because, in these circumstances, it would be unfair for the client to rely on the report without disclosure of the brief, instructions or documents... (5) Similarly, privilege cannot be maintained in respect of documents used by an expert to form an opinion or write a report, regardless of how the expert came by the documents..."

New Cap Reinsurance Corporation Ltd (In Liq) v Renaissance Reinsurance Ltd 41Both parties referred to New Cap as being instructive. The brief facts of New Cap are as follows. New Cap went into liquidation. It was alleged that on about 15 January 1999, New Cap paid the defendant $US8,703,757 and discharged the defendant from liability to pay to New Cap amounts by way of penalty premium and unearned profit commission. It was alleged that at the time of these transactions New Cap was insolvent. Declarations were sought under the Corporations Act 2001 (Cth). The plaintiffs proposed to rely on an expert's report as to New Cap's solvency at the relevant date and the Court made orders for the plaintiffs to file and serve their expert's report on insolvency. The plaintiffs served a list of discovered documents and claimed privilege in respect of 38 documents and also in respect of correspondence between New Cap and its legal advisors. The first 13 of these documents were claimed to be draft reports prepared by the expert. The defendant sought an order that the plaintiffs make the draft reports available for inspection, and also sought an order that the plaintiffs make available for inspection all documents claimed to be privileged that related to instructions from the solicitors in relation to the preparation of the report; record instructions from the solicitors; and constitute notes and/or working papers of the expert's firm relating to the preparation of the report. 42White J in New Cap stated at [34], [52] and [53]: "[34] Section 119(b) of the Evidence Act extends the privilege to confidential documents, whether communicated or not, provided they were brought into existence with the requisite dominant purpose. The question however is what that purpose is. If an expert prepares a draft report, or notes for the report, with the dominant purpose of a draft report (whether the precise draft then prepared by the expert or an intended later draft) being furnished for comment or advice by the lawyer, then it is privileged. If not, it is not. ... [52] I have also taken into account the observations of Harper J in Linter Group Ltd v Price Waterhouse [1999] VSC 245 at [16] that: 'I accept for these purposes the sworn statement by Mr Sawer that that opinion is a mere draft. As such it would only be of relevance to the first defendant if it could be shown that it differed from Mr Spencer's witness statement, not because Mr Spencer had had a genuine change of opinion but because he was motivated by a desire simply to improve the plaintiffs' case. Such would of course be entirely improper; but an expert is surely permitted, indeed to be encouraged, to change his or her mind, if a change of mind is warranted. ... experts should not be inhibited by fear of exposure of a draft from changing their minds when such change is warranted by the material then before the expert.' [53] The question is not merely whether it could be said that the privileged materials were used in such a way that they could be said to influence the content of the report, but whether it could be said that they influenced the content of the report in such a way that the use or service of the report would be inconsistent with maintaining the privilege in those materials, such as, where it would be unfair for the party to rely on the report without disclosure of those materials. Where an expert's report is submitted to a party's legal advisers so as to be put into a form which will ensure that it is admissible, it can be said that the privileged communications between the expert and the lawyers have influenced the content of the report, in the sense of its form, although not in the sense of the formulation of the substantive opinions expressed by the expert. Likewise, privileged communications between an expert and the party's lawyers whereby material information is provided to the expert in the form of assumptions or documents may well influence the content of the report. However, an expert's report is required to state what material and assumptions are relied on. Use of a final report, which refers to such materials and assumptions, is not inconsistent with maintaining confidentiality in the communications which produced the final product." 43In Shea v TruEnergy Services Pty Ltd Dodds-Streeton J commented upon New Cap at [60], where his Honour stated: "[60] Recent persuasive authority, such as New Cap, makes clear that relevant inconsistency may subsist where the draft reports or communications may have influenced the content of the final report in a substantial sense, as in such a case, there would be inconsistency informed by notions of fairness between, on the one hand, withholding the documents or communications while, on the other hand, relying on the final report. If, however, the relevant documents or communications have not influenced the content of the final report, or may have influenced it but in relation only to form or peripheral matters, the inconsistency would be unlikely to be established." 44Homag Australia submitted that the solicitor's May letter provides comments and further instructions to Professor Shafaghi and in some instances seeks to direct, influence and change, with respect to impermissibility, Professor Shafaghi's views. Homag Australia claimed that these have affected the substance of the opinion, going beyond the purely stylistic and formal changes that White J referred to in New Cap. 45Sprayworx submitted that the solicitor's May letter had put forward matters which it asked Professor Shafaghi to consider and be incorporated in the final report if appropriate and consider the barrister's suggested changes which were described as chiefly stylistic. While conceding that in one sense making the report into an admissible form could be said to influence the contents of the report, Sprayworx submitted that such changes would only be in form, not substance. Sprayworx says that on a fair reading of the material produced, any impact on the reports of the communications would be shown to be in regard to form and not substance and that most of the material is routine administrative communications and is privileged. 46Homag Australia submitted that the Shafaghi report refers to information, instructions and materials that are not contained in the report. Another complaint of Homag Australia is that the Shafaghi report stated at [15] that Professor Shafaghi had "help" from the "plaintiff" in the operation the machine, yet it did not state the nature and extent of the "help", or which of the "plaintiffs" rendered him assistance, particularly, as the first plaintiff is a corporation. Further, Homag Australia says that the Shafaghi report at [67], [80] to [84] and [94] stated that Professor Shafaghi had timed the operation of the machine by one and two operators, without disclosing the identity of the operators and the degree and nature of training and experience of those operators. Homag Australia submitted that these communications need to be disclosed. Sprayworx says that it is unable to locate any privileged documents regarding the nature of assistance and the degree of training and experience of those rendering assistance to Professor Shafaghi. 47When the matter is heard, counsel for Homag Australia may ask Professor Shafaghi in cross examination as to the identity of those who assisted him in the operation of the sanding machine. There is no written communication in the Sprayworx camp that identifies who assisted Professor Shafaghi in the operation of the sanding machine. It may be that it was one or both of the natural plaintiffs. 48Sprayworx submitted that this Court should approach the communication documents on the same basis as the draft report. Sprayworx contended that [52] and [53] of New Cap makes it clear that the question is not whether the material might have influenced the content of the report, but whether it influenced the content in such a way that the use of the report would be inconsistent with maintaining the privilege, such that it would be unfair for the party to rely on the report without disclosure of those materials. 49It is common ground that Professor Shafaghi prepared his draft report for the dominant purpose of advice or comment by the lawyer and is privileged (s 119(b)). The solicitor's May letter asked Professor Shafaghi to consider his comments and issues and to amend his report to the extent that he believed was warranted. Professor Shafaghi was also provided with the barrister's suggested changes by way of mark-up, most of which the solicitor describes as "chiefly stylistic". Professor Shafaghi was asked to review the suggested changes and make those changes, suggested by the barrister, where appropriate. While the barrister's suggested changes have not been disclosed, I have inspected them and they involve grammatical and stylistic changes. I have also inspected the two draft reports. 50The import of the solicitor's May letter was to ask Professor Shafaghi to make changes where he [the expert] believed it was warranted and in relation to the barrister's mark-ups, make changes where appropriate. In these circumstances, I cannot and do not draw the inference that those comments by the solicitor could be said to influence the substance of Professor Shafaghi's final report. 51Also after carefully examining the solicitor's comments in the solicitor's May letter that were drawn to this Court's attention and the corresponding paragraphs in Professor Shafaghi's final report, it is my view that it cannot be said that the solicitor's comments influenced the content of the report in such a way that the use or service of the report would be inconsistent with maintaining the privilege in those materials, such as, where it would be unfair for the party to rely on the report without disclosure of those materials. In my view, Sprayworx has not acted inconsistently with the maintaining of its client legal privilege. 52Counsel for Homag Australia's next submission on this topic, is that the communications and drafts are reasonably necessary to understand Professor Shafaghi's final report. 53So far as s 126, loss of client legal privilege is concerned, counsel for Sprayworx referred to ML Ubase Holdings Co Ltd v Trigem Computer Inc [2007] NSWSC 859; (2007) 69 NSWLR 577 and Sugden v Sugden [2007] NSWCA 312; (2007) 70 NSWLR 301. 54In Sugden, the Court of Appeal per McDougall J (with whom Mason P and Ipp JA agreed) at [93] to [96] and [112] to [113] stated: "[93] Section 126 of the Evidence Act is not cast in terms of either unfairness or inconsistency (or, for that matter, inconsistency informed by notions of unfairness). Thus, the operation of s 126 is to be assessed according to its terms, and not on the basis that in some way it incorporates the pre-existing common law. See Sackville J in Towney v Minister for Land and Water Conservation (NSW) (1997) 76 FCR 401 at 412 and 413-414. [94] Sackville J said in Towney that the test set out in s 126 is an objective one. I agree. As his Honour says, that follows from the requirement that consideration of the related communication or document 'is reasonably necessary' for the stated purpose. [95] The stated purpose is to obtain 'a proper understanding of the communication or document' in respect of which one or other of s 121 to s 125 has operated so as, in substance, to override or abrogate client legal privilege. That requires a consideration of the document or communication of which the 'proper understanding' is sought, and of the circumstances in which, and purposes for which, it is required. [96] In Towney, Sackville J referred at 414 to dictionary meanings of 'proper' and 'understand'. He cited the Macquarie Dictionary definitions of 'complete or thorough' and 'to apprehend clearly the character or nature of' respectively. In my view, that is the approach to be taken to the process of analysis that underpins s 126. ... [112] In truth, I think, the reasonable necessity asserted was not directed to understanding the signed statement (or for that matter the claim form) but, rather, to facilitating the cross-examination of Mr Sugden on possible discrepancies in his accounts of the accident. I do not think that this is within the concept of reasonable necessity contained in s 126. [113] For these reasons, I conclude that s 126 has no application in the present case." 55In ML Ubase, Brereton J sets out the application of s 126 in relation to an expert report. At [46] and [47] his Honour stated: "[46] Accordingly, for the purposes of s 126, one starts by looking at the substantive document (made admissible under s 122 or another of the applicable sections) and asking whether, in order to understand it thoroughly, it is necessary to know what is in the associated material. [47] Mr Jhe's final report does not refer to the associated material. In my view, there is nothing in his report which cannot be understood without reference to the associated material. Counsel was unable to identify any specific part of Mr Jhe's report that the associated documents were reasonably necessary to understand, answering that they were necessary to an understanding of the whole of the report, to understand how the witness had come to the conclusions that he expressed. When asked 'what is there in his report that is not capable of understanding?', the answer was, 'The reasoning and basis behind a variety of the opinions ... it is not set out in the document and it is not obvious and there are no instructions'. I suggested in argument that it would follow from Mr Scruby's argument that every time a witness was interviewed by counsel before being called to give evidence, the other party would be entitled to know everything that went on in that conference, whether the witness was expert or lay. Although Mr Scruby suggested that this was only so in the case of an expert witness, because expert opinions were based on processes of reasoning, it seems to me that there would not be the slightest distinction in the case of a lay witness whose evidence might have been influenced by discussion in conference which explored the witness' degree of certainty about a proposition, or might have prompted a recollection. As has been recognised by Sperling J in Roach v Page (No 17) and by Mansfield J in Tirango Nominees, privilege in the conference is not waived in that situation." 56The final report of Professor Shafaghi can be understood thoroughly without reference to the communications or associated material. The communications and drafts of Professor Shafaghi's report do not need to be provided to Homag Australia.

The Katehos communications Mr Chris Katehos is a forensic accountant. On 24 July 2013, Mr Katehos swore an affidavit, which annexes his expert report of the same date. The letter of instruction by Sprayworx's previous solicitors, dated 22 July 2013, was attached to the report of Mr Katehos [CB 397, Attachment A-1]. The layout of Mr Katehos' report is relevantly set out as follows. Section 5 is assumptions and background information; section 6, the sources of information; section 7, the review of available information; section 8, the calculation instructions; section 9, the further assumptions for scenario 1; section 10, the methodology; and finally, section 11, the conclusion. 57Category 3 of the documents sought in the notice to produce reads, "all correspondence and communications between Chris Katehos and the plaintiffs and/or their solicitors in relation to the contents of the expert report dated 24 July 2013." 58The Court ordered that the Katehos report be served by 20 July 2013. Mr Katehos's affidavit, to which his report is annexed, was sworn on 24 July 2013. Homag Australia submitted that the reason why the report was served late was because Mr Katehos was "changing his report" (first Lee aff [5]). In these circumstances, Homag Australia submitted that it was open for the Court to find that the instructions contained in the 22 July 2013 letter influenced the substance of the report. While the letter of instruction formed part of the report, Homag Australia submitted that without the benefit of the draft reports, the contents of the instructions given to the expert and his final report cannot be properly understood. Mr Katehos did not provide any draft reports and the letter of instruction has been supplied. There is nothing contained in that letter that is in any way suggestive of an intention to influence the substance of the report. 59Counsel for Homag Australia also submitted that the Katehos report at [1.2] suggested that the letter of instruction contains the instructions given to Mr Katehos and his associate, Leanne Marks, by Shakenovsky & Associates for the preparation of the report, but refers to no other sources of instructions from Shakenovsky & Associates. 60Counsel for Homag Australia drew this Court's attention to the Katehos report under the heading "General" where he states: "[7.1.1] We have been further instructed for the purpose of our calculations, we are to ignore the results of the Perth and Canberra branches and prepare calculations based solely upon the Miranda (also known as Sydney) branch. ... [7.1.3] Further, in the year ended 30 June 2013, according to the Sprayworx MYOB profit and loss statement, there are sales generated to 'Done-Rite Kitchens'. We have been instructed to assume that Done-Rite Kitchens is a related entity and that sales to Done-Rite Kitchens in actual fact related to a period of six (6) months during the 2012 calendar year." 61Homag Australia further claimed that the Katehos report adopts assumptions [7.1.1] and [7.1.3] in the report but does not explain which documents, materials or instructions Mr Katehos relied on when he decided whether or not to adopt the solicitor's instructions. Homag Australia says that the Court can infer that such documents, materials and instructions exist. Sprayworx's response is that there are no documents contained in the confidential exhibit. It appears that these instructions were given orally. 62UCPR 31.27(1)(b) provides that the expert report must include the facts, and assumptions of fact, on which the opinions in the report are based (a letter of instructions may be annexed). After evidence is given at trial, the assumptions the expert relied upon may not be made good. Mr Katehos refers to affidavits he relied upon. In my view the expert's referral to these assumptions complies with UCPR 31.27. 63Further, Homag Australia referred to [8.1] of the Katehos report where it states: "You have instructed we are to prepare reasonable loss and damage calculation based upon the following scenarios..." 64However, Homag Australia submitted that no such instruction and no stated scenarios were stated in the Katehos letter of instruction. 65The letter of instruction dated 22 July 2013 sets out "Assumptions" at [B] [CB 398]. They are: "1 The 2nd and 3rd Plaintiffs agreed in 2006 to buy and the defendant agreed to sell a sanding machine for $223,600 plus GST (the Machine). 2 The acquisition was completed with finance by way of a chattel mortgage. The finance has now been fully paid. 3 The Machine was installed at some cost during 2007 using additional premises, and was operated by the buyers until about 31 December 2007, following which it was used in the same business, but conducted thereafter by the 3rd Plaintiff. 4 The Machine is defective in the respects described in the affidavits referred to below. 5 Had the Machine operated satisfactorily, the Plaintiffs could have doubled the turnover of the business with limited additional labour. Alternatively, they could have performed the same work but with less labour costs. 6 The Machine remains in situ, but is of no use and of no resale value." 66The letter of instruction continued: "You will find additional facts concerning these matters in the affidavits, and you should assume the accuracy of them to the extent necessary to provide your opinion and to the extent you consider it reasonable to do so." 67Under the heading "Questions", the letter of instruction asks Mr Katehos: "In your opinion, what is the amount of the plaintiffs' losses, on 3 alternative scenarios: 1 Based on the satisfactory operation of the machine, what is the lost opportunity assuming turnover would have doubled from 1 January 2008. Please also include all costs that would not have been incurred? 2 Based on the satisfactory operation of the machine, but with no increase in turnover, what is the lost opportunity in relation to saved labour costs? Please also include all costs that would not have been incurred? 3 Reimbursement of all costs associated with the Machine." 68At [8.1] of the report, three detailed factual scenarios are set out. I agree that some of the information that appears in the report under those headings is not set out in the 22 July 2013 letter of instruction. I have examined the confidential documents. It appears that information was provided to the expert by the plaintiffs from time to time. Further, it cannot be inferred or said that the solicitor's comments in the letter of instruction have influenced the content of the report. 69The result is that the notice to produce issued by Homag Australia to Sprayworx dated 25 November 2013 is set aside. 70Costs are discretionary. Costs usually follow the event. The defendant is to pay the plaintiffs' costs as agreed or assessed. 71The confidential documents belonging to Sprayworx are to be returned to its solicitors forthwith.

The Court orders that: (1) The notice to produce issued by the defendant to the plaintiffs dated 25 November 2013 is set aside. (2) The defendant is to pay the plaintiffs' costs as agreed or assessed. (3) The confidential documents belonging to the plaintiffs are to be returned to its solicitors forthwith.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 June 2014