Watson v McLernonWatson v McLernon & Ors Watson & Anor v McLernon [2000] NSWSC 306 | Case summary

In order to meet our forecasts the company will require appropriate computer and other hardware to effectively run the business. The purchase will be required prior to launch, with two weeks to familiarise ourselves to existing systems, assuming we utilise the existing software currently employed. 33 On 17 November 1995, Mr Kelly and Mr Watson wrote to Mr Smith in relation to launching the new business in the secondary insurance market, setting out a programme of matters essential to a successful launch. This programme gave dates in November, December and January, leading up to a launch date of 17 January 1996. In a further letter from Mr Watson and Mr Kelly to Mr Smith dated 21 November 1995, they enclosed a revised budget and cash flow forecast. 34 On 30 November 1995, a letter was written by Micro Dynamics, computer consultants in Perth, to Mr Kelly at "PolicyLink Ltd" with a quote for the "task of designing the valuation/policy tracking/accounting database package described below", to be available to use by the later of 17 January 1995 or six weeks after acceptance. 35 On 4 December 1995, Minter Ellison sent a fax to Mr Kelly and Mr Watson enclosing a draft letter. This is a further communication in respect of which privilege is claimed in these proceedings. 36 Also on 4 December 1995, Mr Kelly wrote a memo to file recording that Mr McLernon had asked him to terminate Ms Lakovic as soon as possible; and wrote a letter on behalf of LIPE to Ms Lakovic advising that "due to lack of profitability of the Melbourne Office", this office was to be closed on 4 January 1996 and her employment was to cease on the same day. 37 On 6 December 1995, Corrs Chambers Westgarth solicitors sent a fax to National Shelf Companies Pty Ltd, with instructions of the incorporation of PolicyLink Ltd, with Mr Smith, Mr Rich, Mr Kelly and Mr Watson nominated as directors and shareholders. This company was incorporated or acquired on 8 December 1995. 38 On 8 December 1995, Mr Watson wrote to Mr McLernon, formally accepting the notice of termination of his employment, and advising that his last day with LIPE would be 15 January 1996. The letter contained an offer to cease employment earlier. 39 On 11 December 1995, Mr Kelly wrote to Mr McLernon making similar points, but also suggesting that he had expected in addition three months severance pay. On the same day, Mr Kelly resigned as a director of MGI and Guardian. It appears that his employment also ceased on that day. It appears that Peter McLernon replaced him as General Manager of MGI, and moved from Perth to Sydney for this purpose. 40 On 15 December 1995, Mr Kelly wrote to Micro Dynamics confirming that they should proceed with the design and construction of the computer system. 41 On 18 December 1995, Ms Lakovic wrote to Mr McLernon advising that she had decided not to stay with LIPE, and that she would take the redundancy package. The letter advised that she would finish on 4 January 1996. 42 On 19 December 1995, Mr McLernon sent a fax to Greg Donnison at LIPE noting that he had given notice to Mr and Mrs Kelly three months ago and that a decision was made for them to leave the previous Friday. 43 On 22 December 1995, Mr McLernon sent a memorandum to Mr Kelly denying that he had any right to three months pay in addition to three months notice, and referred also to Mr Kelly putting himself and Brent James in between his employer and AM Corporation. Mr Kelly responded to this by a letter dated 2 January 1995 (meaning 1996) which included the following paragraph: During the AM negotiations I was confronted with several complex agreements. As I told you then I did not have sufficient legal knowledge to understand the terms of those agreements. This was the reason that I sought legal advice from Minter Ellison (which you agreed was a good idea) and brought Brent James into the negotiations at the recommendation of Minter Ellison. I do not agree that I placed Brent and myself between you and AM Corporation. 44 On 8 January 1996, there was a directors meeting of PolicyLink. It was attended by Mr Smith, Mr Kelly, Mr Watson and Mrs Kelly. Mr Kelly was appointed a director at that meeting. 45 On the same day, a cheque for $12,000 was written by PolicyLink in favour of Micro Dynamics. On 10 January 1996, Micro Dynamics issued an invoice to PolicyLink for $12,000, banked the cheque, and wrote a cheque for $11,000 which it sent to Mr Haynes. 46 On the evening of 10 January 1996, there were events described in evidence by Peter McLernon, as to which he was not cross-examined. His credit was not attacked, and I see no reason why I should not accept the substance of this evidence, as follows. On that day, Peter McLernon left the LIPE office at about 6.30 pm. Mr Watson was still there, and he said he would stay on to sort out some personal effects. Peter McLernon returned after about twenty minutes, and found Mr Watson sitting at the desk of another employee, at the computer which contained the LIPE database. (Other computers access the database through that computer.) The computer was switched on, and Mr Watson was talking on the telephone. When Peter McLernon came in, Mr Watson hung up the telephone and switched off the computer. Peter McLernon asked who he was talking to. Mr Watson said "No one". Mr McLernon said words to the effect "You were transferring data", which Mr Watson did not deny. Peter McLernon then said words to the effect "You will leave, you will not return, you will not enter the office outside normal working hours." Peter McLernon escorted Mr Watson towards North Sydney Railway Station, and then went back to the office, where he sat at the same desk and attempted to find out what Mr Watson had been doing. About half an hour later Mr Watson returned. When he saw Peter McLernon he said words to the effect "I forgot my sunglasses" and turned and left. Peter McLernon left about half an hour later. While he was at that computer, he received a number of telephone calls, and the caller hung up when he answered the telephone. 47 According to answers given by Mr Watson in interrogatories, he also went to the office that night at about 10pm. In those interrogatories, he said that on the two occasions that he went to the office that night, out of business hours, he did so to collect personal belongings. The interrogatories also indicated that Mr Watson had attended at the office on 1 January 1996. 48 On 17 January 1996, Mr Watson went to Minter Ellison, and saw Charles Alexander and Carolyn Oddie. The next day Mr Watson telephoned Ms Oddie. Ms Oddie on that day prepared a file note recording their communication. A document recording the content of this file note is another document in respect of which privilege is claimed in these proceedings. 49 On 18 January 1996, Mr Smith informed Mr McLernon that his family company was entering into business with Mr Kelly and Mr Watson in a new company, PolicyLink Ltd, in the secondary life insurance market. The next day, there was a further meeting of PolicyLink directors, and Mr Watson was appointed director and secretary. 50 On 30 January 1996, Minter Ellison sent an invoice to Mr Watson in relation to advice given on 17 and 18 January; and this invoice was paid by Mr Watson. 51 There are in evidence further documents concerning payment for the computer system for PolicyLink. On 21 February 1996, PolicyLink drew a cheque for $8000 in favour of Micro Dynamics. Micro Dynamics made out an invoice dated 27 February 1996. Micro Dynamics paid $7750 to Mr Haynes on 2 March 1996. 52 PolicyLink drew a further cheque for $5000 in favour of Micro Dynamics on 29 April 1996. On 6 May 1996, Micro Dynamics paid $4900 to Mr Haynes. On 21 June 1996, PolicyLink drew a cheque for $6740 in favour of Micro Dynamics. On 27 June 1996, Micro Dynamics paid $6640 to Mr Haynes. It seems that PolicyLink drew a cheque for a further $730 in favour of Micro Dynamics on 27 June 1996, and that $720 of this was paid to Mr Haynes. 53 According to Mr Haynes' Income Tax return for the financial year 1995-1996, he was not an employee of Micro Dynamics or of any other person or company. He received no other payments from Micro Dynamics, apart from those referred to. These payments amounted to about $30,000 out of his total business income of about $63,000. 54 Commencing in about February 1996, PolicyLink competed successfully with LIPE in the secondary insurance business. 55 In about October 1997, Mr James, Mr Kelly and Mr Watson together formed a company Dominion Funds Management Limited. Disputes arose between Mr James on the one hand, and Mr Kelly and Mr Watson on the other, and on 17 September 1998 Mr Kelly and Mr Watson commenced proceedings in the Equity Division of this Court against Mr James. Those proceedings were listed to be heard on 15 March 1999. 56 On 1 March 1999, Mr James telephoned Mr McLernon and offered assistance in connection with Mr Kelly and Mr Watson. Mr McLernon gave Mr James an indemnity against any claim against him, and Mr James faxed to Mr McLernon a copy of Minter Ellison's advice of 12 July 1995. On 4 March 1999, Mr McLernon instructed solicitors in Perth in relation to Mr Kelly and Mr Watson. 57 The Dominion Funds litigation commenced on 15 March 1999, was heard for three days and was then adjourned to 22 April 1999. 58 On 29 March 1999, Mr McLernon asked Mr Rainford to go to Sydney, to meet Mr James and take a statement from him. Mr Rainford met Mr James on 30 March 1999, and discussed his dealings with Mr Kelly and Mr Watson. On that day, Mr Rainford telephoned Mr McLernon, who suggested that, if Trojan was the client of Minter Ellison, then Trojan was entitled to access to Minter Ellison's file. 59 Thereafter, Mr James contacted Minter Ellison, and Mr James and Mr Rainford went to the offices of Minter Ellison at about 3 o'clock on 31 March. They saw a solicitor John Oakes, who told them that Mr Alexander was responsible for the files: Mr Oakes then went away to try to speak to Mr Alexander. He left the files (one large file and one small file containing the 18 January 1996 file note) with Mr James and Mr Rainford. Mr James found the 18 January 1996 file note, and Mr Rainford read it over the telephone to Mr McLernon, who noted its contents. Mr McLernon's note produced on this occasion is a document subject to the claim for legal professional privilege in these proceedings. When Mr Oakes returned, Mr James asked that the whole file be copied. Mr Oakes had not been able to speak to Mr Alexander. He looked through the files, noticed letters addressed to Mr Watson, and said he could not provide copies until he had spoken to Mr Alexander. 60 Thereafter, a request for the files was made by The Walker Law Group on behalf of Trojan; and on 6 April 1999, Minter Ellison sent them copies of documents in the large file, but not documents in the small file. 61 On 7 April 1999, there were settlement negotiations between Mr James, Mr Kelly and Mr Watson. In these negotiations, Mr James did not disclose what had happened in relation to the Minter Ellison files between 30 March and 6 April. A Deed of Settlement between Mr James, Mr Kelly and Mr Watson was executed on 22 April 1999, containing releases of claims. 62 Also on 22 April 1999, MGI instructed Ebsworth & Ebsworth to bring proceedings against Mr Kelly, Mr Watson, Mr Smith and others in the Commercial List. On 30 April 1999, Mr Rainford faxed a copy of the 18 January 1996 note to Ebsworth & Ebsworth. On 2 May 1999, Mr James made a statutory declaration concerning his involvement with Mr Kelly and Mr Watson. The Commercial List proceedings were commenced on 11 June 1999. 63 Soon afterwards, Mr Kelly and Mr Watson learnt that MGI had the documents the subject of these proceedings, and these proceedings were commenced on 27 July 1999. On 4 August 1999, I granted an interlocutory injunction restraining to some extent the use and copying of the documents in respect of which privilege is claimed. ISSUES 64 The first issue which I will consider is whether or not the plaintiffs have established the existence of legal professional privilege, leaving aside any question of improper purpose. I will consider this issue firstly in relation to the privilege claim by Mr Kelly and Mr Watson in respect of the communications between May and July 1995, and then in respect of the privilege claimed by them for the communication of December 1995. Finally I will consider this question in relation to the privilege claimed by Mr Watson in respect of the communication in January 1996. 65 This is an issue in respect of which the onus of proof lies on the plaintiffs, and it involves proving that there was a solicitor/client relationship between Minter Ellison and one or both of the plaintiffs. The only substantial dispute as to primary fact on this issue seems to be whether or not, as claimed by Mr James, there was an express request by Mr Kelly and Mr Watson that they not be clients of Minter Ellison, because of concern that Mr McLernon might find out that they were seeking legal advice. There was an attack on the credibility of Mr James, and I will need to make some comment about this. However, for reasons I will give, it will ultimately not be necessary for me to make a comprehensive assessment of Mr James' credibility, or of the credibility of another witness, Mr Johnston, whose evidence supported the attack on Mr James. In circumstances where it may be expected that the credibility of a number of witnesses in these proceedings will be important in the Commercial List case which is yet to be heard, I think it best to keep my comments on credibility to the minimum necessary for the decision of the issues in this case. 66 One other matter that arises in relation to this and other issues is that the plaintiffs did not give evidence. It will be necessary to say something about the significance of this in relation to this and other issues. 67 The second issue is whether legal professional privilege is excluded by reason of some improper purpose in the communications. This issue involves a question of onus or standard of proof. It appears to be common ground that there is an onus on the defendants to show reasonable grounds for believing there was an improper purpose, rather than to prove the existence of improper purpose on the balance of probabilities. However, it is not entirely clear exactly what is the degree of proof that is required. And it is also not entirely clear the extent to which the Briginshaw approach is relevant, or the extent to which Jones v Dunkel is relevant, in circumstances where the plaintiffs have not given evidence. It is also necessary to consider what kind of improper purpose can negative legal professional privilege, and what is meant by statements to the effect that the communications must be in furtherance of the improper purpose. 68 There is a certain amount of contested evidence concerning this matter also, and in relation to this evidence I will make such findings as I think are necessary to decide the issue. However, for the reasons given earlier, I will not make comprehensive findings about the credibility of witnesses where it is not necessary to do so. 69 Next, there is a contention from the defendants that, if there ever was privilege, it has been waived. There is also a defence raised by Mr James that any claim against him is defeated by the release signed in April 1999. 70 There is the further question whether, if the plaintiffs are otherwise entitled to relief, they should be defeated by any discretionary defence, such as unclean hands: Finally, there is the question of the formulation of such relief as the plaintiffs may be entitled to. EXISTENCE OF PRIVILEGE (APART FROM IMPROPER PURPOSE) 71 Apart from the matters referred to in the outline of facts, the main additional evidence relating to this issue is evidence given by Mr James. Mr James gave evidence to the effect that it was a deliberate choice by Mr Kelly and Mr Watson in about May 1995 not to be the client of Minter Ellison, so as to ensure that Mr McLernon did not find out that they were seeking legal advice. He gave evidence to the effect that he himself and his company Trojan were concerned to obtain legal advice so that they were not involved in breaches of contract by Mr Kelly and Mr Watson. He also gave evidence to the effect that the obtaining of advice from Minter Ellison in December 1995 and January 1996 was pursuant to his advice and recommendation. Submissions 72 Written submissions have been provided by Mr Ellicott QC for the plaintiffs, Mr Douglas QC for the defendants apart from Mr James, and Mr Bell for Mr James. I will leave them with the papers. I will be brief in outlining the submissions of the parties. 73 Mr Ellicott submitted that I should reject Mr James' evidence that there was a deliberate choice as to who would be the client. Mr Ellicott submitted that there was a significant difference between Mr James' account of the relevant conversation in his affidavit in the proceedings, and his account of it in the statutory declaration he gave to Mr Rainford. He submitted that the language in the conversation was not the language one would expect Mr Kelly and/or Mr Watson to use. He further submitted that Mr James' "deliberate choice" proposition was implausible: even if Mr McLernon had known that Mr Kelly or Mr Watson were clients of Minter Ellison, that would not have told him what the legal advice was about. Further, he submitted, it was inconsistent with the way in which the advice was sought and given: no attempt was made to conceal the identities of Mr Watson and Mr Kelly. He submitted that the suggestion that Trojan had some interest in obtaining the advice for its own benefit was an unconvincing afterthought: it was not mentioned in the affidavit or statutory declaration. 74 More generally, Mr Ellicott submitted that Mr James was not a truthful witness. Mr Ellicott pointed to variations between Mr James' evidence in cross-examination and that in his affidavit. He pointed to Mr James' initial denial of saying to Mr Oakes words to the effect that he needed to see the files because there were missing documents, and his later admission that he did say words to that effect. He also pointed to evidence from Mr Rainford that Mr James had told him that Trojan had paid the Minter Ellison invoice concerning the advice given in May to July 1995, whereas Mr James must have known that Trojan had not paid that invoice. He submitted that Mr James embellished his evidence in various ways to incriminate Mr Kelly and Mr Watson. Mr Ellicott referred to evidence by Peter Johnston of conversations he had with Mr James between September 1998 and December 1998, to the effect that Mr James would go to any lengths to destroy Mr Kelly. Mr Ellicott submitted that Mr James' evidence was motivated by malice for Mr Kelly and Mr Watson, and that he intended to exact revenge on them in relation to the dispute in the Dominion Funds matter. 75 In relation to the absence of evidence from Mr Kelly and Mr Watson, Mr Ellicott submitted that to require a client to give direct evidence to establish the privilege would be to undermine or devalue the privilege. This was particularly so where there was an allegation of improper purpose vitiating the privilege. If the clients gave evidence, they would be exposed to cross-examination on the subject matter of the dispute and would not be able to claim privilege from that cross-examination. Accordingly, Mr Ellicott submitted, there should be no Jones v Dunkel inference against the plaintiffs. In any event, in relation to the improper purpose issue, Jones v Dunkel was not applicable, because the proceedings were not a final determination as to whether or not the improper purpose existed, but concerned only whether the defendants had shown a prima facie case. 76 Mr Ellicott submitted that privilege would attach to communications with a solicitor whether the client is communicating directly with a solicitor or through an agent: see Heydon Cross on Evidence par 25230; McNichol Law of Privilege (1992) p44; Wheeler v Marchant (1881) 17 Ch D 675 at 682. In respect of the communications between May and July 1995, it was plain that Trojan was acting as agent for Mr Kelly and Mr Watson. In evidence, Mr James conceded that he obtained the advice for Mr Kelly and Mr Watson and on their behalf. The advice related to the rights and obligations of Mr Kelly and Mr Watson, and there is not even a passing reference to the position of Trojan and/or Mr James. There was no question of an undisclosed principal: the principals were known to Minter Ellison, as they attended the initial meetings and provided information directly to Minter Ellison. Their cards were stapled inside the file opened by Minter Ellison. Mr James simply read the advice and passed it on to Mr Kelly and Mr Watson, together with the bills which they paid. At worst, all three were clients. 77 Mr Ellicott submitted that in relation to the later communications, particularly those of December 1995 and January 1996, it was plain that the clients were Mr Kelly and Mr Watson in relation to the December 1995 communication, and Mr Watson in relation to the January 1996 communications. Mr James and Trojan had no involvement with them, and the subject matter of the advice was different. The circumstance that the documents were placed in the original file or a sub-file given the same client name was merely a matter of convenience. 78 Mr Douglas submitted that Mr James' evidence about a deliberate choice had not been challenged in cross-examination. The file was opened in the name of Trojan and the July advice was addressed to Trojan, as was the invoice. There was no agency. He submitted that the identity of a client was very important to a solicitor, and there was no reason not to give effect to the intention of the persons involved. 79 He submitted that this was confirmed by the circumstance that the documents were made available to Mr James after three partners of Minter Ellison had considered the question: the withholding of the file note of January 1996 did not count against this, because file notes were the property of the solicitor: Breen v Williams (1996) 186 CLR 71. 80 In relation to the communications of December 1995 and January 1996, Mr Douglas submitted that this was pursuant to the ongoing retainer by Trojan. Advice was sought on each occasion at the suggestion of Mr James. Trojan had authorised Mr Kelly and Mr Watson to obtain advice pursuant to that retainer: see Halsbury Laws of England 4th ed Vol 44 par 88; Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 at 664.. 81 Mr Douglas submitted that the case had never been pursued as one of joint or common interest privilege; and he submitted that there was insufficient identity of interest for common interest privilege: see Ampolex Ltd v Perpetual Trustee Co Canberra Ltd (1995) 37 NSWLR 405. 82 Mr Douglas further submitted that the evidence did not establish the dominant purpose of the communications. In the absence of evidence from Mr Kelly or Mr Watson, the Court should not draw inferences favourable to them: Jones v Dunkel (1959) 101 CLR 298; Payne v Parker (1976) 1 NSWLR 191; Dilosa v Latec Finance Pty Ltd (1966) 84 WN NSW (Pt 1) 557 at 582; Gibbs v Rea (1998) AC 786 at 798 to 801. 83 Mr Bell submitted that the criticisms of Mr James' evidence were insubstantial, and that Mr Johnston's evidence should be rejected.

Decision 84 I accept Mr Ellicott's submissions that the matters he referred to provide a reasonable explanation for the absence of evidence from the plaintiffs. For that reason, I do not draw a positive inference that their evidence, if given, would not have helped their case; and I do not conclude that, because the plaintiffs did not give evidence on matters in respect of which they were in the best position to give evidence, therefore I could not be satisfied of those matters. On the other hand, however, I cannot make any assumption as to what the plaintiffs' evidence would have been, if given, and I cannot make a positive assumption that their evidence would have advanced their case. In relation to Mr James' evidence of conversations with the plaintiffs, I cannot assume that the plaintiffs' evidence would have contradicted those versions, particularly where no different version of the conversations was put to Mr James in cross-examination. 85 There is some force in Mr Ellicott's submissions concerning the credibility of Mr James. I am inclined to accept Mr Johnston's evidence to the extent of believing that Mr James said words to the effect that he would destroy Mr Kelly, though I am far from satisfied that he said the words alleged by Mr Johnston to the effect that he would "do whatever it takes, factual or not". That evidence seemed to me to be contrived, and I note that it was not given orally when Mr Johnston was given an opportunity to give it orally; and I was not impressed by Mr Johnston's explanation of this. I am inclined to think that Mr James was, to some extent, motivated by revenge in giving information to Mr McLernon and in giving evidence in these proceedings. It appears that he told Mr Rainford that Trojan paid the Minter Ellison account, when he must have known that it did not. For those reasons, if there had been credible evidence contrary to Mr James' evidence, I may have preferred that evidence. However, these and other matters raised by Mr Ellicott do not cause me to reject plausible, uncontradicted evidence given by Mr James, much less to infer that the contrary of that evidence is the case. 86 If one looks at the evidence concerning the solicitor/client relationships in May to July 1995, leaving aside the evidence of Mr James, there do seem to be two possibilities: firstly, that Trojan was the client of Minter Ellison, perhaps providing to Mr Kelly and Mr Watson a service of arranging for the provision of this legal advice; and second, that Mr Kelly and Mr Watson were the clients of Minter Ellison, and that Trojan was merely an agent or conduit, or possibly an additional client. If the former were the case, it could be that Trojan would have fiduciary duties, including duties of confidence, to Mr Kelly and Mr Watson; and it could be that those duties would include a duty to protect for the benefit of Mr Kelly and Mr Watson any legal professional privilege which Trojan had. However, no claim has been advanced on that basis, and it would involve a number of issues which were not touched on in these proceedings; so I need not consider it further. 87 The circumstances relied on by Mr Ellicott, namely that the advice was directed to the rights and obligations of Mr Kelly and Mr Watson, and did not deal at all with rights and obligations of Trojan, and that the account was passed on for payment to Mr Kelly and Mr Watson and was in fact paid by them, tend to support the second alternative. However, the circumstance that Trojan was identified and billed as the client by Minter Ellison, in full knowledge that the advice concerned the rights and obligations of Mr Kelly and Mr Watson, and in full knowledge that Mr Kelly and Mr Watson attended at the offices of Minter Ellison for the purpose of receiving that advice, points strongly in the other direction. I accept Mr Douglas' submission that it is important for a solicitor to identify who the client is, and that the intention of the parties as to the identity of the client should be given effect to. For those reasons, without the evidence of Mr James, I would not be affirmatively satisfied that Mr Kelly and Mr Watson were the clients of Minter Ellison in relation to the communications of May to July 1995. In my opinion, my lack of satisfaction on this point is confirmed by what I consider to be a not implausible explanation given by Mr James, which has not been refuted. 88 Turning to the communications of December 1995 and January 1996, these appear to be the result of communications from Mr Kelly and Mr Watson in December 1995, and Mr Watson in January 1996, without any direct involvement of Mr James. I do not think that the previous involvement of Mr James and Trojan, or the circumstance that Mr James may have suggested these contacts, would displace the prima facie position that the plaintiffs were the clients or client on these occasions. 89 As regards the purpose of the communications, leaving aside any question of improper purpose, I would infer that the communications did have the dominant purpose of obtaining legal advice. IMPROPER PURPOSE 90 The improper purpose alleged by the defendants is particularised at some length, but I take the substance of the allegation to be that Mr Kelly and Mr Watson pursued for their own benefit a business opportunity with AM, which they should have pursued for the benefit of MGI, and in fact sought to subvert MGI's proposed arrangement with AM while dishonestly pretending to be advancing MGI's interest; that they secretly and dishonestly took confidential information belonging to MGI; and that they thereafter used the business opportunity and the information thus dishonestly obtained for their own benefit and to the detriment of MGI. 91 Mr James gave some evidence relevant to this matter also. He gave evidence to the effect that Mr Kelly and Mr Watson were dealing with AM with the intention of leaving MGI, and that they asked Mr James for his advice as to how they could best go about leaving MGI and competing with it. Mr James gave evidence to the effect that he suggested that they get themselves sacked. He gave evidence that Mr Kelly said words to the effect that they would need to get material from the LIPE database; and that on 10 January 1996, Mr Watson said that he had been caught taking material from the LIPE database. 92 Mr McLernon gave evidence to the effect that, in early October 1995, he and Mr Kelly were discussing the reorganisation of MGI's business, and Mr Kelly suggested giving notices of termination to all Sydney employees while working out the best way to proceed. Notices were then given as part of that reorganisation and without the intention that the notices would terminate the employment of all employees. In fact, apart from Mr Kelly and Mr Watson, no other employee left. 93 Mr McLernon also gave evidence to the effect that Mr Kelly recommended that the Melbourne office be closed down and Ms Lakovic dismissed, in circumstances where, in fact, the Melbourne office was performing better than the Sydney office. He also gave evidence that in the month or so prior to the cessation of his employment, Mr Watson said that he was leaving to further his legal career, and that he would not be working with Mr Kelly competing with MGI. 94 Ms Lakovic (now Mrs Michalek) gave evidence that, in mid to late 1995, Mr Kelly told her not to purchase any more policies, because MGI did not have the money to purchase policies; and told her that Mr McLernon did not like her and did not want her services and had decided to close the Melbourne office, and that he had tried to change Mr McLernon's mind but he would not listen. Mr Kelly subsequently offered Ms Lakovic a job with his new business. 95 There was evidence also from Peter Marles to the effect that Mr Kelly said to him words to the effect that they had got LIPE's actuarial modelling from their computer. 96 Finally, there was some expert evidence concerning similarities and differences between MGI's computer system and PolicyLink's computer system. The evidence from KPMG suggested that the latter had been copied from the former. Evidence from PricewaterhouseCoopers criticised the KPMG evidence, and suggested that no inference of copying could be drawn. Submissions 97 Mr Douglas submitted that legal professional privilege did not apply where the client sought the legal assistance in furtherance of the commission of a crime or fraud, whether or not the solicitor was aware of this purpose: R v Bell (1979) 146 CLR 141 at 145; Varawa v Howard Smith & Co Ltd (1910) 10 CLR at 385, 386, 390. The exception is not limited to crime or fraud: it extends to civil or equitable fraud, fraudulent breach of trust, improper or illegal act or civil offence, and deliberate abuse of statutory power: Attorney General of the Northern Territory v Kearney (1985) 158 CLR 599; Seanar Holdings v Kupe Group (1995) 2 NZLR 274; Crescent Farm v Stirling Offices (1972) Ch 553 at 565; Freeman v Health Insurance Commission (1997) 78 FCR 91 at 94. It extends to communications designed to circumvent a bank's security, and to a breach of the duty of fidelity owed by employees to employers: Barclay's Bank v Eustice (1995) 4 All ER 511 at 521-2; Gamlen Chemical Co v Rochem (1983) RPC 1. 98 Mr Douglas submitted that although improper purpose is sometimes treated as an exception to legal professional privilege, the true principle is that communications in furtherance of illegal or fraudulent purposes are never subject to privilege: R v Cox & Railton (1884) 14 QB 153; Carter v Northmore Hale Davey & Leake (1995) 183 CLR 121 at 163; Commissioner of Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501 at 546, 556. 99 Mr Douglas submitted that privilege is excluded if the communications are in furtherance of the improper purpose: O'Rourke v Darbishire (1920) AC 581 at 604. Steps taken subsequent to the misconduct can be in furtherance of the misconduct: Finers (Affirm) v Miro (1991) 1 WLR 35 at 41; Stack v Corbett (1977) 3 NZLR 233. 100 On the evidentiary threshold to be passed by the defendants, Mr Douglas referred to the well-known passage of Viscount Finlay in O'Rourke v Darbishire at 604, and to the adoption of that passage in Propend at 514, 521, 534, 546, 556, 575 and 592; and in Kearney at 516. 101 Mr Douglas made detailed submissions concerning the evidence of the alleged improper purpose of Mr Kelly and Mr Watson. He submitted that, with respect to the 12 July 1995 letter and the January 1996 file note, their purpose was to be aware of which of the steps they were proposing to take were unlawful and so had to be taken surreptitiously so as to avoid detection; and to be aware of which of the steps they had taken were unlawful and so had to be hidden or disguised so as to avoid detection; and to be aware of which of the steps they wished to continue to take the benefit of were unlawful and so had to be hidden or disguised so as to avoid detection. With respect to the 4 December 1995 facsimile, their purpose was to make it appear that they were resigning from employment with MGI without any intention of setting up in competition. 102 Mr Douglas submitted that there was a distinction between a person who, in the midst of committing or concealing a fraud, seeks legal advice as that term is usually employed, and a person who, in the midst of committing or concealing a fraud, seeks legal advice in furtherance of that fraud. In the former case, the person wishes to be advised whether he has committed a fraud, the repercussions of doing so, and his rights in relation to any investigation. In the second case, the person wants to have advice so that he can continue with the fraud with a minimum risk of detection. The circumstance that the client does not give the lawyer the true facts points strongly towards the second alternative. In this case, Mr Watson, in seeking advice from Minter Ellison in January 1996, concealed from them that he and Mr Kelly were using Micro Dynamics to hide the fact that they were employing the person who had worked on MGI's computer system, and also concealed from them the circumstance that he had been caught taking information from MGI's database. 103 Mr Douglas submitted that the failure of Mr Kelly and Mr Watson to give evidence meant that inferences could be readily drawn against them. 104 Mr Ellicott submitted that privilege would be excluded only if the communication itself was in furtherance of the improper purpose: see Varawa at 386; Butler v Board of Trade (1971) 1 Ch 680 at 689; R.v Bell at 152; and Propend at 514, 545. The party challenging the privilege must prove this by admissible evidence: see Propend at 514, 547, 556 and 576; Law Cover Pty Ltd v Commissioner of Police (Hodgson CJ in Eq, 10/12/97); Zemanek v Commonwealth Bank of Australia (1997) 1016 FCA (2/10/97). 105 Mr Ellicott submitted that, whilst the exception is not confined to wrongs amounting to a crime, it is confined to actionable wrongs of which dishonesty is a central characteristic: Crescent Farm Sports v Stirling Office (1972) Ch 553 at 565. Barclay's Bank v Eustice (1995) All ER 511 was not authority for a contrary proposition: the facts in that case amounted to an attempt to defraud creditors; and the approach taken in that case, in balancing conflicting desiderata of access to relevant material and frank disclosure for the purpose of obtaining legal advice, was an approach repeatedly rejected by the High Court of Australia: see Grant v Downs (1976) 135 CLR 674 at 685; Waterford v The Commonwealth (1987) 163 CLR 54 at 64 to 5; Carter v Northmore Hale Davey & Leake (1995) 183 CLR 121 at 128, 134 and 144-5. The decision of Goulding J in Gamlen did not support the proposition that a breach of an employee's duty of fidelity is sufficient to invoke the inception: that decision was appealed, and in the Court of Appeal Gough LJ stated that it was necessary that what be prima facie proved was really dishonest and not merely disreputable: see Eustice at 522. The Briginshaw standard applied. A mere breach of the Keech v Sandford principle was insufficient to invoke the illegality exception. 106 Mr Ellicott provided detailed submissions concerning the evidence relied on. In general terms, he submitted that the evidence did not make out a prima facie case of dishonesty. The seeking of advice was to ascertain what could lawfully be done, not the furtherance of an unlawful purpose: see R v Haydn (1825) 2 Fox & S IR 397 at 381; Pioneer Concrete v Webb (1995) 18 ACSR 418 at 427. 107 Mr Ellicott submitted that the evidence of Mr Marles was slight indeed. Under cross-examination, he conceded that he could not remember the words "from their computer" being used. He further conceded that he could not recall whether it was Mr Watson or Mr Kelly who said the remaining words. Mr Marles' evidence as to the circumstances and time when the statement was made was unreliable. In all probability, the meeting was in August 1996, not late 1995 or early 1996 as Mr Marles suggested. 108 In relation to the adequacy of proof, Mr Ellicott submitted that the right which the defendants seek to deprive the plaintiffs of is a substantive and fundamental common law right which promotes the rule of law: Baker v Campbell (1983) 153 CLR 52 at 88-9, 96-6, 116-7, 127-8 and 131-2; Attorney General v Meurice (1986) 161 CLR 475 at 490; Carter v Northmere Hale Davey & Leake (1985) 183 CLR 121 at 132-3, 145 and 161; Goldberg v Ng (1996) 185 CLR at 95, 106, 109, 120 and 123; Atkins v Abigroup Ltd (1998) 43 NSWLR 539 at 546. The defendants bore the onus of proving the illegality exception. They must prove by admissible evidence a prima facie case of the fraud alleged and that the otherwise privileged communications further that fraud. The Court would then exercise its discretion, having regard to all of the circumstances, for the purpose of seeing whether the charge was made honestly and with sufficient probability of its truth to make it right to disallow the privilege: Propend. In this case, a number of factors weighed heavily in requiring the defendants to prove their allegations by very clear and ample evidence conformably with Briginshaw principles. In particular, the defendants have had the advantage of the privileged communications themselves; they have gone to every conceivable length to prove their case; they have in these proceedings, in support of their prima facie case, deployed substantially the whole of their evidence in the commercial list proceedings; and the conduct of the defendants James, Rainford and McLernon in respect of the events at Minter Ellison on 31 March 1999 was disgraceful. Decision 109 Dealing first with the onus and standard of proof, there is plainly an evidentiary onus on the defendants to show reasonable grounds to believe that the communication was in furtherance of an improper purpose. The majority of the High Court in Propend appeared to accept Viscount Finlay's statement in O'Rourke v Darbishire at 604, in the following terms: But it is not enough to allege fraud. If the communications to the solicitor were for the purpose of obtaining professional advice, there must be, in order to get rid of the privilege, not merely an allegation that they were made for the purpose of getting advice for the commission of a fraud, but there must be something to give colour to the charge. The statement must be made in clear and definite terms, and there must be some prima facie evidence that has some foundation in fact. It is with reference to cases of this kind that it can be correct said that the Court has a discretion as to ordering inspection of documents. It is obvious that it would be absurd to say that the privilege could be got rid of merely by making a charge of fraud. The Court will exercise its discretion, not merely as to the terms in which the allegation is made, but also as to the surrounding circumstances, for the purpose of seeing whether the charge is made honestly and with sufficient probability of its truth to make it right to disallow the privilege of professional communication. 110 In Propend, Gummow J at 575 said that that approach was not appropriate when one of the issues being tried on the hearing of an action is the existence of the privilege. It appears that Gummow J took the view that in such a case it must be proved on the balance of probabilities, having regard to the Briginshaw principle, that the communication was in furtherance of the improper purpose. However, Gummow J appears to be in a minority in holding that view. 111 However, in a case such as the present, where the defendants have had the benefit of access to the communications themselves, and have had ample opportunity to prepare their evidence in support of the allegation, it is in my opinion necessary that there be a strong prima facie case shown. 112 One way of testing whether a sufficiently strong prima facie case is made out would be to ask what finding would or could be made if, at a final hearing in which there was an issue as to whether the communications were for an improper purpose, the evidence was the same as it had been before me. Plainly, if I took the view that, on the evidence before me, there would be a finding on the balance of probabilities that the communications were for an improper purpose, that would be sufficient. I am inclined to think it would also be sufficient if I were to take the view that, on the evidence before me, a finding that the communications were in furtherance of an improper purpose would be an available finding in the sense that it could not be upset on an appeal on questions of fact. 113 Another possibility would be to adopt the approach advocated by Gaudron J in Propend at pp 546-7, to the effect that the onus on the person challenging the privilege is an evidentiary onus, which when discharged casts a further onus on the person making the claim for privilege to establish that the purpose of the communication was a purpose untainted by the existence of any improper purpose. On this approach, the ultimate question would be whether the plaintiffs have established that their dominant purpose in obtaining legal advice was a legitimate one and not the illegitimate one of furthering an improper purpose. 114 I will consider the question in relation to each of these possible approaches. 115 The next question is, what amounts to an improper purpose? I accept Mr Ellicott's submission that a mere breach of contract or mere breach of the Keech v Sandford principle would be insufficient. I accept that dishonesty is an essential element. Mr Ellicott accepted that, if Mr Kelly and/or Mr Watson secretly collected, copied and made use of MGI confidential information for the purpose of a new competing business, that would amount to fraudulent and dishonest conduct; and in my opinion that would be a sufficient improper purpose. In my opinion also, if it were sufficiently shown that Mr Kelly and Mr Watson were actively pursuing a business opportunity with AM for their own benefit, while in fact subverting MGI's proposed arrangement with AM and dishonestly pretending to be advancing MGI's interests, that would be dishonest conduct sufficient to amount to an improper purpose which could displace legal professional privilege. 116 The next question is, what would amount to furtherance of such a purpose? I accept that a purpose of merely concealing previous dishonest conduct, and avoiding adverse consequences, such as penalties or claims for damages, which could flow therefrom, would not amount to furtherance of the improper purpose. The policy of the law is to encourage people to get legal advice so that they can be aware of their rights in relation to such matters. However, if the person seeking advice proposes to continue the dishonest conduct, in this case to go on using the opportunities and information dishonestly acquired, in a business competing with the employer in such a way as would be likely to damage the employer, and proposes to use legal advice to assist in this purpose, then in my opinion that would be sufficient to amount to a furtherance of the improper purpose. 117 Turning to the question of whether there is in this case a sufficient prima facie case or sufficient reasonable grounds, it is not necessary for me to come to a decision on this matter in relation to the communications from May to July 1995; and I think it best to refrain from doing so, because to do so would involve closer consideration of questions of credibility, particularly Mr James' credibility, than I would otherwise need to undertake. In relation to the communications of December 1995 and January 1996, I have come to the view that there is a sufficient prima facie case or reasonable grounds to believe that the communications were in furtherance of the improper purposes to which I have referred. 118 In considering what I would or could find in a hypothetical final hearing, I consider that it is appropriate to take into account both the Briginshaw and Jones v Dunkel principles. The relevant findings would be findings of serious misconduct, which require strong evidence in order that the Court be satisfied; but on the other hand, since I am assuming that the evidence would be precisely the same at such a hearing, it would be appropriate that inferences be drawn on the assumption that the plaintiffs' evidence would not assist them. The particular matters that in my opinion support a conclusion that, at such a hypothetical hearing, I could and would find that the communications in December 1995 and January 1996 were in furtherance of an improper purpose are as follows. 119 The facts that I have outlined do strongly suggest that Mr Kelly and Mr Watson were dealing over many months with AM with a view to leaving MGI and joining AM to compete with MGI. This is consistent with such evidence as to their intention as appears from the Minter Ellison letter of 12 July 1995, which is the subject of the claim for privilege. Of course, unless in their dealings with AM they failed to promote the interests of MGI, as they were obliged to do, none of this would involve dishonesty or breach of fiduciary duty. However, those are matters which must be considered along with the additional matters to which I will come. 120 There is in my opinion significance in the change from the recommendation made by Mr Smith and Mr Rich on 20 September 1995 that AM proceed with a joint venture with MGI, to a decision by AM not to proceed with that joint venture communicated on 22 September 1995, following a meeting between Mr Kelly, Mr Rich and Mr Smith, in which Mr McLernon's role in a proposed joint venture was discussed. In my opinion, in the absence of evidence or explanation from Mr Kelly, Mr Rich or Mr Smith, and taken together with the material to which I will come, I could and would draw an inference that at that meeting, Mr Kelly dishonestly acted to the disadvantage of MGI and with a view to bringing about a situation where AM would join with him in a competing business after he left MGI. 121 In my opinion, in the absence of evidence or explanation from Mr Kelly or Mr Watson, I could and would infer that the identification of Trojan as the client of Minter Ellison was done in order to conceal from Mr McLernon that Mr Kelly and Mr Watson were seeking legal advice. Without evidence or explanation from Mr Kelly, I could and would infer that the explanation given by Mr Kelly in his letter of 21 January 1996 of the involvement of Mr James and Minter Ellison were deliberate lies by Mr Kelly, to conceal from Mr McLernon the true basis of their involvement. 122 Next, in the absence of evidence of explanation from Mr Kelly and Mr Watson, I could and would infer that the involvement of Micro Dynamics in the arrangement to prepare a computer system for the new business had no other role whatsoever other than to conceal the involvement of Mr Haynes. The use of Mr Haynes was not of itself necessarily dishonest or a breach of fiduciary duty, but the elaborate concealment of this use supports an inference that the use was for a dishonest purpose. In relation to Mr Watson, this inference is confirmed by what is and what is not in the file note of 18 January 1996. 123 In the absence of evidence or explanation from Mr Watson, I could and would infer that he told deliberate lies about leaving to further his law career and not being further involved with Mr Kelly or competing with MGI. 124 In the absence of evidence or explanation from Mr Kelly, I could and would infer that his actions in bringing about the dismissal of Ms Lakovic and the closing of the Melbourne office were deliberate and dishonest actions, undertaken with the intention of assisting his proposed venture to the detriment of MGI. I do not think that this conclusion is affected either by Mr Kelly's file note of 4 December 1995, or by any doubt which might be cast on Mr McLernon's evidence as to the purpose of the October dismissal notices by Mr Kelly's file note of 16 October 1995 and/or Mr McLernon's fax of 19 December 1995 125 Without evidence or explanation from Mr Watson, I could and would infer that either his answer to interrogatories concerning what he was doing on 10 January 1996, or his instructions to Minter Ellison on 17 January 1996 (which I would take to relate to this incident), or both, was or were a deliberate lie or lies. In fact, from all the circumstances, including Peter McLernon's description of what he saw, I could and would infer that his purpose on that occasion was to dishonestly take material from the MGI database; so that in the ultimate, my inference could and would be that both the answer to interrogatories and the instruction to Minter Ellison were deliberate lies. 126 So far I have not referred to the evidence of Mr James. I have not found it necessary to rely on his evidence to come to these conclusions. However, as before, I would regard his evidence as giving some support to these conclusions. Likewise, the evidence of Mr Marles. The expert evidence does not in my opinion give positive support to the conclusions, but is consistent with them. 127 Putting all these matters together, at such a hypothetical final hearing, I could and would infer that Mr Kelly and Mr Watson together deliberately and dishonestly sought to subvert the AM and MGI joint venture, and to obtain a deal with AM for their own benefit; and deliberately and dishonestly sought to take MGI's confidential information to use in a business competing with MGI, and that their communications with Minter Ellison in December 1995 and January 1996 were to further these purposes, that is, to continue to pursue the deal with AM and to use the confidential information thus dishonestly obtained in their new business competing with MGI. In relation to Mr Watson, I would regard this as confirmed by misinformation and withholding of information to Minter Ellison, as indicated in the file note of 18 January 1996. The speed with which PolicyLink's business was established also tends to support these conclusions. 128 For those reasons, if the true test is whether the material makes out a prima facie case or gives reasonable grounds for believing that the communications were in furtherance of an improper purpose, that test is satisfied. I would stress that I have not in fact made findings of dishonest conduct against Mr Kelly and Mr Watson, merely that I could and would make such findings at a hearing in which the relevant matters were squarely in issue and the evidence was the same as before me. It may be that Mr Kelly and Mr Watson can and will give evidence and explanations that preclude such findings being made. 129 The matter can also be considered in terms of the plaintiffs having an onus to prove, on the balance of probabilities, that the purpose of the communications was to obtain legal advice untainted by a purpose of furthering the dishonest appropriation of business and confidential information from their employer. In considering that question, I would, as before, accept that there is a reasonable explanation for Mr Kelly and Mr Watson not giving evidence in this case but, as before, I could not make an assumption that their evidence would have advanced their case. I would also proceed on the basis that evidence is not required to exclude dishonest conduct unless there is substantial evidence supporting its existence. Having regard to the matters which I have outlined, although not drawing the positive inferences that I have said I could and would draw at a final hearing in the absence of evidence from Mr Watson and Mr Kelly, I find that I am not affirmatively satisfied that the purpose of the communications was the obtaining of legal advice untainted by the purpose of furthering the dishonest objectives which I have mentioned. 130 For those reasons, in my opinion, legal professional privilege is not made out in respect of any of the communications the subject of these proceedings. WAIVER 131 In view of the findings I have made, this issue does not arise. However, since I have a clear view on it, it is convenient to deal with it. 132 Mr Douglas submitted that any privilege has been lost because the communications of May to July were knowingly and voluntarily disclosed to Brett James, who knowingly and voluntarily disclosed them to the other defendants. The communications were also knowingly and voluntarily disclosed by Minter Ellison to Mr Rainford and Mr James. Mr Douglas also submitted that certain questions in cross-examination amounted to waiver of privilege. 133 If I had held that Mr Kelly and Mr Watson were clients of Minter Ellison, I would have held that Mr James was either their agent or the principal of a further client, namely Trojan. In either event, I do not think the disclosure of the communications to Mr James would amount to waiver by Mr Watson and Mr Kelly. 134 On the assumption that Mr Kelly and Mr Watson were the clients of Minter Ellison, I would regard the disclosure of the communications by Minter Ellison as a mistake by Minter Ellison, not as something done by them as agents for Mr Kelly and Mr Watson. For that reason, I do not think Minter Ellison's actions could amount to waiver. 135 In my opinion, nothing asked in cross-examination could conceivably amount to a waiver of the privilege. RELEASE OF MR JAMES 136 Again, this issue does not arise; but again, I will deal with it briefly. 137 The Deed made on 22 April 1999 included a release by Mr Watson and Mr Kelly of any claims which they may have had against Mr James arising out of any dealings between them prior to that date. However, as submitted by Mr Ellicott, the general words of a release cannot be used as a means of escaping the fulfilment of obligations falling outside the true purpose of the transaction: see Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112 at 119. 138 In my opinion, the circumstances where Mr Kelly and Mr Watson did not know at the time of the Deed that Mr James had passed on the letter of July 1995 to Mr McLernon and had given Mr Rainford access to the Minter Ellison files, the release would not be effective to bar a claim in relation to those matters. In any event, the release certainly could not preclude Mr Kelly and Mr Watson obtaining an injunction against future disclosure by Mr James of privileged material. UNCLEAN HANDS, DISCRETION AND RELIEF 139 Again, this issue does not arise; but I will deal with it briefly. 140 Mr Ellicott submitted that the plaintiffs should have orders that each defendants deliver up all copies and records of the privileged communications, be restrained from using information derived from them, and be examined under oath as to the use of information derived from the privileged communications. He submitted that on the assumption that the defence of improper purpose had not succeeded, no defence of unclean hands could prevent the giving of that relief. 141 Mr Douglas submitted there was no automatic entitlement to relief: Webster v James Chapman & Co (1989) 3 All ER 934; Calcraft v Guest (1898) 1 Ch 759; G v Day (1982) 1 NSWLR 24; Butler v Board of Trade (1971) 1 Ch 680; Lord Ashburton v Pape (1913) 2 Ch `469; Derby & Co Ltd v Weldon No 8 (1990) 3 All ER 762. He submitted that the conduct of Mr McLernon and Mr Rainford in obtaining the material was not improper. The information has already been in the defendants' hands for a considerable period of time, and there would be no utility in restraining its use. Any disadvantage to the plaintiffs was caused to a large degree by their efforts to hide the fact that they were seeking legal advice by causing Trojan to be the client of Minter Ellison. 142 Had I found legal professional privilege in favour of the plaintiffs, I do not believe any defence of unclean hands would have succeeded. Although formulation of effective relief would have been difficult because the information has been in the defendants' hands for some time, I believe I would have formulated injunctive relief to protect the plaintiffs as far as possible from disadvantage due to the defendants' access to what, on these assumptions, would be privileged material. 143 However, on the basis of the findings I have made, in my opinion the proceedings should be dismissed, and the plaintiffs ordered to pay the defendants' costs of the proceedings. **********

Watson v McLernonWatson v McLernon & Ors Watson & Anor v McLernon;

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