Xuereb v Viola [2007] NSWSC 1304 | Case summary

3813 of 2005 CARBOTECH-AUSTRALIA PTY LIMITED and Anor -v- IAN KENNETH YATES and Ors JUDGMENT 1 HIS HONOUR: By notice of motion filed on 4 September 2006 the Plaintiffs, Carbotech Australia Pty Limited and Ground Consolidation Pty Limited, claim substantively an order that the confidential report of Associate Professor Wayne Cook ("the Referee") dated 30 May 2006 ("the Report") be adopted by the Court pursuant to the Uniform Civil Procedure Rules 2005, Part 20 rules 14 and 15. The application is opposed by the Eleventh and Twelfth Defendants, Era Polymers Pty Limited and Era Polymers Holdings Pty Limited (to which Defendants I shall comprehensively refer as either "Era or "the Defendants"). 2 By order made by Justice Barrett on 18 April 2006 the Referee was appointed to enquire into and report on the following matters: (a) Identify and list all Formulas and Recipes of Bevedol from 1 January 2001 to date. (b) Identify and list all Formulas and Recipes of GeoBind from 1 January 2001 to date. (c) What are the similarities and differences in the Formulas and Recipes for Bevedol (on the one hand) and GeoBind (on the other hand) from 1 January 2001 to date? 3 It is appropriate that I should set forth the following summary of the factual background to the appointment of the Referee. 4 The Plaintiffs (or, strictly, the Second Plaintiff) manufacture a chemical product known as Bevedol. That product comprises two components, which when mixed together form a polyurethane resin. That resin is used in the consolidation of fractured ground (for example, in coal mining). 5 The Plaintiffs allege that Era conspired with Ian Kenneth Yates (the First Defendant), a former managing director of the Plaintiffs, to produce a product which would compete with Bevedol. In particular, it is alleged that Era was the recipient of confidential information of the Plaintiffs, which Era used to produce a product known as GeoBind. Era denies those allegations. 6 The parties agreed to refer to the Referee questions regarding the similarities of and the differences between their respective products. 7 The orders contemplated that each of the Plaintiffs and Era would produce to the Referee upon request copies of all formulas and recipes (as defined in the schedule to the orders) for their respective products. On 19 April 2006 the Referee requested copies of the formulas and recipes from each of the respective solicitors for the Plaintiffs (Clayton Utz) and for Era (Photios Vouroudis & Co). 8 On 28 April 2006 the Plaintiffs provided to the Referee the formulas and recipes of Bevedol. By letter dated 27 April 2006 (but not sent until 1 May 2006) Era provided the recipes and formulas for GeoBind. 9 On 28 May 2006 the Referee sent an e-mail to Clayton Utz, attaching his report. That e-mail included the following, I have spent approximately: 19 emails plus 4 telephone conversations over several weeks - estimated 4 hrs

Please let me know if you have any problems with this report. 10 Photios Vouroudis was not included as a recipient of the e-mail attaching the report of 28 May 2006 from the Referee. 11 However, correspondence passed between Clayton Utz and the Referee concerning the Report having been made available by the Referee to a person who had not signed a confidentiality undertaking. In responding to the query from Clayton Utz regarding this fact the Referee in his e-mail of 29 May 2006 asked, "Is the report satisfactory?". 12 The Referee did not include Photios Vouroudis as a recipient of that e-mail. However, shortly thereafter, Mr Vouroudis of that firm became aware, from the text of Clayton Utz's e-mail, of the existence of the report of 28 May 2006. 13 A few days later, on 31 May 2006, the Referee sent to Clayton Utz a further version of his report (the 30 May 2006 report). The covering e-mail stated, "Here are the new documents". Again, the Referee did not include Photios Vouroudis as a recipient of the e-mail. 14 On 1 June 2006 Photios Vouroudis wrote to Clayton Utz in the following terms, Our clients and this Office is very concerned that Associate Professor Cook has disclosed that the has sent 19 emails and his draft report to your Office. We have not received copies of these emails or the draft Report. Your Office has received and commented on his draft Report. All legal representatives, including our Office, ought to have been provided with a copy of the draft Report at the same time (subject to any parts which were the subject of the confidentiality order). Our Office had assumed that if you were communicating with Associate Professor Cook, or he with you, we would be copied in on all such communications. Associate Professor Cook was appointed as the independent expert. The whole integrity of the process has been compromised. In the circumstances, this conduct has given rise to a reasonable apprehension of bias and all rights of our clients in this respect are reserved. We require copies of all communications and attachments between your Office and Associate Professor Cook within 24 hours together with your undertaking to copy this Office in on all future communications. We give the undertaking to copy your Office in with all future communications with Associate Professor Cook. 15 The adoption of the report is opposed by Era on the following grounds: (a) the conduct of the reference and the preparation of the Report by the Referee constituted an egregious denial of procedural fairness and gave rise to a reasonable apprehension of bias in that: · The Referee conducted communications directly with Clayton Utz (the Plaintiffs' Solicitors), notwithstanding that he was aware that Photios Vouroudis & Co (Era's Solicitors) acted for Era; · The Referee sent the first draft of the Report directly to Claton Utz for their "comment", yet declined to send it to Photios Vouroudis & Co (and where it ought to have been obvious to from the covering e-mail to Clayton Utz that Photios Vouroudis & Co had not been copied in of the first draft of the Report); · Clayton Utz had an opportunity to comment on the first draft Report, yet Photios Vouroudis & Co did not; · The Referee sent a second draft of the Report directly to Clayton Utz for their "comment", yet again declined to send it Photios Vouroudis & Co (and where it ought to have been obvious from the covering e-mail from Clayton Utz that Photios Vouroudis & Co had also not been copied in on the second draft of the Report); · The Referee had four telephone conversations with Clayton Utz prior to preparation of the first draft of his Report, yet he has refused to disclose to Photios Vouroudis & Co the substance of these conversations. (b) the Referee had a patent misapprehension of the evidence or exhibited perversity and/or manifest unreasonableness in fact finding in that he: · Incorrectly included "4, 4 Diphenyl Methane Diisocyanate Oligomer" ("MDI") as part of the Recipe and Formulation of both Bevedol and GeoBind; · Purported to compare the respective products notwithstanding that he had incorrectly included MDI as part of the Recipe and Formulation of both Bevedol and GeoBind; · Failed to state which Recipes and Formulations of which products were similar or different. (c) the Referee failed to comply with the order for reference in that he: · Included Bevedan and Geobind Iso in his report, when he was not required to do so; · He gave a qualified opinion as to the similarity of the respective products. · He did not include all Recipes and Formulations of Geobind, which consequently rendered any conclusions as to the similarities or differences of all formulations meaningless. 16 I have had the benefit or receiving a written outline of submissions from Counsel for the respective parties. Those documents will be retained in the Court file. 17 The first substantive ground relied upon by Era in opposing the adoption of the report is the ground of apprehended bias. The test to be applied is that of the disinterested bystander. (See, for example, Re JRL; Ex parte CJL (1986) 161 CLR 342; Vakauta v Kelly (1989) 167 CLR 568; Goktas v Government Insurance Office of New South Wales (1993) 31 NSWLR 684.) Regarding this ground, Era relies upon the fact that, according to the Referee himself, 19 e-mails and four telephone conversations passed between himself and the solicitors for the Plaintiff, Clayton Utz, none of which e-mails or telephone conversations were disclosed to Photios Vouroudis, the solicitors for Era. 18 Era relies upon the existence of those communications between the referee and the solicitors for the Plaintiffs as compromising the integrity of the process of the preparation of the report by the Referee, and submits that the conduct of the Referee in this regard gives rise to a reasonable apprehension of bias. 19 Era relies, further, upon the fact that not only were the 19 e-mails and four telephone calls not revealed to or copied to Photios Vouroudis, but that the original draft of the report was submitted to the solicitors for the Plaintiff, but not to the solicitors for Era, and only the solicitors for the Plaintiff were invited to comment upon the adequacy and correctness of the report. 20 Regarding the foregoing communications passing between the Referee and the solicitors for the Plaintiff, it should be recognised that it is the conduct of the Referee, not the conduct of Clayton Utz, the solicitors for the Plaintiffs, which has been of concern to Era and its solicitors. 21 The solicitors for Era, also in regard to the compromising of the integrity of the process, rely upon the assertion by the Referee (an assertion which he must have been aware was false) that he did not know the contact details of Mr Vouroudis as constituting an implied admission by the Referee that he should have copied to Mr Vouroudis the 19 e-mails and four telephone conversations. 22 In response to the submission of the Defendants regarding the untrue assertion on the part of the Referee that he did not have the contact details of Mr Vouroudis, the Plaintiffs said that they did not suggest that the Referee did not have the contact details of Mr Vouroudis. Counsel for the Plaintiffs, however, attempted to place what I regarded as a somewhat tortured constuction upon the clear statement by the Referee that he did not have Mr Vouroudis's contact details. 23 In support of their submission regarding apprehended bias, Era, particularly, relies upon the content of the following e-mails, being that of 28 May 2006 from the Referee to Mr Fairbairn (of Clayton Utz), that of 29 May 2006 from the Referee to Mr Fairbairn, and that of 30 May 2006 from Mr Fairbairn to the Referee. 24 Regarding the first of those e-mails, which enclosed the draft Report, it was submitted on behalf of Era that it was not necessary for the Defendants to establish (and the Defendants did not so suggest) that Clayton Utz had any input into the Report in its final form. 25 The Defendants rely upon the fact that the foregoing e-mails were sent in the context of allegations of fraud and improper conduct made against the Defendants. 26 It was submitted that the disinterested bystander must, in the light of the foregoing e-mails (in particular, the three specific e-mails to which reference has just been made), have perceived that the Referee was favouring one of the parties, especially since the Referee was not copying any of those communications to Mr Vouroudis, the solicitor for the Defendants. 27 It is all very well for the Plaintiffs and Clayton Utz to say (as they now do) that the 19 e-mails and the four telephone conversations dealt essentially with procedural matters, and not with matters of substance. In approaching this question of procedural fairness and perceived or apprehended bias, I consider it to be the fact of the e-mails and the telephone conversations passing between the Referee and the solicitors for only one party (a fact of which the other party was at the time totally unaware), and not the content of those e-mails and the telephone conversations, which constitutes the ground for apprehended bias in the mind of an objective observer or disinterested bystander. 28 Similarly, the fact that the draft report was sent to only one party, with an invitation to comment thereon, and not to both parties, is relied upon by Era as a further ground for such apprehended bias. The Plaintiffs, however, point to the fact that the report in its final form was in identical terms to the draft report which had been sent by the Referee to Clayton Utz. That there was no change to the draft report does not appear to me to be relevant to this ground relied upon by the Defendants in respect to apprehended bias. The fact that an opportunity was given to the Plaintiffs to comment upon the draft report is what I consider to impugn the integrity of the procedure. It matters not whether the Plaintiffs chose to comment upon the draft report, or whether the Referee chose thereafter to make any alterations thereto. What matters is that the Referee gave to the Plaintiffs (but not to Era) an opportunity so to comment and to himself an opportunity to change the draft Report in the light of any such comments. 29 It was submitted on behalf of the Plaintiffs, however (responding to the Defendants' submission regarding the conduct of the Referee in sending the report with an invitation to the Plaintiffs' solicitors to comment thereon), that there was nothing on the face of the Report to suggest that it was only a draft Report. 30 However, if the Referee considered that it was a Report in final form, there would have been no purpose in the Referee making the enquiry, "Is the report satisfactory?". Neither would there have been any purpose in the e-mail from the Referee to Clayton Utz of 28 May 2006, where the Referee enquired of Clayton Utz whether they had "any problems with this report". 31 The requirement that a referee must apply the principles of procedural fairness was considered by Cole J (as he then was) in Xuereb v Viola (1988) 18 NSWLR 453 at 459f. His Honour, having reviewed the relevant authorities (including the decision of the High Court of Australia in Re JRL; Ex parte CJL, supra, at 346 -347 per Gibbs CJ and at 350 per Mason J; and Kiowa v West (1985) 159 CLR 550 at 582-584 per Mason J), said, at 469, Another aspect of natural justice is that the referee must be actually impartial, and must be perceived by a disinterested bystander to be so. Accordingly he must not hear evidence or receive representations from one side behind the back of or in the absence of the other. 32 His Honour continued, at 472, It follows that he [the referee] must observe concepts of natural justice in preparing his opinion. For if he does not do so, the court, being obliged to apply concepts of natural justice, must reject his report. 33 I am satisfied that the Referee, by the fact of the foregoing communications passing between himself and only one of the parties (irrespective of the content of those communications) and the opportunity which he gave to only one of the parties to comment upon the draft Report, has so compromised the integrity of the procedure, and has so contravened the concept of natural justice, by disregarding the principles of procedural fairness, that he has given rise to a perception of apprehended bias which, in the interests of natural justice, requires that the report be rejected. 34 The Defendants also pointed to the e-mail of 26 May 2006 between two solicitors at Clayton Utz dealing with the matter (John Fairbairn and Robert Cutler), which referred to the Referee contacting Mr Fairbairn and saying "something about a retainer between us [Clayton Utz] and him". 35 The Defendants were unaware of the existence of that e-mail until it emerged as an exhibit to Mr Fairbairn's affidavit of 1 February 2007. 36 It was submitted on behalf of Era that the apparent belief of the Referee that a retainer existed between Clayton Utz and himself could be regarded as actual bias (rather than merely perceived or apprehended bias) on the part of the Referee, being in the context of the failure of the Referee to provide to Mr Vouroudis copies of the 19 e-mails and four telephone conversations. 37 The Defendants further submitted that the question of actual bias being inferred from the e-mail of 26 May 2006 must be approached in the context that only two days later, on 28 May 2006, the Referee sent to Mr Fairbairn a copy of his draft report, with the question, "Is the report satisfactory?". 38 I consider that a Referee who submits a draft report to one of two parties who are in contention (in the context of allegations of fraud and improper conduct), and then invites the party to whom he has submitted that report to comment upon it, by asking whether the party to whom it has been sent considers the draft report to be satisfactory, can certainly be regarded as conducting himself in a way which exposes him to a charge of actual bias. 39 However, it was suggested by the Plaintiffs that there had been a waiver on the part of the Defendants of their right to object to the adoption of the Report on the ground of lack of procedural fairness. In rejecting that suggestion I would refer to the e-mail of 20 June 2006 from Mr Vouroudis to Mr Fairbairn, which is clear evidence against the existence of any such waiver. 40 The foregoing submissions regarding both perceived bias and actual bias on the part of the Referee were relied upon by the Defendants as being relevant to their resistance to the assertion by the Plaintiffs that the Defendants had waived their right to complain about a lack of procedural fairness on the part of the Referee. I am in agreement with that submission on the part of the Defendants. 41 I am satisfied that the Defendants have been denied procedural fairness by the Referee on account of the foregoing communications which passed between the Referee and the solicitors for the Plaintiffs. I am satisfied that those communications constituted perceived bias on the part of the Referee. Further, I am satisfied that there is strong evidence supporting the inference of actual bias on the part of the Referee, grounded upon his e-mail of 26 May 2006. In this regard, I consider the following passages from the decision of the High Court in Re JRL; Ex Parte CJL, supra, to be relevant. Gibbs CJ said, at 346, It is a fundamental principle that a judge must not hear evidence or receive representations from one side behind the back of the other, see Kanda v Government of Malaya [1962] AC 322 at 337.

Xuereb v Viola

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