AAA Shares Pty Ltd v Strangio - [2006] SADC 121

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Appeal Against a Master's Decision)
AAA SHARES PTY LTD v STRANGIO & ORS
[2006] SADC 121
Judgment of His Honour Judge Rice
29 September 2006
PROCEDURE
MASTER'S APPEAL
Plaintiff ordered to make further and better discovery - proper application of DCR r 58A.03 and r 58A.04 - plaintiff conducted sharetrading on behalf of defendants - defendants operated a margin lending account with the plaintiff - defendants incurred losses - plaintiff seeking to recover losses - defendants claim they were pushed into trades against their better judgment by an advisor of the plaintiff - order obtained by defendants requiring plaintiff to discover documents relating to termination of the advisor's employment plus the files of other clients of the plaintiff to see if other traders pushed in a similar manner.
Held: Appeal allowed - documents did not come within the ambit of r 58A.03 and r 58A.04 - order set aside.
District Court Act 1991 s 43(2)(a); District Court Rules r 58A.03, r 58A.04 and r 97; Trade Practices Act 1974 (Commonwealth) s 52, referred to.
Mister Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd (1981) 36 ALR 23; H W Thompson Building Pty Ltd v Allen Property Services Pty Ltd (1983) 48 ALR 667; Boyce v Cafred Pty Ltd (1984) 4 FCR 367; Sheldon v Sun Alliance Australia Ltd (1989) 53 SASR 97; Channel Seven Adelaide Pty Ltd v Lane and Hurley (2004) 234 LSJS 225; Santos Ltd & Ors v Pipelines Authority of SA (1996) 66 SASR 38; Rehn v Australian Football League and Ors (2003) 225 LSJS 378, considered.

AAA SHARES PTY LTD v STRANGIO & ORS
[2006] SADC 121
Introduction

This is an appeal against the order of a Master relating to further and better discovery by the plaintiff. The appeal is brought pursuant to s 43(2)(a) of the District Court Act 1991 and DCR r 97. As such, it is by way of re-hearing and the Court has the power to make any order that it considers should have been made at first instance. The Court must exercise its own discretion.
The appeal relates to the proper reach of DCR r 58A.03 and r 58A.04.
The case for the plaintiff can be stated quite briefly. The plaintiff is a licensed financial services provider. It employs Mr Carlsen (second defendant by counterclaim) as an advisor. On 30 April, 2004, the plaintiff, through its executing broker, E*Trade, purchased a total of 500,000 BHP shares in three parcels on behalf of the defendants. The plaintiff dealt with the defendants through its advisor, Mr Carlsen.
The defendants failed to pay at settlement. The shares were then sold by the plaintiff. There was a shortfall and the plaintiff now seeks to recover that amount from the defendants in accord with the contractual arrangements between them. The defendants operated a margin lending account with the plaintiff.
The defendants have filed a defence and counterclaim. Those pleadings are dealt with below but, in effect, the defendants say Mr Carlsen “pushed them into” a trade that they did not want to get into. The plaintiff asserts that the defendants were aggressive, speculative traders and the fact that the defendants were left with outstanding positions was of their own making.
The plaintiff terminated Mr Carlsen’s employment and authority by letter dated 21 September, 2004. Part of the letter of termination states that “...we have withheld all commissions outstanding to this date, as these funds have been allocated to your clients’ outstanding positions.”
By Notice for Specific Directions filed on 2 March, 2006, the defendants sought further discovery of various documents. The appeal is limited to a challenge to Order 2. Order 2 is as follows:
2.I make an order for further discovery by the plaintiff, verified on oath, in terms of paragraph 3.2 of the Notice for Specific Directions, but will hear from the parties if there are confidentiality or other concerns. In this regard I give liberty to apply.
Paragraph 3.2 of the Notice for Specific Directions sought the following:
3.2All documents relating to the employment and ultimate termination of employment by AAA Shares Pty Ltd, of the second defendant by counterclaim, Craig Windberg Carlsen, including but not limited to:
3.2.1 Correspondence, emails, notes, minutes of meetings, diary notes, memoranda and any other documents generated internally by AAA Shares Pty Ltd, relating to Mr Carlsen’s job performance and the ultimate termination of his employment;
3.2.2 Correspondence, emails, notes, minutes of meetings, diary notes, memoranda and any other documents generated by Mr Carlsen’s clients and any other source external to AAA Shares Pty Ltd, relating to Mr Carlsen’s job performance and ultimate termination of employment;
3.2.3 Correspondence, emails, notes, minutes of meetings, diary notes, memoranda, financial and accounting documents and any other documents relating to the trading history, and margin lending account position of Mr Carlsen’s various clients.
3.2.4 Financial, banking and accounting documents, correspondence, emails, notes, minutes of meetings, diary notes, memoranda and any other documents relating to the circumstances of Mr Carlsen’s commissions being withheld and applied to his clients’ outstanding positions.
In succeeding in obtaining an order in terms of paragraph 3.2, the defendants, in part, require the plaintiff to open all of its clients’ files to scrutiny. The purpose is to ascertain whether other clients have been “pushed into” aggressive share trading against their better judgment. The reasoning is said to be that it renders more probable that these defendants were “pushed into” unwarranted or foolish trades if others were “pushed into” unwarranted or foolish trades by this same advisor, irrespective of the precise words used. That purpose is perhaps best illustrated by the terms of part of the order in sub-paragraph 3.2.3 above.
One of the issues to which the order gives rise is the ambit of similar fact evidence in civil cases.
There are many decisions relating to this type of evidence and reasoning, particularly in the Federal Court where representations are allegedly made in contravention of s 52 of the Trade Practices Act 1974 (Commonwealth). For example, one case where such evidence was admitted was Mister Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd (1981) 36 ALR 23, per Northrop J (at 30).
A case going the other way was H W Thompson Building Pty Ltd v Allen Property Services Pty Ltd (1983) 48 ALR 667, per St John J (at 675) where the evidence was not permitted.
Spender J took a similar view in Boyce v Cafred Pty Ltd (1984) 4 FCR 367. Further, he warned that, even if the evidence was legally admissible, “...the reception of the evidence would tend very seriously to multiply the issues for determination and would prolong the trial without correspondingly being able to contribute greatly to the issue on which it is led” (at 371).
Finally, I mention Sheldon v Sun Alliance Australia Ltd (1989) 53 SASR 97 where the admissibility of so-called similar fact evidence in civil cases was discussed. As Bollen J declared in that case (Prior J agreeing) “...the courts of South Australia [in civil cases] will admit evidence of ‘similar facts’ if that evidence is logically probative, that is, if it is logically relevant in determining the matter which is in issue” (p 148).
Depending upon the proposed evidence and issues as defined by the pleadings, a separate question may arise about any discretion to exclude such evidence. The principles that would apply to any such discretion are beyond the scope of these reasons.
The appeal
The appeal challenges the order on the basis that none of the documents is directly or indirectly relevant to the issues between the parties, or should be discovered in the interests of justice. The plaintiff also challenges whether so-called similar fact evidence has any application to the issues between these parties.
There is also a secondary challenge to the breadth of the order, particularly requiring the plaintiff to search its clients’ files to see who dealt with Mr Carlsen and whether any client had a margin lending account and was left with outstanding positions at an unspecified time. The period of time covered by such a search has no commencement date and, presumably, finishes at or soon after the termination of Mr Carlsen’s employment. It should be noted that the particular share trading that is said to give rise to the cause of action occurred in late April, 2004 and that Mr Carlsen’s employment was terminated on 21 September, 2004, almost five months later.
The plaintiff would also be required to make a judgment in the situation where the client normally dealt with another advisor relating to share trading activity, but dealt with Mr Carlsen on one or two occasions.
I mention again that the appeal process is in the nature of a review and requires an examination of the issues between the parties.
DCR 58A.03 and 58A.04
These rules provide as follows:
58A.03     The parties must discover in their lists of documents, but discover only, the documents which are or have been in their possession, custody or power which are directly relevant to any issue arising on the pleadings.
58A.04     (1)     Parties are not to include in their lists of documents any documents which are only indirectly relevant to any issue arising on the pleadings unless it is ordered by the Court where it is in the interests of justice to do so.
(2)     Where an order under (1) is made after a list of documents has been filed a supplementary list of documents is to be filed within 14 days of the order.
Under r 58A.03 it is necessary to identify issues that are directly relevant on the pleadings. Documents may become discoverable if they are indirectly relevant to any issue arising on the pleadings but only if ordered by the Court where it is in the interests of justice to do so. A discretion arises in the latter situation.
The issues here arise from the Amended Statement of Claim, Defence and Counterclaim and the Reply and Defence to Counterclaim.
The pleadings
As mentioned above, the plaintiff is claiming damages for losses on particular share trading entered into by it on behalf of the defendants.
Put broadly, the defence and counterclaim assert that, as the result of certain advice and representations made by the plaintiff through its employee, Mr Carlsen, there was a breach of the duty of care between broker and customer, a breach of contract and misleading and deceptive conduct from which damages flowed. Those allegations centre upon the purchase of 500,000 BHP shares on 27 April, 2004, particularly that the plaintiff, through Mr Carlsen, owed the defendants a duty of care in the provision of advice and that the defendants relied upon that advice. It is said by the defendants that the plaintiff guaranteed that the shares would go up in value and a profit made. There are also allegations of misleading, false and deceptive statements and misleading and deceptive conduct contrary to State and Commonwealth legislation.
The shares decreased in value and it is further asserted by the defendants that the plaintiff, through Mr Carlsen, failed to act on instructions to sell the shares. Other shares were sold by the plaintiff in excess of the instructions given by the defendants.
The plaintiff denies any allegation that it guaranteed that the shares would increase in value but says, in any event, that the defendants were experienced share traders and that they were only too familiar with the risks and did not rely upon anything they were told by the plaintiff.
The legal principles
Rule 58A.03 requires disclosure of documents that are “...directly relevant to any issue arising on the pleadings.” It is necessary to discern the meaning of the words “directly relevant”.
There is one additional requirement before the Court could make such an order. Rule 58.04(e) requires the Court to be satisfied that before such an order is made “...there are grounds for a belief that some document or class of documents relating to any matter in question in the proceedings may be or may have been in the possession, custody or power of a party.” To the extent that some of the language of that requirement is less restrictive than r 58A.03, in my view, the more restrictive approach of r 58A.03 should be maintained.
The operation of r 58A.03, particularly the meaning of “directly relevant”, has been examined by the Supreme Court on a case-by-case basis. In one of the most recent cases, Channel Seven Adelaide Pty Ltd v Lane and Hurley (2004) 234 LSJS 225; [2004] SASC 177, the Full Court (Duggan J, with whom Mullighan and Nyland JJ agreed) brought together the various dicta as to the operation of r 58A.03. Those dicta are as follows:
[22]   In Southern Equities Corporation Ltd (In Liquidation) v Arthur Andersen & Co (No 5) [2001] SASC 335 Bleby J expressed the view that the new test required a greater focus on the pleadings and the issues which arose thereon. He said that the test of relevance is the same as that which is applied to admissibility, but that it is not a test which includes only those documents which are strictly admissible in that documents, although relevant, may not be admissible under the common law or various statutory provisions.
[23]   Referring to the use of the word “directly” his Honour said at [10]:
However, there is a further qualification, in that the documents must be ‘directly’ relevant. I doubt whether that qualification effectively narrows, for the purposes of discovery, ordinary concepts of relevance for the purpose of admissibility into evidence. In my opinion, it cannot mean, if the document is not itself proof of a fact in issue but is merely a piece of circumstantial evidence tending, along with other evidence, to prove the fact in issue, that it is not discoverable. Many a case is provable and in fact proved by circumstantial evidence, including documents. I note that a similar view was expressed by Demack J in Robson v REB Engineering Pty Ltd (1997) 2 Qd R 102 at 104-105 in respect of a similar rule in Queensland. The Rule cannot be allowed to govern in practice the admission of documents into evidence merely because they have not been revealed in the discovery process.
What the qualification does reinforce is the notion of relevance to proof or disproof of a fact in issue, and the unquestionable abolition of the rule which required discovery of a document which might directly or indirectly lead to a train of inquiry or which might, in some other way, otherwise advance the party’s case or damage that of the adversary. For example, it would seem that documents going solely to the credit of a witness, unless that witness’s credit is an issue raised on the pleadings, would not be discoverable. However, it is inappropriate to attempt to define exhaustively what will and what will not be discoverable under this Rule.
[24]   Doyle CJ agreed with these observations in Quenchy Crusta Sales Pty Ltd v Logi‑Tech Pty Ltd (2002) 223 LSJS 266. He added [11]:
It is not wise to attempt to state in comprehensive terms the effect of the requirement that the document be ‘directly relevant’. The adverb ‘directly’ is probably intended to emphasise the requirement of relevance, and to be used in the sense of requiring that the document be directly in point, excluding as sufficient indirect relevance which might be established through another linking circumstance. That is not to say, as I have already said, that a document is not directly relevant if it is merely a piece of circumstantial evidence. The point is that a document will not be directly relevant if, rather than tending to prove an issue on the pleadings, it merely tends to prove something that may be relevant to an issue.
[25]   In Rehn v Australian Football League and Ors (2003) 225 LSJS 378 Doyle CJ again considered the rule. He said at [24]:
However, as I commented in Quenchy Crusta, it is not possible to state precisely the effect of the adverb “directly” in r 58A.03. Indirect relevance to an issue is not enough for the purposes of r 58A.03, but distinguishing between direct and indirect relevance is not easy.
It is consistent with the intent of r 58A.03 to apply the requirement of direct relevance firmly, and to give it a relatively narrow meaning. To hold that a document is not directly relevant to an issue arising on the pleadings is not to deprive a party of access to the document. The effect of such a holding is merely that the requirement to discover the document is not imposed by r 58A.03, and that the court will decide, on application to it, whether the document must be discovered. In other words, r 58A.03 draws the line between an obligation to make discovery as a matter of course, and an obligation to make discovery upon application to the court and after the court has considered whether the interests of justice requires that discovery should be made.
Another point relevant to the meaning of r 58A.03 is that the rule assumes that a party is able to decide, from the pleadings, what documents must be discovered. This also suggests a narrow meaning for “directly relevant”. It would be counter-productive if a party was expected to discover documents because they might be relevant, depending on how the other party’s case was put at trial. R 58A.03 assumes that a party can determine that party’s obligation to make discovery by reference to the pleadings.
The Court adopted those observations. I would, with respect, adopt one further observation by the Full Court in the Channel Seven case (paragraph 30):
[30] In Southern Equities Corporation Ltd (In Liquidation) v Arthur Anderson & Co (No 5) Bleby J pointed out that documents may be “directly relevant” by reason of the fact that they constitute an item of circumstantial evidence tending, along with other evidence, to prove a fact in issue. However, r 58A.03 contemplates that the relevance of the documents is apparent at the time when discovery is under consideration. The possibility that a financial statement of this nature could lead to an enquiry which might uncover other aspects of circumstantial evidence or that it could be used along with other circumstances not apparent on the pleadings to establish the existence of an item in the house at the time of the valuation, cannot lead to the conclusion that the document is directly relevant for the purposes of the rule.
Affidavit material
For the purposes of this appeal, the argument concentrated on the documents in Order 3.2, referred to in the supporting affidavit as “The Employment Documents”.
Before examining the relevant parts of that affidavit, it is useful to reflect again upon the suggested direct relevance of the documents being sought. The view expressed by the Master, which is now challenged on this appeal by the plaintiff, is that “...the documents are directly relevant as they may show that Mr Carlsen pushed his trading clients into trades they did not really want to go into.”
There is no doubt that Mr Carlsen’s employment with the plaintiff was terminated by letter dated 21 September, 2004, that is, about five months after the subject purchase of the BHP shares.
Paragraph 12 of the supporting affidavit asserts the following:
12.From the content of the termination letter, the defendants have reasonable grounds for suspecting that:
12.1   Mr Carlsen’s employment was terminated on or about 21 September 2004;
12.2   That representatives of AAA Shares Pty Ltd held meetings and discussions with Mr Carlsen in relation to his employment being terminated;
12.3   That immediately prior to Mr Carlsen’s employment being terminated he managed multiple clients on behalf of AAA Shares Pty Ltd who had substantial outstanding positions, and who accordingly may also have held margin lending accounts managed by Mr Carlsen.
12.4   That due to the circumstances of Mr Carlsen’s employment being terminated AAA Shares Pty Ltd withheld commissions owing to Mr Carlsen and allocated those funds to Mr Carlsen’s various clients’ outstanding positions.

Paragraph 12.1 is not contested. Paragraph 12.2 is not substantiated except that the terms of the letter record there was a representative of the plaintiff and that one meeting took place.
The terms of paragraph 12.3 cannot be justified. There is an insufficient basis for the timeframe, or that “he managed multiple clients...who had substantial outstanding positions” or “who accordingly may also have held margin lending accounts managed by Mr Carlsen”.
In my view that is rank speculation and illustrates why this aspect of the discovery cannot succeed. The defendants simply do not know whether such clients exist or the nature of any account with the plaintiff. This is fishing in its simplest sense: (see Santos Ltd & Ors v Pipelines Authority of SA (1996) 66 SASR 38 at 57). This is the defendants searching to see if such clients or accounts exist. Not only, in my view, would such documents not be directly relevant to the issues on the pleadings, their existence is a matter of assumption and speculation.
As to paragraph 12.4, apart from all outstanding commissions due to Mr Carlsen being withheld and being allocated to his clients’ outstanding positions, the rest is conjecture.
Paragraph 13 of the affidavit asserts as follows:
13Pursuant to general practise there would be various documents, that are or have been in the possession, custody or power of the plaintiff, including:
13.1   Correspondence, emails, notes, minutes of meetings, diary notes, memoranda and other documents generated internally by AAA Shares Pty Ltd, relating to Mr Carlsen’s job performance and the ultimate termination of his employment;
13.2   Correspondence, emails, notes, minutes of meetings, diary notes, memoranda and other documents generated by Mr Carlsen’s clients and any other source external to AAA Shares Pty Ltd, relating to Mr Carlsen’s job performance and ultimate termination of employment;
13.3   Correspondence, emails, notes, minutes of meetings, diary notes, memoranda, financial and accounting documents and other documents relating to the trading history, and margin lending account position of Mr Carlsen’s various clients.
13.4   Financial, banking and accounting documents, correspondence, emails, notes, minutes of meetings, diary notes, memoranda and other documents relating to the circumstances of Mr Carlsen’s commissions being withheld and applied to his clients’ outstanding positions.
There is no need to dwell on the documents referred to in this paragraph, assuming some of them at least exist. In my view, none of them is directly relevant to any issue on the pleadings.
The relevant timeframe identified by the pleadings commences in or about March, 2003 through until about early May, 2004. 21 September, 2004 merely identifies the date upon which Mr Carlsen’s employment was terminated.
The relevant issues identified by the pleadings relate to the terms of any contractual arrangement between the parties and what words passed between them. The contractual arrangements with other clients with whom Mr Carlsen also dealt on behalf of the plaintiff, or the words that passed between any such clients and Mr Carlsen, are not directly relevant to any issues (assuming they were subsumed in a document of the plaintiff).
There is also a serious question as to whether any of these files contain any documents that might provide any evidence of speculative trading by any other clients. What is more, how each such client came to be in that position could be a trial within itself. I do not think it is even reasonably arguable so as to require discovery now and leave the question of admissibility to the trial Judge.
Application of r 58A.04
I refer again to the words of Doyle CJ in Rehn’s case (supra) [25]:
In other words, r58A.03 draws the line between an obligation to make discovery as a matter of course, and an obligation to make discovery upon application to the court and after the court has considered whether the interests of justice requires that discovery should be made.
In this case, it is difficult to see how any of these documents are even indirectly relevant to any issue on the pleadings. Put another way, do the documents merely tend to prove something that may be relevant to an issue. In my view, the documents do not even pass this test.
Even if I am wrong and the documents are indirectly relevant, a consideration of the interests of justice requires a balancing of competing factors. There is a discretion that must be exercised judicially. An order for discovery is not automatic. Different considerations may apply to Mr Carlsen’s employment documents and files of other clients of the plaintiff.
One of the main arguments that militates against an order for discovery is the breadth of the order. Although the plaintiff has not filed an affidavit on this topic, I infer it would be quite onerous to sift through all other client files and make a judgment as to whether a document comes within the terms of the order.
Further, the question of confidentiality is no small matter. It would be necessary for the defendants to know the names of the other clients because the documents themselves do not say, so far as I infer, anything about the actual instructions to Mr Carlsen and what he told the client. It would be necessary to actually speak to the other clients and ascertain what Mr Carlsen said to them, what they said to Mr Carlsen and whether any instructions to Mr Carlsen were flouted by him. This is a factor against the making of the order.
The defendants argue that it is only with these documents that it can promote its defence and counterclaim. There must, in this process, be a measure of practicality in the request. The pleadings identify an issue about whether the defendants were pushed into speculative trading against their better judgment. I would be unwilling to make such an order when the possibility of finding anything useful is really quite remote. There are no factors sufficiently in favour of the order and I decline to make it.
Orders
I have considered the matter afresh and exercised my own discretion concerning all documents, including those relating to Mr Carlsen’s employment.
The appeal is allowed and the order of the Master that the plaintiff make further discovery, verified on oath, in terms of paragraph 3.2 be set aside.
I will hear the parties on the question of costs.