Barbeques Galore (Aust) Pty Ltd v Jones Lang LaSalle (SA) Pty Ltd
[2006] SASC 31
•3 February 2006
SUPREME COURT OF SOUTH AUSTRALIA
(Appeal from a Master: Civil)
BARBEQUES GALORE (AUST) PTY LTD v JONES LANG LASALLE (SA) PTY LTD
Judgment of The Honourable Justice Besanko
3 February 2006
PROCEDURE - DISCOVERY AND INTERROGATORIES - DISCOVERY AND INSPECTION OF DOCUMENTS - DISCOVERY OF DOCUMENTS - ORDERS FOR FURTHER AND BETTER DISCOVERY
Appeal against two orders for further discovery – appellant brought action against three defendants – appellant and first defendant entered into settlement agreement –appellant seeking to recover losses flowing from settlement agreement from second and third defendants – in challenging appellant’s claim, third defendant sought discovery of two classes of documents – first, appellant’s financial statements and taxation assessments – secondly, non-privileged communications between appellant and first defendant.
Held, dismissing appeal – as to first class of documents, documents relevant to third defendant's allegation that, in assessing damages, any taxation benefit derived by appellant for expenses or outgoings allegedly caused by third defendant's wrongdoing should be taken into account - allegation reasonably arguable – as to second class of documents, documents directly relevant to third defendant’s allegation that settlement agreement between appellant and first defendant not reasonable.
Supreme Court Rules 1987 r 58A.03; Workers Compensation Act 1926 (NSW), referred to.
British Transport Commission v Gourley [1956] AC 185; Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1980) 145 CLR 625; Milner v Delita Pty Ltd (1985) 9 FCR 299; Neilsen v Hempston Holdings Pty Ltd (1986) 65 ALR 302; Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353; Osric Investments Pty Ltd v Clout (as liquidator of Woburn Downs Pastoral Pty Ltd) [2001] FCA 1402; Williams Aviation Pty Ltd v Santos Ltd (1985) 40 SASR 272; Sands v State of South Australia [2005] SASC 381, considered.
BARBEQUES GALORE (AUST) PTY LTD v JONES LANG LASALLE (SA) PTY LTD
[2006] SASC 31Appeal from a Master
BESANKO J: This is an appeal against two orders for further discovery made by a master of this Court. Barbeques Galore (Australia) Pty Ltd is the appellant.
Under the relevant rule of Court, the appellant was required to discover those documents, which were or had been in its possession, custody or power, which were directly relevant to any issue arising on the pleadings: r 58A.03, Supreme Court Rules 1987.
Background
The appellant brought an action in this Court against three defendants in relation to a lease of premises which it entered into in 1997. The appellant’s action was listed for trial to commence on 2 December 2003. On 3 December 2003, the appellant entered into a settlement agreement with the first defendant under which agreement it was required to pay rent which it alleges was over and above the current fair market value for the premises for a period of five years. It was also required to pay the first defendant’s legal costs of the action in the sum of $80,000 plus goods and services tax. The action against the first defendant has therefore settled, but the appellant now seeks to recover from the second and third defendants the losses flowing from its settlement with the first defendant.
Paragraph 52 of the fifth amended statement of claim contains the appellant’s plea of loss and damage and is in the following terms:
52.The plaintiff has suffered loss and damage by reason of the conduct complained of in paragraphs 45, 46, 47, 48 and 49 and by reason of the matters set forth in paragraph 51 above.
PARTICULARS
52.1 the necessity to prosecute the action against the first defendant and its ultimate compromise involved cost to the plaintiff which was caused by the conduct complained of in paragraphs 45, 46, 47, 48 and 49 above namely:
52.1.1 Additional rent payable in respect of the lease which includes the storage shed and yard calculated as follows:
Compromised rent
$ 184,000.00pa $ 184,000.00pa less current fair market rent $150,000-$160,000pa $ 150,000.00pa $ 160,000.00pa $ 34,000.00pa
$ 24,000.00pa
x 5 years $ 170,000.00 $ 120,000.00
52.1.2 legal costs
$ 80,000.00
plus GST52.1.3 arrears on occupancy of storage shed and yard
$ 9,177.60 52.1.4 interest on arrears
$ 732.00 52.1.5 value of airconditioning plant
$ TBA
The second defendant has taken no part in the hearing of the appeal.
The third defendant, Jones Lang LaSalle (SA) Pty Ltd, obtained the two orders for further discovery and it submits that the appeal should be dismissed. I will refer to the third defendant as the respondent.
The respondent submits that the further discovery is relevant to two allegations it raises in relation to the appellant’s claim for loss and damage. First, it submits that, assuming for present purposes that liability is established, the additional rent, although an expense or outgoing for the appellant, is an allowable tax deduction and has or will give rise to a taxation benefit for the appellant, and that this should be taken into account in the assessment of the appellant’s damages. It therefore seeks the discovery of the appellant’s financial statements and taxation assessments for the period 3 December 2003 to date. Secondly, the respondent alleges that the action by the appellant against the first defendant was doomed to fail and should not have been brought, or, at least, should have been settled earlier. The respondent further alleges that the settlement agreement between the appellant and the first defendant, insofar as it involved the payment of the first defendant’s legal costs, was not reasonable, and it challenges the appellant’s claim against it for such costs. It therefore seeks discovery of the documents which passed between the appellant and the first defendant in relation to the action, because these will be relevant to establishing the quantum of the first defendant’s legal costs and when they were incurred.
The first allegation of the respondent is not expressly pleaded in the third amended defence. However, the appellant does not take any point about that.
The order for further discovery relating to the first allegation was made by the master on 2 November 2005. For the purposes of this appeal it is sufficient to note that it requires the appellant to discover its financial statements and taxation returns for the period 3 December 2003 to date.
The order for further discovery relating to the second allegation was made by the master on 19 December 2005 and it is in the following terms:
1.The plaintiff to make further discovery by 31 January 2006 of all documents which are or have been in its power or possession relating to its dealings with the first defendant which are indicative of the amount of costs chargeable by the first defendant’s solicitors to the first defendant arising out of this action.
The first order
The appellant concedes that the payment of rent is an expense or outgoing which, in theory at least, could be claimed as a tax deduction. However, it submits that it is not reasonably arguable that a tax benefit it obtained by way of a tax deduction, or which it will obtain by way of a tax deduction, is relevant to the damages it is entitled to recover against the respondent. It follows, the appellant submits, that discovery in relation to the allegation should not have been ordered.
Ordinarily, assuming there is an allegation in the pleading, it would be appropriate for the moving party to apply to strike out the allegation and then, if necessary, to contest an application for discovery. However, having regard to the circumstances of this case and the attitude of the parties, it is appropriate for me to consider the challenge to the first order for discovery on the basis upon which it was put.
The master held that the respondent’s first allegation was reasonably arguable and that it was for the trial judge to determine the issue at the conclusion of the trial. In those circumstances, he considered that it was appropriate to make an order for further discovery.
The appellant submits that there is a rule that the tax consequences of an expense or outgoing caused by a wrongdoer are never relevant to the damages the innocent party may recover from the wrongdoer. In the alternative, it submits that the tax consequences of an expense or outgoing are only relevant if the tax benefits associated with the expense or outgoings are what its counsel called the “gist of the action” by the innocent party.
Counsel for the appellant referred to the decision of the House of Lords in British Transport Commission v Gourley [1956] AC 185 (“Gourley’s Case”). In that case, the House of Lords said that it was appropriate in assessing past and future loss of earning capacity to take into account the income tax which would have been payable had the plaintiff kept working. In that case, it was clear that tax was not payable on the damages awarded for loss of earning capacity. The appellant did not contest that principle, but sought to rely on passages in the speeches to the effect that, on occasions, tax considerations are too remote to be taken into account in fixing damages. Earl Jowitt said (at 203):
My Lords, I agree with Lord Sorn in thinking that to ignore the tax element at the present day would be to act in a manner which is out of touch with reality. Nor can I regard the tax element as so remote that it should be disregarded in assessing damages. The obligation to pay tax – save for those in possession of exiguous incomes – is almost universal in its application. That obligation is ever present in the minds of those who are called upon to pay taxes, and no sensible person any longer regards the net earnings from his trade or profession as the equivalent of his available income. Indeed, save for the fact that in many cases – though by no means in all cases – the tax only becomes payable after the money has been received, there is, I think, no element of remoteness or uncertainty about its incidence.
Lord Reid said (at 214):
I do not think that it is possible to formulate any principle by which it can be determined what is and what is not too remote. Mayne on Damages, 11th ed., p. 151, refers to “matter completely collateral,” and for a general description of what is too remote I cannot find better words, but I do not think that every case can be solved merely by applying those words to it. Taking this description, however, and applying it to the present case, I do not think that the plaintiff’s personal position is completely collateral. It is not something brought in as a separate factor, but only something which helps to quantify an obligation which is imposed by an Act of Parliament as a consequence of earning income, and I cannot regard that obligation as in itself collateral – certainly not completely collateral.
The appellant submits that the possible tax deductions in this case are quite different from tax payable on income and are too “remote” or “completely collateral” to the assessment of its damages.
There is nothing in Gourley’sCase which provides direct support for the appellant’s submission. The House of Lords did affirm the broad general principle concerning the assessment of damages, namely, that the award should be such as to put the injured party in the same position it would have been in had it not sustained the injuries.
Counsel for the appellant also referred to Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1980) 145 CLR 625. In that case, a worker employed by the plaintiff was injured on his way to work. The plaintiff, through the fault of its insurance broker, did not have a current workers’ compensation policy. The plaintiff was liable to reimburse the Uninsured Liability Fund created by the Workers Compensation Act 1926 (NSW) for its periodic payments to the worker and sought damages from the insurance broker. After the trial, and shortly before the Court of Appeal handed down its decision, the Act was amended to provide for twice-yearly indexation of workers’ compensation by reference to an index published by the Australian Statistician. The principal question before the High Court was whether, and, if so, to what extent, increases in workers’ compensation payments should be provided for in the lump sum damages payable to the plaintiff by the defendant.
A majority of the Court (Barwick CJ, Gibbs, Mason and Wilson JJ) held that the amount of future liability, as presently determined, should be discounted. Counsel for the appellant referred to a passage from the reasons for judgment of Gibbs J (as he then was) about the relevance of possible future tax deductions in fixing damages, in the context of considering whether tax on the income assumed to be derived from the amount awarded for future economic loss should be taken into account (at 642):
The present value of the future loss is arrived at by the use of tables which show what sum, if invested at the given rate, would produce sufficient income to allow the given weekly sum to be obtained by recourse both to income and capital over the whole period, so that at the end of the period the fund is entirely exhausted. It is not assumed that in fact the plaintiff will invest the sum in this way. It is fundamental that the court has no concern with what the plaintiff actually does with his damages. Therefore, in the present case, it is quite irrelevant that Pennant Hills may in fact receive a tax deduction in respect of the payments of worker’s compensation when it comes to make them. Pennant Hills may cease to carry on business, so that no deduction is claimable, or for some other reason a tax deduction, if allowable, may be of no value to it, but questions of this kind are collateral to the issue of damages and must be entirely disregarded.
The remarks of Gibbs J appear to support the appellant’s contention. None of the other judges took the same approach. They took tax deductions into account in declining to treat as relevant tax liability on income notionally derived from the sum awarded: Stephen J at 662-663; Mason J (as he then was) at 681-682; Wilson J at 687.
The appellant also referred to the decision of Lockhart J in Milner v Delita Pty Ltd (1985) 9 FCR 299, which it submits supports its contention that tax deductions that might be available as a result of expenses or outgoings caused by the wrongdoer are too remote and are not to be taken into account in fixing damages.
The respondent referred to decisions which go the other way in holding that tax deductions should be taken into account in fixing damages: Neilsen v Hempston Holdings Pty Ltd (1986) 65 ALR 302 (“Neilsen”); Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353 (“Akron Securities”); Osric Investments Pty Ltd v Clout (as liquidator of Woburn Downs Pastoral Pty Ltd [2001] FCA 1402 (“Osric Investments”). It is true, as the appellant submits, that Akron Securities and Osric Investments are cases in which the tax deductions were part of the promised benefits under the contract, but as at present advised, I am not convinced that that is a material difference. In any event, the decision in Neilsen supports the respondent’s contention.
It is important to remember that it is not for me to resolve the issue on this application. For the purposes of this application, I need only decide that the respondent’s allegation is reasonably arguable. I think that, in the absence of authority binding on me, it is reasonably arguable, having regard to the general principle for assessing damages, that, in assessing the loss and damage which the appellant has suffered, any benefit it has received by way of tax deductions for expenses or outgoings caused by the wrongdoer should be taken into account in fixing damages. It is reasonably arguable that difficulties which might occur in cases where there are carry-forward tax losses, or where the company is part of a group of companies, are difficulties of fact, to be resolved in the particular case, rather than reasons for a principle that tax deductions are always too remote or collateral. My conclusion that the respondent’s allegation is reasonably arguable is sufficient to support the first order.
The appellant’s challenge to the first order is rejected.
The second order
Clearly, the documents which are the subject of the second order will give an indication of at least some of the legal work done by the first defendant’s solicitors, although it is unlikely that the appellant will have in its possession, custody or power all documents relevant to the first defendant’s legal costs. At the same time, it is not clear to me what documents it obtained when it agreed to pay the first defendant’s costs. It is likely that the complete picture as to the legal work comprising the first defendant’s legal costs would only emerge upon discovery of the file of the first defendant’s solicitors. The respondent sought discovery of documents from the first defendant and its solicitors, but a claim for privilege was made in relation to the solicitor’s file, even, it seems, in relation to documents which passed between the appellant and the first defendant. The claim for privilege by the first defendant and its solicitors has not been challenged by the respondent.
On the face of it, documents relating to the costs which the appellant paid to the first defendant, and which it now seeks to recover from the respondent, are directly relevant to an allegation by the respondent that the costs are not reasonable, or that costs after a certain point in time are not recoverable because the action between the appellant and the first defendant should have been settled earlier.
The appellant put two submissions in support of its contention that the documents which are the subject of the second order are not directly relevant. First, it submits that the documents likely to be produced by the appellant would not constitute the whole of the file of the first defendant’s solicitors, or even a substantial part of it, and therefore would not assist in determining if the costs are reasonable. It is said that it follows that the documents are not relevant, or, at least, are not directly relevant. I reject that submission. The reasonableness of the settlement between the appellant and the first defendant involving the payment of the first defendant’s legal costs is in issue and the documents identified in the master’s order are directly relevant to that issue. The fact that it is not clear how far the documents will go in establishing the correctness or otherwise of the respondent’s allegation does not make them any less relevant.
Secondly, the appellant submits that the order should not have been made because the respondent could and should have pursued the first defendant and its solicitors for the documents. In my view, the answer to this submission is that given by the master, namely, that the court will usually not allow a claim for discovery under r 60 (discovery against a person not a party) to be pursued where the documents in question can be obtained from a party to the action: Williams Aviation Pty Ltd v Santos Ltd (1985) 40 SASR 272; Sands v State of South Australia [2005] SASC 381. It is true that the first defendant is a former party to the action, but I do not think that this makes a material difference. Even if the matter was at large, I do not think there is a principle requiring the respondent to seek the documents from a former party. The appellant has not identified an error in the master’s decision to make the second order.
The appellant’s challenge to the second order is rejected.
Conclusion
In my opinion, the appeal should be dismissed.
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