Beston Parks Management Pty Ltd v Sexton
[2008] VSC 392
•6 October 2008
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 4897 of 2008
| BESTON PARKS MANAGEMENT PTY LTD (ACN 111 782 846) and BESTON PARKS MANAGEMENT HOLDING PTY LTD (ACN 112 122 693) | Applicants |
| v | |
| ROGER NEIL SEXTON and STEPHEN GERLACH | Respondents |
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JUDGE: | Hollingworth J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 29 May 2008 | |
DATE OF RULING: | 6 October 2008 | |
MEDIUM NEUTRAL CITATION: | [2008] VSC 392 | |
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PRACTICE AND PROCEDURE – Preliminary discovery – Whether reasonable grounds to believe that applicants may have right to obtain relief against respondents – Whether sufficient information to enable applicants to decide whether to commence proceeding – Whether applicants required to disclose legal advice as to sufficiency of information – Preliminary discovery ordered – Supreme Court (General Civil Procedure) Rules 2005 r 32.05
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APPEARANCES: | Counsel | Solicitors |
| For the Applicants | Mr J Karkar QC with Mr P Fox | Freehills |
| For the Respondents | Mr J Davis | Norton Gledhill as agents for Cowell Clarke |
HER HONOUR:
Introduction
The first applicant (“Beston Parks”) manages about 40 caravan parks throughout Australia, and provides temporary and permanent accommodation in the form of motels, holiday villages (including caravan sites and units or villas) and mining camps. The second applicant (“Holdings”) is the holding company of Beston Parks. Beston Parks and Holdings are both members of a larger group of companies, referred to as the Beston group.
Until August 2007, the respondents, Dr Roger Sexton and Mr Stephen Gerlach, occupied senior executive positions with Beston Parks and Holdings.
The respondents are parties to several agreements, which contain clauses prohibiting them, or entities related to them, from carrying on a competing business or using confidential information after the termination of their employment.
In January 2008 – some five months after the respondents ceased their employment with the applicants – two emails were sent to Dr Sexton’s former work email address at Beston Parks. The contents of the emails caused the applicants to have concerns that the respondents were, or were considering, breaching their contractual obligations.
Dissatisfied with the respondents’ response to their requests for further information, the applicants issued this proceeding, seeking preliminary discovery under r 32.05 of the Supreme Court (General Civil Procedure) Rules 2005, for the purpose of determining whether to commence proceedings against the respondents.
On 28 March 2008, a Master dismissed the application for preliminary discovery, principally on the basis that the applicants had failed to establish that they did not have sufficient information to determine whether to commence a proceeding. The applicants now appeal from that decision.
The evidence
There were a number of disputes as to what evidence I should consider for the purposes of this appeal.
The applicants’ evidence
The first Gerber affidavit
There is no dispute as to the admissibility of the principal affidavit relied upon by the applicants, being the affidavit of David Neil Gerber, the applicants’ solicitor, sworn on 27 February 2008.
However, the first Gerber affidavit referred to the existence of a dispute between the parties, as to whether an email sent by Mr Gerlach on 17 January 2008 (“the Gerlach email”) was protected by “without prejudice” privilege. Accordingly, Mr Gerber did not exhibit the Gerlach email, and only exhibited redacted copies of later correspondence, in so far as they referred to that email.
The first Gerber affidavit, in particular paragraph 31, clearly stated that the applicants challenged the privilege claim and would seek a ruling on that matter at the hearing of the preliminary discovery application. Given that fact, I do not understand how the respondents could seriously suggest to me that they did not put before the Master any evidence to substantiate the privilege claim because they did not know that privilege would be in issue.
Whatever the position may have been prior to the hearing before the Master, the respondents must have been well aware that the applicants would be challenging privilege on the appeal, yet chose to put no evidence before me to substantiate the claim.
In the absence of such evidence, the question of privilege would have to be determined from the contents of the relevant correspondence, including the Gerlach email itself. Although it commences with a reference to an earlier, “without prejudice” telephone conversation about “outstanding differences”, the Gerlach email does not identify any particular “dispute” which it seeks to resolve.
The Gerlach email goes on to discuss the respondents’ proposal to set up a business involving, amongst other things, the provision of mining camp accommodation. It acknowledges that Beston Parks has two mining camps in Queensland, and that there may be uncertainty as to whether the respondents’ proposed business would therefore be in breach of their contractual obligations. Far from making a “without prejudice” offer to settle any dispute, the email appears to have been intended to have legal consequence: it asks for written consent, under clause 24 of the shareholders agreement[1], to the respondents going into the proposed business, “to make sure there is an appropriate level of transparency”.
[1]See para [33] below.
The parties’ solicitors referred to the Gerlach email in subsequent open correspondence, without any apparent suggestion that it was privileged.
These are just some of the features which strongly suggest that the relevant parts of the Gerlach email are not privileged. However, at the end of the day, it is not necessary for me to finally determine the question of privilege, because I agree with the applicants that the preliminary discovery application should succeed, even if regard is had only to the redacted version of the exhibits.
The second Gerber affidavit
At the start of the hearing before me, the applicants sought leave to file a supplementary affidavit of Mr Gerber, sworn on 28 May 2008. The respondents objected to the filing of the affidavit. After the lunch adjournment, the court was informed that the parties had agreed that there was no need for the court to have regard to that affidavit. Accordingly, I have not done so.
The respondents’ evidence
The Green affidavit
There is no contest about the admissibility of the very short affidavit of the respondents’ Melbourne solicitor, Andrew Green, sworn 17 March 2008. It does no more than exhibit a letter from the respondents’ Adelaide solicitors to the applicants’ solicitors, dated 30 January 2008.
The respondents’ own affidavits
Each of the respondents filed a very short affidavit, in almost identical terms. The respondents’ affidavits do not specifically address the factual matters raised in the first Gerber affidavit.
The applicants object to the admissibility of the last two paragraphs of those affidavits, which are in the following terms:
6. Since 22 December 2004 neither I, nor any entity of which I or any of my immediate family members has an interest (whether as trustee, beneficiary, agent, shareholder, unit holder, officer, employee, consultant or in any other capacity) has directly or indirectly carried on (whether alone, in partnership or in joint venture with anyone else) or otherwise been concerned with or interested in (whether as trustee, principal, agent, shareholder, unit holder or in any other capacity) any Competing Business (as defined by the [relevant] Service Agreement) in Australia or New Zealand or any business which is similar to or competitive with any of the Group Business or the Trust Group Business (both as defined by the Subscription Agreement).
7. I have no documents in my possession, custody or power relating to any Competing Business (as defined by the [relevant] Service Agreement) or relating to any business which is similar to or competitive with any of the Group Business or the Trust Group Business (both as defined by the Subscription Agreement).
The Master ruled that paragraph 6 was not admissible, but allowed paragraph 7. As this is a hearing de novo, the parties agree that I must consider the question of admissibility afresh.
Paragraph 6 should not be admitted, for a number of reasons. It essentially contains a statement of the deponent’s belief or opinion as to whether there has been compliance with contractual obligations, not a statement of fact. In so far as it expresses an opinion about matters of law (such as the meaning and effect of various contractual provisions), the deponent’s opinion is irrelevant (even if the deponent were qualified to express such an opinion). It is also conclusionary and completely lacking in supporting evidence. In so far as it refers to the conduct of (unidentified) entities other than the deponent, including entities in which (unidentified) members of the deponent’s family may have a relevant interest, it is not clear on what basis (hearsay and/or personal knowledge) the deponent is purporting to give the evidence. And, in so far as it relies on hearsay evidence, the deponent has not identified the source(s) of any hearsay.
Paragraph 7 is also problematic, in so far as it contains a conclusion based on the deponent’s personal opinion or belief about the construction of the relevant agreements. Even if it were admitted into evidence, I would give it little, if any, weight. The fundamental problem is that paragraph 7 does not address the categories of documents actually sought by the applicants, and say whether the deponent has any such documents in his possession. Instead, it takes an apparently narrow, legalistic view of the respondents’ possible obligations. For example, the CVC and Happy Hallidays emails, discussed below, are clearly documents now in the respondents’ possession. But, apparently because of the respondents’ narrow view of their legal obligations, they have not disclosed the existence of them (or any similar documents).
I do not accept the applicants’ suggestion that I ought to draw any adverse inference against the respondents, by reason of the fact that they did not attend for cross-examination, having been asked to do so in recent solicitors’ correspondence. The applicants’ senior counsel did not press for their attendance, he merely invited me to draw an adverse inference from their non-attendance. In fact, during the course of this proceeding, both sides have changed their position as to whether such cross-examination would be necessary or permitted, apparently for forensic reasons; I draw no adverse conclusion from that.
The evidence before the court
Relevant relationships
From 17 January 2005 to around 9 August 2007, Dr Sexton was the Chief Executive Officer of Beston Parks and Mr Gerlach its Strategic Manager. Both were directors of Beston Parks and Holdings, and Mr Gerlach was chairman of both companies. Their employment was governed by written service agreements with Beston Parks, both dated 22 December 2004 (“the service agreements”).
There is no dispute that, as a result of their employment in these senior executive roles, the respondents were privy to the strategy for the Beston Parks business, its future plans, and all financial information traditionally considered by a board of directors, including budgets and forecasts.
At all relevant times, the respondents were (and still are) the directors of Beston Pacific Asset Management Pty Ltd (“BPAM”). By a management agreement dated 22 December 2004 (“the management agreement”), Beston Parks and another Beston group company engaged BPAM to provide financial and investment management advice and services in relation to their assets, liabilities and operations.
The terms upon which the respondents parted from the Beston group are set out in a letter dated 9 August 2007 (“the separation letter”). The separation letter provides that the respondents’ employment came to an end, and they resigned as directors of Beston Parks and other Beston group companies, with effect from that date. The separation letter also provides for the termination of the management agreement on that date.
By the separation letter, the respondents agreed to continue to comply with clauses 5 and 6 of the service agreements, after their departure.
Clause 5 of the service agreements imposes obligations on the respondents to keep secret certain confidential information obtained in the course of their employment, and provides for the ownership by Beston Parks of intellectual property created by the respondents during their employment.
Clause 6 of the service agreements relevantly provides:
6.1 Restricted areas and restricted activities
(a)For the purposes of clause 6.1(b) the expression ‘Competing Business’ means a business carried [sic] which is substantially the same as or competitive with the business carried on by [Beston Parks] or any other entity in the [Beston group] as at the Termination Date [9 August 2007].
(b)The Employee must not, without [Beston Parks’] prior written consent, do any of the following:
(1)directly or indirectly carry on (whether alone, in partnership or in joint venture with anyone else) or otherwise be concerned with or interested in (whether as trustee, principal, agent, shareholder, unit holder or in any other capacity) any Competing Business in Australia or New Zealand for a period of 12 months from the Termination Date;
(2)solicit or persuade at any time within 12 months from the Termination Date any person or corporation which is a customer or client of the [Beston group] or who was in the previous year a customer or client of the [Beston group], to cease conducting business with the [Beston group] or reduce the amount of business which the customer or client would normally conduct with the [Beston group];
(3)at any time, induce or attempt to induce any director, manager or employee of the [Beston group] to terminate his or her employment or engagement with the [Beston group].
The obligations in clauses 5 and 6 are expressly agreed to survive the termination of the respondents’ employment.
During their employment, the respondents also held interests in various unit trusts pursuant to a subscription, shareholders’ and unitholders’ agreement dated 22 December 2004, as subsequently varied (“the subscription agreement”). Holdings was a party to the subscription agreement, as were other investors, including ABN AMRO Capital (Belgium) NV.
Clause 24 of the subscription agreement contains a restraint clause, preventing the respondents and entities in which they or their immediate family members have an interest from carrying on, or having an interest in entities which carry on, any business which is similar to or competitive with certain businesses carried on by the Beston group[2], without the prior written consent of ABN AMRO Capital (Belgium) NV.[3]
[2]Being the Group Business and Trust Group Business, which are defined terms of broad compass, and include the businesses of Holdings, Beston Parks and any other Beston group member.
[3]It was ABN AMRO’s consent under clause 24 that Mr Gerlach was requesting in the Gerlach email.
Clause 24.2 has various temporal and geographic limits, expressed in what is commonly referred to as a “waterfall” or “cascade” clause. The least expansive restraint prevents the respondents from having an interest in a competitive business within 100 km of any land owned or used by Beston Parks or the Beston Parks Accommodation Trust at any time within one year after the Reference Date – a defined term which includes when the respondents cease to be employees of the Beston group. At its widest, the clause seeks to prevent such conduct for two years after the Reference Date, and in respect of competing businesses within the same State as such land.
Clause 23 of the subscription agreement imposes restrictions on the disclosure of confidential information.
The conduct of concern
During his employment by Beston Parks, the company provided Dr Sexton with an email address for business purposes. Following Dr Sexton’s resignation, Beston Parks continued to maintain the Sexton email address, and monitored incoming email.
At 2:05 pm on 8 January 2008, an email (“the CVC email”) was received at the Sexton email address from the email address of Rob Morrison, a partner of Barwon Investment Partners (“Barwon”). Barwon is an investment management company which provides investment advisory services and independent fund management.
The CVC email is addressed to “Roger” (Dr Sexton’s Christian name) and reads, in part:
As discussed briefly this morning, feedback yesterday from CVC was generally positive with them now moving to prepare their DD for their internal investment approvals. CVC asked for any materials we may have about the Parks industry, as well as information on individual parks proposed for the initial portfolio.
The CVC email refers to an “agreed term sheet” and listed a number of issues which CVC had raised about the structure of the “parks venture”. It goes on to say, amongst other things, “Roger as you would no doubt appreciate, we need to get a balance here between practical self interest (ie it must work for us) and commercial reality (working for CVC).”
Attached to the CVC email is a document entitled “Barwon Pacific Parks: Venture Structure Options January 2008”. Mr Morrison describes the attachment as “an alternative model which is designed to answer (either in whole or in part) many of the questions [posed by CVC]”. It contains several different structures for the ownership and operation of a “Caravan Park Fund” or “Caravan Park Venture”. One model provides for the “Barwon – Beston Pacific Joint Venture.”
It seems probable that “CVC” is a reference to CVC Limited or one of the companies in the CVC group, which describes itself as a “pioneering venture capital firm”.
Later that same afternoon, Mr Morrison sent a further email to the Sexton email address (“the Happy Hallidays email”), which read, in part:
Roger,
You have forwarded me details of the trading results for the Happy Halliday Park. Do you have any further information regarding the operating costs, resourcing etc? Do you have a view on future Cabin additions and numbers, cap ex etc.
I am attempting to put this park into our model so any further info would be helpful.
The applicants invite the court to infer that “Happy Hallidays” is a reference to the Happy Hallidays Holiday Park, near Sydney and Newcastle, which provides holiday accommodation in villas and bungalows, as well as caravans and camping. The respondents do not suggest the inference should not be drawn, they merely assert that the applicants have not proved that Happy Hallidays is in competition with the applicants.
Beston Parks informed Dr Sexton of its discovery of the CVC and Happy Hallidays emails. Dr Sexton wrote and complained that monitoring the Sexton email address constituted a breach of his privacy. Beston Parks’ solicitors replied that it was appropriate for Beston Parks to monitor incoming email, as it assumed the address had been used by Dr Sexton for business purposes, and any email received after his departure would be attended to by the replacement Chief Executive Officer.
Correspondence continued between 25 January and 19 February 2008, between the applicants’ solicitors and the respondents’ Adelaide solicitors, the general nature of which is summarised below.
The applicants sought full details of any dealings with CVC, Barwon, or any other party, which may be in breach of the respondents’ contractual obligations, as well as undertakings to withdraw from any such discussions or arrangements and to compensate Beston Parks for any loss suffered as a result of such breach. They explained in some detail their concerns about the CVC and Gerlach emails.
Although admitting that their clients had received “a number of business approaches, offers of employment and other proposals from various sources” since resigning, the respondents’ solicitors asserted that none of those proposals involved activities similar to or competitive with Beston Parks, and denied that their clients had breached the relevant contractual clauses. The respondents did not provide any of the information requested by the applicants, and would not even concede that any of the relevant clauses were binding on them.
I would give little weight to some of the assertions in the respondents’ solicitors’ correspondence. For example, the suggestion that the respondents had brought matters to the applicants’ attention “so there would be no misunderstanding” seems rather disingenuous. The unchallenged evidence is that the respondents said nothing at all to the applicants about any approaches or discussions until after they realised that the applicants had seen the CVC and Happy Hallidays emails. Likewise, the bald assertion, without any explanation, that the CVC/Barwon approach ceased on 8 January 2008 seems odd, given that the CVC and Happy Hallidays emails were sent mid afternoon on that very day, apparently as part of an ongoing process.
Given all of the above circumstances, it is hardly surprising that the applicants were not prepared to simply accept the respondents’ undertaking to have no further discussions with Barwon/CVC.
As mentioned earlier, the respondents have chosen not to put before the court any evidence whatsoever about the CVC and Happy Hallidays emails. They have not even inserted in their affidavits a single sentence confirming the truth of the factual matters asserted by their solicitors in the above correspondence.
Relevant legal principles
Rule 32.05 is headed “Discovery from prospective defendant” and provides:
Where—
(a)there is reasonable cause to believe that the applicant has or may have the right to obtain relief in the Court from a person whose description the applicant has ascertained;
(b)after making all reasonable inquiries, the applicant has not sufficient information to enable the applicant to decide whether to commence a proceeding in the Court to obtain that relief; and
(c)there is reasonable cause to believe that that person has or is likely to have or has had or is likely to have had in that person's possession any document relating to the question whether the applicant has the right to obtain the relief and that inspection of the document by the applicant would assist the applicant to make the decision—
the Court may order that that person shall make discovery to the applicant of any document of the kind described in paragraph (c).
The following general principles are not controversial. The rule should be construed benevolently, because it is intended to assist an applicant who does not have sufficient, precise information to commence a proceeding, and to prevent the bringing of speculative suits.[4] It must be given the fullest scope its language will reasonably allow.[5]
[4]Schmidt v Won [1998] 3 VR 435 at 445 per Ormiston JA, with whom Charles and Batt JJA agreed.
[5]Paxus Services Ltd v People Bank Pty Ltd (1990) 99 ALR 728 at 733.
It is not necessary to show precisely what cause of action the applicant may have, merely that the facts are such from which it may reasonably be believed that the applicant may have a right to obtain relief.[6] The word “may” indicates that the putative belief does not have to amount to a firm view that there is a right to relief.[7] Although some “fishing” enquiry is permitted, a “flimsy foundation” or “mere hunch” will not be sufficient to constitute reasonable cause.[8] An applicant does not have to prove that there will be, only that there may be, a real benefit from making the order.[9] The benefit may be the drawing of an appropriate pleading with proper particulars and the avoidance of substantial amendment after discovery, or, alternatively, the possible avoidance of unnecessary and fruitless litigation.[10]
[6]Schmidt v Won op cit at 456.
[7]Telstra Corporation Limited v Minister for Broadband, Communications and the Digital Economy [2008] FCAFC 7 at [58].
[8]Scarletti Pty Ltd v Millwood Printing Co Pty Ltd (SC (Vic) App Div, 28 July 1994, unreported BC 9400965); Schmidt v Won op cit at 445.
[9]Scarletti Pty Ltd v Millwood Printing Co Pty Ltd op cit at 11-12.
[10]Aroni Colman v Titchener (Supreme Court of Victoria, unreported 10 July 1998, BC9803498).
However, there is a dispute about the extent to which the requirement in r 32.05(b) is to be assessed objectively and/or subjectively.
The “reasonable cause to believe” requirement is primarily concerned with whether, as an objective fact, an applicant has sufficient information to decide whether to commence proceedings.[11] So, an application cannot succeed if the applicant has sufficient information (assessed objectively), but where the inability to determine whether to commence proceedings arises, for example, due to an overly indecisive or cautious nature.
[11]Hooper v Kirella Pty Ltd (1999) 96 FCR 1 at 11; Alstom Power Ltd v Eraring Energy (2004) ATPR 42-009; Telstra Corporation Limited v Minister for Broadband, Communications and the Digital Economy at [59].
There is no dispute that there may be a subjective element, in the sense that if there is evidence that the applicant has in fact decided to commence proceedings, that will be fatal to the application.[12]
[12]Alphafarm Pty Ltd v Eli Lilly Australia Pty Ltd (Federal Court of Australia, 24 May 1996, unreported, BC9602085).
But the respondents seek to elevate the subjective requirement in the following, novel way. They say that an applicant is required to disclose to the court any legal advice it has received, because that advice must bear on the applicant’s “genuine” belief as to whether it has sufficient information to commence proceedings. Because the applicants in this case have not disclosed whether they have received legal advice, or produced any such advice to the court, the respondents say the application must fail for that reason alone.
The first step in the respondent’s argument is to say that there is a requirement for an applicant to put in evidence that they “genuinely” feel unable to decide whether to commence proceedings. As authority for that proposition, they rely on the decision in Alphafarm Pty Ltd v Eli Lilly Australia Pty Ltd.[13] In that case, Lindgren J acknowledged that if an applicant had in fact made the relevant decision, then the second requirement would not be satisfied, even if the material was insufficient if looked at objectively. His Honour also said that an application could not succeed if, assessed objectively, there was sufficient information, even if the applicant “genuinely feels unable” to make such a decision. But Alphafarm is not authority for the alternative proposition suggested by the respondents, namely, that an applicant cannot succeed unless they prove that they “genuinely feel unable to decide to commence a proceeding”.
[13]Op cit.
The next step in the respondents’ argument is to say that an applicant cannot prove it “genuinely feels unable to decide to commence a proceeding” unless it discloses whether it has received legal advice and the content of any such legal advice. The authority relied upon in support of this proposition is the following comment by Graham J in the recent Federal Court decision of Telstra Corporation Limited v Minister for Communications, Information Technology and the Arts (No 2)[14]:
If information going to the ability of a person in the position of Telstra to make a decision whether to commence a proceeding in the Court against the Minister as a prospective respondent included information contained in documents which may otherwise enjoy legal professional privilege, it would seem surprising if the applicant could advance its claim for relief under [the equivalent in the Federal Court Rules of r 32.05] without laying bare all of the information which it had, whether privileged or not.[15]
[14][2007] FCA 1445 (“Telstra (No 2)”).
[15]Ibid at [46].
Graham J’s comment was made by way of obiter dicta and his Honour went on to note in the following paragraph that it was unnecessary for him to reach any concluded view in relation to this aspect of the matter. Telstra (No 2) has not subsequently been cited as supporting the proposition the respondents advance.[16]
[16]See Cadbury Schweppes Pty Ltd v Amcor Ltd [2008] FCA 88; Rich v Harrington [2007] FCA 1987 and Rilstone v BP Australia Pty Ltd [2007] FCA 1557.
In that case, Telstra had brought preliminary discovery proceedings against the Minister. The Minister served on Telstra a notice to produce documents. Telstra objected to producing documents created by its in-house counsel, on the grounds of legal professional privilege. Graham J rejected the claim for privilege, because there was no evidence of the independence of the lawyers who had given the advice contained in the documents. Therefore, it was not necessary for his Honour to reach a conclusion on whether privilege in the documents had been waived by virtue of Telstra’s application for preliminary discovery from the Minister.
It seems from the very brief reasoning on this point that this part of the case had been argued on the basis of implied waiver of legal professional privilege.[17] In the present case, the respondents expressly disavowed any argument based on implied waiver.[18]
[17]Graham J referred to the cases of Benecke v National Australia Bank (1993) 35 NSWLR 110 and Commissioner of Taxation v Rio Tinto Ltd (2006) 151 FCR 341, both of which were issue waiver cases. I infer from this that the learned judge intended his observations to be limited to issue waiver.
[18]T108-9.
There is nothing in Graham J’s observation to suggest that advice as to the sufficiency of the information – as opposed to the information itself – should be produced.
I also agree with the applicants that legal advice is not “information” within the meaning of that term where it appears in r 32.05. An applicant may have legal advice that it does not have sufficient information to commence a proceeding, and yet may fail in an application under r 32.05, and vice versa. The existence and content of legal advice has no bearing on the question of whether the test in r 32.05 has been made out.
Similarly, an applicant may have received legal advice that there is sufficient information to commence proceedings and may still feel that there is insufficient information. The production of such advice to the court may have some impact on the credibility of the applicants’ assertion that they are unable to decide whether to commence proceedings, however it does not affect the court’s objective determination whether there is sufficient information to commence proceedings.
Finally, and most fundamentally, the privilege is a fundamental common law right, which can only be abrogated by clear words or necessary implication.[19] A necessary consequence of the respondents’ argument is that r 32.05 would have the effect of abrogating legal professional privilege in advice concerning the sufficiency of information in the hands of an applicant. There is nothing in the drafting of the rule or the cases to suggest that the rule was intended to have any such effect.
[19]See for example Daniels Corporation International Pty Ltd v ACCC (2002) 213 CLR 543.
For these reasons, I reject the respondents’ suggestion that an applicant under r 32.05 cannot succeed unless they produce to the court all relevant legal advice.
Is there “reasonable cause to believe”?
The respondents say that the applicants’ affidavit material is insufficient to establish that there is reasonable cause to believe that the applicants have, or may have, the right to obtain relief against them. I disagree, for the following reasons.
The CVC email suggests at least the following: in early January 2008, the respondents, apparently through their company, BPAM, were considering becoming involved in the caravan parks industry; Dr Sexton had already had discussions with Barwon about that possibility; one possible structure involved a joint venture between Barwon and BPAM; CVC was considering investing with Barwon and BPAM in the caravan parks business; CVC had already been provided with sufficient information to provide positive feedback and move to the due diligence stage; CVC wanted further information from Barwon or Dr Sexton to prepare its due diligence, including information about the parks industry.
The Happy Hallidays email suggests that Dr Sexton was sufficiently connected with the Happy Hallidays business to have been able to provide Barwon with the trading results for the business, and to be potentially able to provide further information about the business. It also suggests that the Happy Hallidays business might be included in the model for the CVC project.
The respondents’ solicitors have also admitted that the respondents received a number of business approaches from persons other than Barwon and CVC, although have provided no further details about any such approach.
Although the CVC and Happy Hallidays emails were only addressed to Dr Sexton, the respondents’ solicitors confirmed in a letter dated 1 February 2008 that Mr Gerlach had “full knowledge of the Barwon approach, and all other approaches” when he sent the Gerlach email on 17 January 2008.
In deciding whether a restrictive covenant has been breached, courts have drawn a distinction between exploratory or preparatory steps, preceding the establishment of a business, and the commencement of the business.[20] Here, the respondents say that, at their highest, the CVC and Happy Hallidays emails show no more than that the respondents have undertaken some preparatory work towards establishing a business.
[20]Bristol-Myers Squibb Pharmaceuticals Pty Ltd v Collins [1995] 30 IPR 488 at 495-6, following Pioneer Concrete Services Ltd v Galli [1985] VR 675.
Whilst the CVC email on its own appears to be preparatory, that is not the case with respect to the Happy Hallidays email. It suggests that in January 2008, Dr Sexton already had sufficient connection with the Happy Hallidays business to be able to provide financial information above and beyond that which is ordinarily publicly available, and to answer various questions about the operation of the business.
Even though the CVC email itself appears preparatory, that proposal may have developed since January into something which does breach the relevant restraints. Neither the court nor the appellants is required to accept the bare assertion in the respondents’ solicitors’ correspondence, that the CVC proposal did not proceed after 8 January 2008, in circumstances where neither respondent has deposed to that simple fact.
As a further point, the respondents say the applicants have not proved that the Happy Hallidays park operates in competition with them. In fact, clause 24 of the subscription agreement applies to any business which is “similar to or competitive with”, and clause 6 of the service agreement to any business which is “substantially the same as or competitive with”, a Beston Parks’ business. The undisputed evidence is that the Happy Hallidays park is a holiday village providing, amongst other things, caravan park accommodation, close to Sydney and Newcastle. There is no dispute that Beston Parks operates holiday villages, and caravan parks in New South Wales. Whilst the evidence on this point is not extensive, it is sufficient to raise the inference that Happy Hallidays is a competing business in the relevant sense.
In my opinion, the evidence here amounts to more than a hunch or a flimsy foundation. Construing the rule benevolently, and bearing in mind its purpose, I am satisfied that there is reasonable cause to believe that the applicants may have the right to obtain relief against the respondents for a possible breach of their contractual obligations.
Do the applicants have “sufficient information”?
Paragraph (b) of r 32.05 requires the applicants to establish that, after making all reasonable inquiries, they do not have sufficient information to enable them to decide whether to commence a proceeding in the Court to obtain that relief.
The respondents do not dispute the adequacy of the applicants’ inquiries. However, the respondents say that the applicants in fact have sufficient information to decide whether to commence a proceeding against them.
The first Gerber affidavit deposes that:
(a) The applicants are “unable to decide whether to commence proceedings without further information”[21]; and
(b) Despite making the various inquiries deposed to, “they do not have sufficient information available to them” to decide whether to commence a proceeding against the respondents.[22]
[21]Para 5 of the first Gerber affidavit.
[22]Para 40(b) of the first Gerber affidavit.
It is for the court to determine whether or not an applicant has sufficient information available to it; the applicant’s own assertion that it does not is not determinative (nor strictly necessary, although such an assertion is commonly made in a supporting affidavit).
The respondents say that I should read Mr Gerber’s statements as referring to a commercial inability to decide whether to commence proceedings, rather than a legal one – that is, that the applicants have sought preliminary discovery only to determine the strength of their case. The respondents rely on a passage in the first Gerber affidavit, where the deponent says that an inspection of any other documents passing between the respondents and CVC, Barwon and others “would reveal whether or not the [applicants] have the right to obtain relief for breach”. The respondents contrast “the right” with the words in the preceding paragraph “enable [the applicants] to decide whether to commence a proceeding”. The respondents say this indicates that what is sought is material that goes to the strength of the case against the respondents. However, I do not find this distinction persuasive, particularly in view of the reference to “whether or not” the applicants have the right to obtain relief.
The respondents also argue that the evidence shows that the applicants have already made up their mind to issue proceedings against them. They rely on a letter dated 8 February 2008 from the applicants’ solicitors to the respondents’ solicitors. The letter deals with a number of quite discrete topics, only one of which is the “non-compete issues”. The last paragraph is in the following terms:
To avoid any misunderstanding we are instructed to commence proceedings concerning the warrants and the non-compete issues subject to amending the claim to deal with the February warrants and giving you a reasonable opportunity to respond to our request for documents concerning the non-compete issue, respectively. We are instructed that our clients will pursue the other issues outlined above, which may regrettably lead to further disputation. Our clients will commence both proceedings without further notice.
The respondents say this proves that the applicants had already made up their mind to issue proceedings against them for breach of the non-competition clauses. That argument involves ignoring what the letter actually says. After requesting the provision of documents and information, at the bottom of the second last page of the letter, the applicants’ solicitors made it perfectly clear that the proceedings they were proposing to issue in respect of the non-compete issues were preliminary discovery proceedings pursuant to r 32.05.
The respondents also rely on another sentence in the 8 February letter. In the course of comments about the CVC email, the applicants’ solicitors said:
We have further evidence that your clients expressly discussed caravan parks. In light of the history of your clients disclosing only that which they know or our clients are aware of, we do not propose to disclose the further evidence at this time [emphasis added].
The respondents say this proves that the applicants are hiding material from the court. However, the applicants say (and I accept) that the reference to “further evidence” is a reference to the Happy Hallidays email, which was not expressly referred to in that letter. Whilst it would have been more satisfactory had this been specifically addressed in the applicants’ evidence, the failure to do so will not defeat the application for preliminary discovery.
I am satisfied that the applicants do not have sufficient information to enable them to decide whether to commence a proceeding against the respondents for breaches of the relevant contractual provisions. Nor could a statement of claim be properly drawn on the material currently available to the applicants. For example, they do not know: the circumstances in which the CVC and Happy Hallidays emails came about; what information was provided by the respondents to Barwon and/or CVC; whether the Barwon/CVC proposal has gone ahead; whether any information which has been provided by the respondents was “confidential” within the meaning of the relevant agreements; the extent of Dr Sexton’s involvement in the Happy Hallidays Holiday Park; and Mr Gerlach’s precise knowledge of, and involvement in, all of these matters.
Documents
At the hearing of the appeal, the applicants sought leave to amend the categories of documents sought in their summons and originating motion to seek discovery of the following:
(a) Documents recording communications between Dr Sexton, Mr Gerlach or BPAM or any one of them on the one hand and any private equity, funds management, financial advisory or other similar business between 9 August 2007 to 26 February 2008 (“the Relevant Period”) concerning any business (whether or not commenced) involved the provision of temporary or permanent accommodation, including caravan parks or mining camps, which is substantially the same as, similar to, or competitive with, the business of the [applicants] (“Business”);
(b) Feasibility proposals, agreed or draft terms sheets, due diligence reports, final draft proposed structure diagrams, business plans, marketing documents, information memorandums or resumes for a Business sent or received by BPAM in the Relevant Period;
(c) Presentations to or by BPAM concerning a Business in the Relevant Period;
(d) Trading results for any business that may have formed part of any Business in which BPAM may have became involved, sent to or received by BPAM in the Relevant Period;
(e) Documents recording BPAM’s analysis, consideration, assessment or review of any Business in the Relevant Period;
(f) Documents recording communications with, presentations to or by, or applications for finance to, or offers of finance from any financial institution concerning a Business in the Relevant Period;
(g) Documents concerning the Happy Hallidays Holiday Park (Happy Hallidays); and
(h) Documents recording BPAM’s interest in Happy Hallidays.
The respondents opposed any amendment to the summons and originating motion, on the basis that it would change the nature of the application to such a degree that it was not really an appeal. I reject that argument, for the following reasons.
The proposed amendments to categories (a) to (f) involve no more than a narrowing of the types of documents sought in the originating motion, and are unobjectionable. It is true that categories (g) and (h) were not specifically sought in the originating motion, but they appear to be covered by the broader categories contained in that document. None of the proposed amendments require the leading of additional evidence or the making of further arguments which were not advanced before the Master. I will allow the amendments.
The respondents have not deposed as to whether they have (or have had) in their possession, custody, power or control, documents falling in the categories listed above. Instead, they have simply made the bald assertion in paragraph 7 of their affidavits, discussed earlier. The applicants and the court are not bound by the respondents’ solicitors’ interpretation of the relevant clauses (whatever that may be, which was not actually explained to the court).
Given the contents of the CVC and Happy Hallidays emails, and the admission by the respondents’ solicitors as to the various proposals which their clients have received, I am satisfied that there is reasonable cause to believe that the respondents have or are likely to have had in their possession documents relating to the question whether the applicants have the right to obtain relief against them, and that inspection of those documents by the applicants would assist the applicants to make the decision whether to commence proceedings against them.
Conclusion
I will allow the appeal and order preliminary discovery of the documents now sought by the applicants. I will hear from the parties as to the precise form of orders and as to costs.
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