Ceneavenue Pty Ltd v Martin - [2008] SASC 332

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
CENEAVENUE PTY LTD & ORS v MARTIN & ORS
[2008] SASC 332
Judgment of The Honourable Justice White
25 November 2008
PROCEDURE - DISCOVERY AND INTERROGATORIES - DISCOVERY AND INSPECTION OF DOCUMENTS - DISCOVERY OF DOCUMENTS - THE APPLICATION AND THE ORDER
Application by second defendant for further and better disclosure from plaintiffs under r 145 of the Supreme Court Civil Rules 2006 (the 2006 Rules) – whether “possession” for the purposes of r 4 of the 2006 Rules has been given an extended definition – “possession” for the purposes of r 4 includes documents which are, in a practical sense, within a party’s power to obtain, even if not in a legal sense – whether the second defendant established a reason to doubt that the plaintiffs had fully complied with their disclosure obligations and that the documents it sought were directly relevant to its pleadings.
Held: further and better disclosure ordered with respect to some documents and application dismissed in all other regards.
Supreme Court Civil Rules 2006 r 4, 136, 139, 145, referred to.
Channel Seven Adelaide Pty Ltd v Lane & Hurley (2004) 234 LSJS 225; Quenchy Crusta Sales Pty Ltd v Logi-Tech Pty Ltd (2002) 223 LSJS 226; Rehn v Australian Football League (2003) 227 LSJS 378; Harris Scarfe Ltd v Ernst & Young (No 4) 2005 93 SASR 300; NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740; Williams Aviation Pty Ltd v Santos Ltd (1985) 40 SASR 272; Belcar Pty Ltd v Premier Automotive Group Australia Pty Ltd (2007) 249 LSJS 403, applied.
Taylor v Santos Ltd (1998) 71 SASR 434, considered.

WORDS AND PHRASES CONSIDERED/DEFINED
"Possession"

CENEAVENUE PTY LTD & ORS v MARTIN & ORS
[2008] SASC 332
Civil

WHITE J. This decision concerns an application by the second defendant Gillmar Holdings Pty Ltd (Gillmar) for further and better disclosure of documents.
On 18 November 2008 I made orders that the plaintiffs make further and better disclosure of certain documents but otherwise dismissed Gillmar’s application. I said that I would publish reasons at a later time. These are those reasons.
The circumstances of the underlying dispute have been set out in two previous decisions of this Court.[1] As this decision concerns an interlocutory issue only, I do not propose to repeat these circumstances in any detail. What follows is derived from the allegations in the pleadings. The first defendant (Mr Martin) is the former CEO of a group of companies, which includes the second to sixth plaintiffs, known as the Renniks Group. The first plaintiff, Ceneavenue Pty Ltd (Ceneavenue) currently owns 75 per cent of the shares in each of the Renniks Group companies. The remaining 25 per cent of those shares are owned by Gillmar. It is, effectively, controlled by Mr Martin and his wife Mrs Martin (the fourth defendant).
[1] Ceneavenue Pty Ltd & Ors v Martin & Ors [2007] SASC 465; Ceneavenue Pty Ltd & Ors v Martin & Ors [2008] SASC 158; (2008) 67 ACSR 130.
At a time when the Renniks Group was smaller, Gillmar entered into an agreement with Ceneavenue entitled “Shareholders’ Agreement”. The agreement bears the date 16 January 2004. Pursuant to this agreement, Ceneavenue loaned $1,337, 500 to Gillmar to purchase 25 per cent of Ceneavenue’s shares in each of four companies. This was an interest free loan with repayments consisting only of deductions from dividends payable to Gillmar on the shares. A term of the agreement was that if Mr Martin ceased employment with the Renniks Group, Gillmar would transfer its shares in the Renniks Group companies to Ceneaveneue at their market price, that price being determined by the Renniks Group’s accountant. Subsequent to the Agreement being entered into, as further companies were added to the Renniks Group, the shares in these companies were divided between Ceneavenue and Gillmar 75 per cent to 25 per cent respectively.
Following the termination of Mr Martin’s employment on 4 October 2006, the Renniks Group’s accountant undertook a valuation of Gillmar’s shares. That valuation produced a figure which was substantially less than the amount still owing under the loan between the two parties. Ceneavenue seeks (amongst other things) a declaration that Gillmar transfer to it the shares at the price of the valuation, and also payment of a sum equal to the difference between the loan amount still owing and the value of the shares.
Gillmar denies (amongst other things) any liability to Ceneavenue for the amount claimed, contending that it was agreed between the parties that, on the transfer to Ceneavenue of the shares, the loan would be extinguished. Further, it disputes the valuation of the shares by the Renniks Group’s accountant, alleging that he made a substantial mistake in his calculations. It also alleges that the valuation process has denied it natural justice, was biased and involved collusion between the accountant and Ceneavenue.
By an interlocutory application filed on 29 October 2008 [FDN 53], Gillmar sought orders for both non-party disclosure of certain documents and further and better disclosure from the plaintiffs of the very same documents. This was a curious way to proceed bearing in mind the ordinary principle that rights to disclosure of documents from a party to the litigation should be exhausted before any application for non-party disclosure is made.[2]
[2] Williams Aviation Pty Ltd v Santos Ltd (1985) 40 SASR 272.
The application for further and better disclosure indicated that Gillmar invoked r 139 of the Supreme Court Civil Rules 2006 (the 2006 Rules). However, on the hearing of the application Mr Burnett for Gillmar indicated that it relied instead on r 145 of the 2006 Rules. Rule 145(1) provides:
If there is reason to doubt whether a party has fully complied with the party’s obligations to disclose and produce documents under this Part, the Court may make orders the Court considers appropriate to ensure that the obligations have been fully complied with and, if necessary, to enforce those obligations.
That means that in order to obtain an order for further and better disclosure, Gillmar must establish that there is reason to doubt that the plaintiffs have complied with the relevant disclosure obligation found in r 136, ie, that each party disclose any documents which are or which have been in that party’s possession and which are directly relevant to any issue raised in the pleadings.
The word “possession” is defined in r 4. A person is taken to be in possession of a document or object if either:
(a)the document or object is in the person’s custody or control; or
(b)it lies within the person’s power to obtain immediate possession of the document or object or to control its disposition (whether or not the power is one that would be recognised at law or in equity)
In Belcar Pty Ltd v Premier Automotive Group Australia Pty Ltd[3] Judge Burley considered that this definition extended the scope of documents which may be regarded as being in a party’s possession. I agree with that conclusion. A litigant is now required to disclose directly relevant documents which are in a practical sense within its power, even if it does not have a legally enforceable right to possession.[4] So for example, documents which are in the de facto control of a party will be regarded as being in its possession.
[3] [2007] SASC 240 at [20]-[21]; (2007) 249 LSJS 403 at 407-08.
[4] Cf Taylor v Santos Ltd (1998) 71 SASR 434 at 437-38.
I consider that the expression “reason to doubt whether a party has fully complied with the party’s obligations to disclose and produce documents” in r 145 implies a presumption that there has been compliance with a party’s disclosure obligations. Hence, it will be incumbent upon an applicant for further and better disclosure to point to matters which indicate that the Court should not give effect to that presumption. It is not necessary for the Court to be convinced that the plaintiffs’ disclosure is inadequate, or to be satisfied on the balance of probabilities that it is inadequate. It is sufficient if the Court is satisfied that there is a reasonable basis for doubting that the disclosure made is adequate. This will require a degree of satisfaction going beyond the mere possibility that the plaintiffs’ disclosure is inadequate.
An applicant may establish the doubt by demonstrating, amongst other things, that the party making the disclosure has proceeded under some form of misconception, whether as to the nature of the issues arising on the pleadings, or as to the documents which may be directly relevant to those issues, or as to the reach of the rules concerning possession. It may also satisfy the evidential onus by pointing to the documents which one would expect to have come into existence in the circumstances of the case by reason of ordinary commercial practice or experience, by reference to the pleadings themselves or by reference to other documents already disclosed.
As to the reach of the expression “directly relevant”, I refer to the Full Court decision in Channel Seven Adelaide Pty Ltd v Lane & Hurley;[5] to the reasons of the Chief Justice in Quenchy Crusta Sales Pty Ltd v Logi-Tech Pty Ltd;[6] to the judgment of the Chief Justice in Rehn v Australian Football League;[7] and finally to the judgment of Bleby J in Harris Scarfe Ltd v Ernst & Young (No 4).[8] The issue of direct relevance is to be determined by reference to the pleadings. A document will be directly relevant if it tends to prove or disprove a matter which is in issue. It will not be directly relevant if it merely tends to prove or disprove something that may be relevant to a matter in issue, or if there is merely a chance that the document will prove or disprove a matter in issue.
[5] [2004] SASC 177 at [22] - [25]; (2004) 234 LSJS 225 at 230-31.
[6] [2002] SASC 374 at [9] – [11]; (2002) 223 LSJS 266 at 267.
[7] [2003] SASC 159 at [24]; (2003) 227 LSJS 378 at 381.
[8] [2005] SASC 443 at [13] – [15]; (2005) 93 SASR 300 at 303-04.
This means that Gillmar must establish that there is a reasonable basis for doubting that the plaintiffs’ lists of documents have disclosed all the documents which are or which have been in their possession in this extended sense and which are directly relevant to an issue in the proceedings.
I turn to the particular documents sought by Gillmar.
Negotiations for and entry into the Shareholders Agreement dated 16 January 2004 and the Employment Agreement dated 16 January 2004
Gillmar seeks disclosure of documents relevant to the following issues:
2.1The negotiation, drawing, terms, and meaning, of the document entitled “Shareholders Agreement” between the first plaintiff and the first and second defendants dated 16 January 2004; and
2.2The negotiation, drawing, terms, and meaning, of the document entitled “Employment Agreement” between the first plaintiff and the first defendant dated 16 January 2004; and
2.3Communications relevant to the matters referred to in 2.1 and 2.2 hereof with any of the following:
2.3.1 The plaintiffs or their officers or staff including Mr Rodney Bertram;
2.3.2 Lipman Karas Lawyers or any of their staff;
2.3.3 Edwards Marshall, Chartered Accountants or any of their officers or staff;
2.3.4 Gibson & Partners, Chartered Accountants or any of their officers or staff and in particular Mr Mark Andrew;
2.3.5 Mr Andrew Martin; or
2.3.6 The second defendant.
Gillmar said that the documents which it seeks in this category are directly relevant to its two pleas for rectification of the Shareholders’ Agreement contained in paragraphs 112-116 and in paragraphs 117-121 of the Cross-Action. It is not necessary to outline those pleas. It submitted that in determining the pleas of rectification the Court may have regard to parol evidence in order to determine the actual intention of the paries, as opposed to their presumed intention. This is so. In NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd[9] Clarke J held:
It would seem to me that the learned author is clearly correct when he points out that the differences between the task of construing an agreement and determining whether rectification should be ordered are so fundamental as to deny the validity of any proposition which purports to require the court to limit the admissible evidence in rectification suits to outward expressions of intention. As Mason J pointed out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 353, the court is concerned in construing contracts to focus upon the presumed, rather than the actual, intention of the parties, which is drawn from the contents of the documents. In contrast the court in a rectification suit is concerned to determine whether the document reflects the actual intention of the parties.[10]
Later, Clarke J said:
It seems to me to follow that the search for the subjective intention should not be circumscribed by reference to rules of evidence which are concerned only with the construction of written contracts. For instance, I see no reason why a party should not be able to say what he intended to convey by the written document.
…
Similarly it seems to me that facts, whether pre or post contractual, from which an inference can be drawn that a party had, or the parties had, at the time of entering into the transaction, a particular intention should be received.[11]
[9] (1986) 6 NSWLR 740.
[10] Ibid at 751-52.
[11] Ibid at 752.
Because of the way in which Gillmar has framed its application for further and better disclosure, its submissions tended to focus on the instructions given to the law firm Winters in connection with the formation of the Shareholders’ Agreement and the Employment Agreement. I did not understand the plaintiffs to contend that documents recording instructions given to Winters concerning the content of the two agreements were not directly relevant to the issues of rectification raised by Gillmar. Further, the plaintiffs did not contend that they had already made complete disclosure of all documents recording communications with the firm of Winters. Instead, the plaintiffs’ submission was that the evidence in support of the application for further and better disclosure was not sufficient to raise a doubt that they had complied with their disclosure obligations. However, the plaintiffs acknowledged that only one document recording instructions to the firm of Winters had been disclosed.
In these circumstances, I am satisfied that Gillmar has made good its claim. Ordinary experience suggests that solicitors will keep a record of the instructions which they receive from time to time relating to the content of commercial agreements which they are retained to prepare. The defendants’ lists of documents suggests that there have been numerous emails, at the least, concerning the preparation of the two agreements. It is highly likely that some of those at least went to the plaintiffs. It does not matter if those documents are no longer in the plaintiffs’ possession. The plaintiffs have to disclose not only the documents which are presently in their possession but also those which have been in their possession. The disclosure of only one document by way of communication with the firm of Winters is sufficient to raise a doubt that the plaintiffs’ discovery is complete.
Accordingly, I am satisfied that Gillmar is entitled to at least some of the documents sought in paragraph 2 of the application. However, I am not prepared to make an order as wide as that sought by Gillmar. I will order that the plaintiffs make further and better disclosure of any documents in their possession (as defined in r 4 of the 2006 Rules) which request, record or propose matters of content for the Shareholders’ Agreement between the first plaintiff and the first and second defendants and for the Employment Agreement between the first plaintiff and the first defendant.
Financial Documents
Gillmar seeks further and better disclosure of further financial documents as follows:
3.1The value, and any valuation, of any of the second to sixth plaintiffs (hereafter the “Renniks Group companies”);
3.2The “valuation” conducted by Mr Mark Andrew of the Renniks Group companies dated 7 December 2006;
3.3The Earnings Before Interest and Taxation (EBIT) for each of the Renniks Group companies for the years 2004 to date;
3.4The appropriateness of the use of a factor of 4 as the multiplier for the purposes of the “valuation” of the Renniks Group companies prepared by Mr Mark Andrew and dated 7 December 2006;
3.5The General Ledgers, Budgets and Projections and Depreciation Schedules for each of the second to sixth plaintiffs for the years 2004 to date;
3.6The profits made by the Renniks Group companies for the years 2004 to date;
...
Gillmar asserts that these documents are directly relevant to the mistake which it alleges in paragraph 87.9 of the Amended Defence. Paragraph 87 of the Amended Defence responds to paragraph 159 of the Amended Statement of Claim. Paragraph 159 pleads:
By report dated 7 December 2006 from Mark Andrew, of Gibson & Partners, being the accountant for the Renniks Group within the meaning of clause 2.2.2 of the Shareholders’ Agreement, determined the market value of the shares held by Gillmar within the meaning of clause 2.2.2 to be $929,475.
Paragraph 87 of the Amended Defence reads as follows:
87.As to paragraph 159 of the Statement of Claim, the second and fourth defendants deny the allegations contained therein and say further that:
87.1. the market value of the shares was not $929,475, but was substantially more;
87.2. the “report” was not prepared in accordance with the requirements of clause 2 of the Shareholders Agreement;
87.3. the report does not value the shares held by the second defendant in the companies the subject of the Shareholders Agreement, such companies comprising Renniks Trading, Renniks Assets, Renniks Employment Old and Wavals;
87.4. the report did not properly determine the actual market value, but determined a figure substantially less than the actual market value;
87.5. the report did not properly determine the EBIT, but instead wrongly adjusted the reported figures for the 2006 financial year so that the EBIT determined was substantially less than the true EBIT for the 2006 financial year;
87.6 the report failed to consider the provisions of clause 2.2.1 of the Shareholders Agreement and as such failed to prepare the report in accordance with the terms of the Shareholders Agreement;
87.7 on a proper construction of the Shareholders Agreement Mr Andrew was required to undertake a valuation of the shares of the companies the subject of the Shareholders Agreement and further was required to calculate the EBIT of the companies the subject of the Shareholders Agreement but he did not undertake a valuation of the shares of the companies the subject of the Shareholder’s Agreement and did not calculate the EBIT of the companies, because he ~~but instead~~ merely adopted and relied upon ~~essential aspects of~~ a report prepared by Mr Hugh McPharlin of Edwards Marshall which adjusted the 2006 EBIT figures;
…
87.9. says further, in preparing the report, Mr Andrew made a mistake of a substantial nature by reason of the matters set out in paragraph 87.1, 87.4 and 87.5 and further by adopting an EBIT multiplier of 4. The first and second defendants are not presently in a position to provide any further particularity concerning this paragraph and say further that they will not be in such position until after completion of disclosure and the obtaining of an expert report.

It will be noted that Gillmar pleads a number of matters in paragraph 87. In particular in paragraph 87.9 it alleges that Mr Andrew made a mistake of a substantial nature by reason of matters pleaded in three earlier paragraphs and by adopting an EBIT multiplier of 4. Gillmar asserts that they will not be able to provide further particulars of the alleged mistake until after completion of disclosure of documents and the obtaining of an expert’s report.
With respect to the expert’s report, Gillmar relies upon the affidavit of Christopher Robert Powell sworn 16 April 2007 [FDN 9]. In an exhibit to this affidavit, Mr Powell asserts that he is unable to provide a report as to the valuation of the shares without access to the documents which Gillmar seeks.
A schedule provided by Gillmar after the completion of the argument on 14 November 2008 indicates that the plaintiffs have already disclosed a substantial amount of financial documentation. A second schedule provided at the same time indicates 14 categories of documents which Gillmar says have not been disclosed. Gillmar did not engage in any analysis of the documents already disclosed with a view to demonstrating that the further documents which it seeks are directly relevant to the mistake which it asserts. Gillmar’s approach seemed to be to allege a mistake in quite general terms, to allege that it is unable to particularise further the precise nature of the mistake until the obtaining of an expert’s report, to allege that this report cannot be prepared without access to the large range of primary and secondary financial documents which it seeks, and then to assert that this results in the entire range of financial documents relating to each of the plaintiff companies, of both a primary and a secondary kind, being directly relevant to its plea of mistake.
I do not consider this to be an appropriate approach. It does not give proper effect to the concept of “directly relevant” to which I referred earlier. Gillmar has to show more than that a document may be relevant: it has to raise a doubt that directly relevant documents have been disclosed. A document will be directly relevant if it tends to prove or disprove a matter in issue. It will not be directly relevant if it may be relevant only to the proof or disproof of something which is in turn relevant to a matter in issue. Gillmar does not point to any material, through analysis of already disclosed documents or otherwise, to establish that the documents it seeks are directly relevant to its plea of mistake. Given the substantial amount of documents already disclosed, I consider that Gillmar should demonstrate, by reference to those documents, a proper basis for its application. It has not done so. In that circumstance I am not satisfied that Gillmar has shown a reason to doubt the adequacy of the plaintiffs’ disclosure.
Gillmar also contended that the financial documents it seeks are necessary so that Mr Powell can prepare his report. I do not consider that this provides a reasonable basis for Gillmar’s claim. If it is not established that the documents are directly relevant to an issue on the pleadings, they do not become directly relevant because an expert may wish to consider them in the preparation of a report.
Finally, I consider that Gillmar’s application gives the distinct impression that it is casting about for any material which may indicate a mistake, rather than for documents which are directly relevant to the particular mistake which is the subject of its plea.
Accordingly, Gillmar’s application for an order for further and better disclosure of financial documents by the plaintiffs is dismissed.
Communications
Gillmar contends that the plaintiffs have not made adequate disclosure of documents comprising communications with Mr Andrew in relation to the preparation of his report of 7 December 2006. It claims that such documents are directly relevant to its pleas of a denial of natural justice, bias and collusion by Mr Andrew with Ceneavenue in relation to the preparation of the report. These pleas are made in paragraphs 88.5, 88.6 and 88.7 of Gillmar’s Amended Defence. As particulars of the plea of denial of natural justice, Gillmar pleads (amongst other things) that Mr Andrew received instructions and submissions from Ceneavenue and provided it with a copy of his report in draft before finalising it but did not provide the same opportunities to Gillmar.
Gillmar pointed to material suggesting that there were at least two communications by the plaintiffs or their representatives with Mr Andrew in relation to the preparation of his report.
In their submissions in response, the plaintiffs did not contend that the Court should be satisfied that there were no documents incorporating or recording such communications which had not already been disclosed. Rather, they submitted that the evidence before the Court was not sufficient to allow the Court to conclude that there was reason to doubt that its present disclosure is adequate.
As a matter of ordinary experience, it is reasonable to suppose that Mr Andrew must, at the least, have received some instructions in relation to the preparation of his report. It is also reasonable to suppose that those instructions were incorporated in writing in some way. Further, as I understand it, it is not in dispute that Mr Andrew did provide a copy of a draft report to Ceneavenue at some stage. Again, as a matter of ordinary experience, it is to be expected that there would be some communication associated with the provision of that draft and comments or instructions provided in relation to the draft. It is also reasonable to suppose that such communications may have been recorded in writing.
I am satisfied that Gillmar has raised a doubt of the kind contemplated by r 145(1) that the plaintiffs’ disclosure of such documents is complete.
Accordingly, I direct that the plaintiffs make further and better disclosure of any documents in their possession (as defined in r 4 of the 2006 Rules) which incorporate or record communications in relation to the preparation and provision of the report of 7 December 2006 between Mr Andrew of the firm of Gibson & Partners (and any other member or employee of that firm) on the one hand, and, on the other:
(a)     the plaintiffs or their officers or staff including Mr Rodney Bertram;
(b)     Lipman Karas Lawyers or any of their staff;
(c)     Edwards Marshall, chartered accountants or any of their officers or staff;
(d)     the first defendant; or
(e)     the second defendant.
In all other respects, Gillmar’s application for further and better disclosure by the plaintiffs is dismissed.