Harris Scarfe Ltd (in Liq) v Ernst & Young (No 2) - [2005] SASC 168

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
HARRIS SCARFE LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) & ORS v ERNST & YOUNG & ORS (No 2)
Judgment of The Honourable Justice Bleby
6 May 2005
APPEAL AND NEW TRIAL - APPEAL GENERAL PRINCIPLES - RIGHT OF APPEAL - WHEN APPEAL LIES - FROM INTERLOCUTORY DECISIONS - LEAVE TO APPEAL
Test to be applied by single judge on application for leave to appeal against own interlocutory decision – Difficulty posed by question whether decision clearly wrong – Anomaly where application before Full Court could be decided on different criteria - No set criteria which must apply in every case – Discussion of considerations relevant to granting of leave.

PROCEDURE - SUPREME COURT PROCEDURE - SOUTH AUSTRALIA - PRACTICE UNDER RULES OF COURT - PLEADINGS
Application for leave to appeal pursuant to s 50(1a)(c) Supreme Court Act 1935 by defendants against order granting leave to the plaintiffs to file amended statement of claim – Nature of amendments such that application treated as equivalent to application to strike out on ground that no cause of action disclosed – Whether claim so untenable that it cannot possibly succeed – Plaintiffs’ right to state their case as they choose – Whether facts pleaded would be established and whether causation of loss as alleged would be proved were matters to be determined on basis of evidence at trial – Whether order determines substantive rights – Whether difficult and complex question of law – Whether issue of general importance – Whether substantial injustice caused by allowing pleading to stand – Leave to appeal refused.
Supreme Court Act 1935 (SA) s 50(1a)(c); Supreme Court Rules (SA) r 94.02, referred to.
Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170; Niemann v Electronic Industries Ltd [1978] VR 431; Decor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397; State of Western Australia v Bond Corporation Holdings Ltd (1991) 5 WAR 40; Coles Myer Ltd v Bowman [1996] 1 VR 457, applied.
Duke Group Ltd (In Liquidation) v Arthur Young (1991) 4 ACSR 355, distinguished.
Alexander v Cambridge Credit Corporation (1987) 9 NSWLR 310, discussed.
SA Government Financing Authority v Bank of NZ and BT Australia (Hong Kong) Ltd [2002] SASC 56; Cambridge Credit Corp Ltd v Hutcheson (No.3) 8 ACLR 526; Wentworth v Rogers (No.3) (1986) 6 NSWLR 642, considered.

HARRIS SCARFE LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) & ORS v ERNST & YOUNG & ORS (No 2)
[2005] SASC 168

BLEBY J: The three defendants in this action have applied for leave to appeal against the order I made on 30 March 2005 granting leave to the plaintiffs to file an amended statement of claim. I published reasons for that order: Harris Scarfe Limited (Receivers and Managers Appointed) (In Liquidation) & Ors v Ernst & Young & Ors [2005] SASC 113. The proposed grounds of appeal by all defendants are identical.
Since that order was made and the amended statement of claim filed, the plaintiffs have foreshadowed and have given some indication of the nature of further proposed amendments to the statement of claim. I am satisfied that those amendments, if made, are not likely to have any material effect on the issues decided or on any appeal against the decision if leave is given.
The nature of the amendments the subject of my order and the nature of the arguments against the granting of leave were such that the question was treated in the same way as if this were an application by the defendants to strike out an already filed statement of claim on the ground that it does not disclose a cause of action. For the purpose of this application for leave to appeal I intend to treat the application as being equivalent to an application to strike out the statement of claim on that ground.
A question arises as to the appropriate principles which should govern consideration of an application for leave to appeal pursuant to s 50(1a)(c) of the Supreme Court Act 1935. In Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170, Gibbs CJ, Aickin, Wilson and Brennan JJ in their joint judgment said, at 177:
Nor is there any serious dispute between the parties that appellate courts exercise particular caution in reviewing decisions pertaining to practice and procedure. Counsel for Brown urged that specific cumulative bars operate to guide appellate courts in the discharge of that task. Not only must there be error of principle, but the decision appealed from must work a substantial injustice to one of the parties. The opposing view is that such criteria are to be expressed disjunctively. Cases can be cited in support of both views: for example, on the one hand, Niemann v Electronic Industries Ltd [1978] VR 431 at 440; on the other hand, De Mestre v A D Hunter Pty Ltd (1952) 77 WN (NSW) 143 at 146. For ourselves, we believe it to be unnecessary and indeed unwise to lay down rigid and exhaustive criteria. The circumstances of different cases are infinitely various. We would merely repeat, with approval, the oft-cited statement of Sir Frederick Jordan in In Re the Will of FB Gilbert (deceased) (1946) 46 SR (NSW) 318 at 323:
“… I am of opinion that, … there is a material difference between an exercise of discretion on a point of practice or procedure and an exercise of discretion which determines substantive rights. In the former class of case, if a tight rein were not kept upon interference with the orders of judges of first instance, the result would be disastrous to the proper administration of justice. The disposal of cases could be delayed interminably, and costs heaped up indefinitely, if a litigant with a long purse or a litigious disposition could, at will, in effect transfer all exercises of discretion in interlocutory applications from a Judge in Chambers to a Court of Appeal”
See also, Brambles Holdings Ltd v Trade Practices Commission (1979) 28 ALR 191 at 193; Dougherty v Chandler (1946) 46 SR (NSW) 370 at 374. It is safe to say that the question of injustice flowing from the order appealed from will generally be a relevant and necessary consideration.
The Court was there dealing with an appeal against an order discharging a party from an earlier undertaking upon an alternative undertaking being given, although it is clear that the Court in the passage quoted was speaking of appeals in general against decisions relating to practice and procedure. It is also clear that, whatever other criteria might be adopted in a particular case, the question of injustice flowing from the order appealed against will generally be a relevant and necessary consideration.
Niemann v Electronic Industries Ltd [1978] VR 431 decided that leave to appeal from an interlocutory order, in that case a summons for dismissal of the plaintiffs’ actions for want of prosecution, should be granted only where the decision was wrong, or at least attended with sufficient doubt to justify granting leave, and in addition, where substantial injustice would be done by leaving the decision unreversed: see McInerney J at 432-433, Murphy J at 440-441, Gillard J at 444-445.
In Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 the Full Court of the Federal Court (Sheppard, Burchett and Heerey JJ) reviewed a number of authorities including Niemann. They concluded, at 399:
In our opinion, the principles discussed in Niemann and in the other cases to which we have referred provide general guidance which a court should normally accept. However, there will continue to be cases raising special considerations, and the court should not regard its hands as tied in any case beyond this; that by s 24(1A) [Federal Court of Australia Act 1976 (Cth)] the legislature has evinced a policy against the bringing of interlocutory appeals except where the court, acting judicially, finds reason to grant leave. When the court comes to exercise its discretion on a particular application, an important distinction to be observed is that between the common interlocutory decision on a point of practice – concerning which the High Court has given (see Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170 at 177) a strong warning that “a tight rein” should be kept on appeals – and an interlocutory decision determining a substantive right – where leave will more readily be granted.
The applicants in this case relied on the decision of the Full Court of this Court in Duke Group Ltd (In Liquidation ) v Arthur Young (1991) 4 ACSR 355, and in particular a passage in the judgment of Olsson J at 381-382:
To the extent that leave is necessary and is applied for, the Full Court must be satisfied that the decision sought to be impugned is either wrong or attended with sufficient doubt to warrant its re-consideration on appeal, or has the effect of working a substantial injustice on the proposed appellant: Wentworth v Rogers (No 3) (1986) 6 NSWLR 642; Niemann v Electronic Industries Ltd [1978] VR 431.
Duggan J, at 407, must be taken to have concurred in the remarks. Matheson J gave his own reasons, citing Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (supra) and Cambridge Credit Corp Ltd v Hutcheson (No 3) 8 ACLR 526: at 372-373. He did not advert to the three alternative criteria stated by Olsson J.
The passage quoted from the judgment of Olsson J suggests that the three criteria mentioned are all disjunctive. However, the authorities cited by Olsson J do not support the proposition he stated. Wentworth v Rogers (No 3) (1986) 6 NSWLR 642 does not address the proposition at all. Niemann v Electronic Industries Ltd (supra) stands for the proposition that the question of substantial injustice to a party will be relevant in every case. I do not regard the dictum of Olsson J as binding, as in that case the court heard full argument on and decided the merits of the appeals the subject of the applications for leave to appeal, and granted or refused leave, where necessary, according to the final outcome. The case did not turn on the application of the principle stated.
It appears to have been established, at least in Western Australia and Victoria, that leave to appeal, at least in cases involving strike out applications, will only be granted where the decision appealed from was wrong or at least attended with sufficient doubt to justify the granting of leave and that, in addition, substantial injustice would be done by leaving the decision unreversed: State of Western Australia v Bond Corporation Holdings Ltd (1991) 5 WAR 40 at 54-57: Coles Myer Ltd v Bowman [1996] 1 VR 457 at 459. The Full Court of this court has taken a similar approach in relation to an interlocutory order concerning production of documents after rejection of a claim for legal professional privilege in SA Government Financing Authority v Bank of NZ and BT Australia (Hong Kong) Ltd [2002] SASC 56 at [12] – [13], Gray J, with whom Nyland and Martin JJ agreed.
However, the authorities to which I have referred all relate to the granting of leave by an appellate court. The criteria to be established according to those cases present some difficulty to a single judge who determined the issue and who is faced with an application for leave to appeal from that decision. Murphy J was alive to the problem in Niemann (supra) at 441:
It also seems to me important to note that the judge who makes the interlocutory order or judgment may be in a different position, when considering whether to grant leave to appeal from his order or judgement from that in which the Full Court finds itself when considering a similar application.
He has tried the case, whatever it may be. He has made the interlocutory order or given the interlocutory judgment. He could not be expected, when considering whether or not to grant application for leave to appeal, to say this his order or judgment was clearly wrong and that substantial injustice would follow if it went undisturbed. If those criteria had in all cases to be established, leave would never be granted by the primary judge.
In practice, he may consider (1) whether the issue raised is one of general importance or whether it simply depends upon the facts of the particular case; (2) whether there are involved in the case difficult questions of law, upon which different views have been expressed from time to time or as to which he has been “sorely troubled”; (3) whether the order made has the effect of altering the substantive rights of the parties or either of them; and (4) that as a general rule there is a strong presumption against granting leave to appeal from interlocutory orders or judgments which do not either directly or by their practical effect finally determine any substantive rights of either party.
When the matter comes before the Full Court on a motion for leave to appeal from the interlocutory order or interlocutory judgment it seems to me that different considerations should apply.
However, that approach presents an unresolved anomaly that a leave application will be decided according to different criteria depending on whether application is made to the judge who determined the issue or whether application for leave is made to the Full Court. The anomaly may become more pronounced where, as in this Court, if leave has been refused by a single judge, a fresh application may be made to the Full Court: r 94.02, Supreme Court Rules. Perhaps all this merely indicates that the approach must always remain flexible according to the nature of the case and the issues at stake, and that no universal rule can be applied.
What is a common thread running through the cases, however, is that there is a general unwillingness to grant leave to appeal from interlocutory orders which do not either directly or by their practical effect finally determine the substantive rights of a party. The Court should be slow to encourage unnecessary, costly and time consuming appeals having the effect of unduly disrupting the orderly conduct of litigation, particularly litigation of a complex nature such as this. I think I am also in a position to be able to determine, notwithstanding the remarks of Murphy J in Niemann, whether the defendants are likely to suffer some substantial injustice if leave to appeal is refused.
It is also relevant to bear in mind what Charles JA said, with the concurrence of Brooking and Callaway JJA, in Coles Myer Ltd v Bowman (supra) at 459:
One does not need to cite authority for the propositions that: (a) an application to strike out a statement of claim on the grounds that it does not disclose a cause of action is to be refused unless the claim which is attacked is so clearly untenable that it cannot possibly succeed; and (b) the plaintiff’s right to state his own case as he will, and to plead the facts which he contends will ground his claim, is not to be restricted unless it appears on the face of the pleading that the connection contended for between the facts alleged and the claims which are made is bound to fail. If Bowman’s claim is not so clearly untenable that it is bound to fail, the proper course is for the matter to proceed to a trial at which the relevant facts can be established and it will then become possible for the courts to apply the law to those facts: cf. Wickstead v Browne (1992) 30 NSWLR 1 at 6 per Kirby P.
As Murphy J has identified in Niemann (supra), there is an obvious difficulty in asking a single judge to consider whether a decision of his or hers is clearly wrong. However a single judge is capable of viewing that decision objectively and determining whether it is one which might have been determined differently either because it involved a difficult and complex question of law, or because it turned on a controversial point of law the subject of varying or conflicting interpretations. The decision the defendants now seek to appeal against exhibits neither characteristic. The only question which poses difficulty or doubt, and upon which the law is not settled, is the test that I should apply in determining whether to grant leave to appeal. Although it may be an important question generally, I do not believe that its resolution would have any bearing on this particular application.
In Niemann it was also suggested that if a decision concerned an issue of general importance that factor might warrant the granting of leave to appeal. While my decision may affect the way in which this litigation is conducted, it does not involve an issue of general importance. The fact that the litigation will be long, complex and costly and that the ultimate outcome may have serious consequences for the parties does not in any way elevate the question I was called upon to decide to one of general importance. No-one has challenged the correctness of the majority decision in Alexander v Cambridge Credit Corporation (1987) 9 NSWLR 310. That case is distinguishable on the facts. The same can be said of other cases relied on by the defendants.
The primary issue in this case is whether the plaintiffs’ pleading, assuming that the facts pleaded are established, alleges a causative link between the alleged negligence or misrepresentations of the defendants and the loss and damage alleged by the plaintiffs. As the authorities I have referred to in my reasons for allowing the amendment show, causation is essentially a matter of commonsense. That principle does not appear to be challenged by the present applicants. It will be for the trial judge to determine, by the application of commonsense, whether the causative link is established as a matter of fact. I cannot say that on the face of the pleading the connection contended for is bound to fail.
What distinguishes this case from Cambridge Credit is that the plaintiffs in this case have pleaded more than merely a temporal link between the alleged representations and the alleged loss. They have pleaded reliance by them on the defendants’ actions and the consequences that they say flow, as a matter of commonsense, from that reliance. Whether the evidence at trial will justify that is another question.
The defendants complain of a substantial injustice caused by allowing the pleading to stand. It will be open to the defendants to plead and to conduct a case at trial designed to demonstrate that the plaintiffs cannot prove, on the balance of probability, that the losses they claim flow, as a matter of commonsense, from the negligence or misrepresentation of the defendants. The defendants may bear an evidentiary onus to introduce evidence to show either that there was no reliance on the reports of the defendants or that the losses or some or all of them, or even greater losses, would have been incurred by Harris Scarfe if the representations had not occurred. The fact that there is an evidentiary onus on the defendants does not mean that the defendants are under any greater disadvantage in this regard than they would be in any other case.
The plaintiffs rely on a series of decisions, in reliance on the audit reports, to continue trading in the same manner as they had been trading before. They plead the consequences of so doing. They assert that there would have been a cessation of trading and other measures taken if the truth were known. By taking that course in their pleading, the plaintiffs have merely shifted the spotlight in the proceedings onto that series of decisions and their consequences rather than on to any one particular transaction said to have been influenced by the representations. Depending on what the defendants plead, the plaintiffs will stand or fall by that. No doubt they have confidence that expert evidence will justify those respective courses. That is not to say that other evidence might not show that other courses could or would have been followed by reasonably prudent directors, sufficient to undermine the attempted discharge by the plaintiffs of their onus of proof.

There is nothing unjust or unfair in the plaintiffs’ choice of battleground of the broad picture of trading policy rather than particular instances of trading activity. That course causes no injustice to the defendants.
Leave to appeal will be granted more readily where the interlocutory decision has the substantive effect of determining a party’s rights. A decision against the plaintiffs would not determine their rights. They would be given an opportunity to reformulate their claim. A decision against the defendants does not determine their rights to pursue their causation arguments, when all the facts are known, based on the decision in Cambridge Credit Corporation Ltd.
The defendants argue that the decision in this case needs to be viewed in the context of a case that will require a great deal of preparation, that will involve a long trial and the application of significant resources of the parties and of the Court. If the plaintiffs succeed at trial on the current pleading and that decision is reversed on appeal, those resources would have been wasted. I do not accept that argument. If the plaintiffs are required to reformulate their claim it is unlikely to make any difference to the length or complexity of the preparation or trial. It might be different if the effect of a successful appeal by the defendants would necessarily result in a re-trial, but it seems to me in this case that that would be most unlikely and that the plaintiffs will stand or fall by the course they have chosen.
It is said that there would be injustice to the defendants in any process of alternative dispute resolution which might be adopted before trial in that they would be unable to undertake any meaningful role in a mediation where the basis on which they may be liable for damages (if any) is uncertain. I disagree. If the pleading stands, the mediation will be conducted on the basis of that pleading. There will be no uncertainty about it.
In short, I am not persuaded that there is any injustice to the defendants in allowing the present decision to stand. In my opinion the defendants have failed to clear the hurdles required to secure the granting of leave. Leave to appeal is refused.