Harris Scarfe Ltd (Receivers & Managers Appointed) (in liq) v Ernst & Young (No 10) - [2006] SASC 325

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
HARRIS SCARFE LTD (RECEIVERS & MANAGERS APPOINTED) IN LIQ & ORS v ERNST & YOUNG & ORS (No 10)
[2006] SASC 325
Judgment of The Honourable Justice Debelle
26 October 2006
PROCEDURE - DISCOVERY AND INTERROGATORIES - DISCOVERY AND INSPECTION OF DOCUMENTS - PRODUCTION AND INSPECTION
Production and inspection of documents - application by second and third defendants for production of confidential settlement agreement between plaintiff and first defendant – document relevant - parts of document masked to cover up irrelevant material – whether affidavit that masked portions are irrelevant is conclusive – whether judge should examine unmasked document for purpose of determining whether masked portions are irrelevant - whether entire document should be produced for inspection – whether masked portions are in fact irrelevant.
Fair Trading Act 1987 (SA) s 56; Suprem Court Rules 1987 (SA) r 59.03, r 59.04; Supreme Court Rules 1947 (SA) O 31, r 22, O 31, r 22; Rules of the Supreme Court 1883 (UK) O XXXI, r 19A(2), referred to.
Burmah Oil Co Ltd v Bank of England [1980] AC 1090; Ehrmann v Ehrmann [1896] 2 Ch 826; Grant v Downs [1974] 2 NSWLR 401; Grant v Downs (1976) 135 CLR 674; Mobil Oil Australia Ltd v Guina Developments Pty Ltd [1996] 2 VR 34; National Science Research Council v Nasse [1980] AC 1028, applied.
GE Capital Corporate Finance Group Ltd v Bankers Trust Co [1995] 1 WLR 172, not followed.
Addstead Pty Ltd (in liq) v Simmons [2004] SASC 260; Adelaide Brighton Cement v State of South Australia (1999) 75 SASR 209; Birmingham & Midland Motor Omnibus Co Ltd v London and Northwestern Railway [1913] 3 KB 850; Candacal Pty Ltd v Industry Research & Development Board (2005) 223 ALR 284; LT and KT Conlon v Lensworth Interstate (Vic) Pty Ltd [1970] VR 293; Curlex Manufacturing Pty Ltd v Carlingford [1987] 2 Qd R 335; Esso Australia Resources Ltd v Commissioner of Taxation (1999) 201 CLR 49; Guardian Royal Exchange Assurance of NZ Ltd v Stuart [1985] 1 NZLR 596; Jones v Andrews (1888) 58 LT 601; Kelly v Commonwealth of Australia (1980) 39 FLR 372; Legal Services Commission v Trotter (1990) 54 SASR 74; Lion Rolling Mills Pty Ltd v Noyes Bros (Melbourne) Pty Ltd [1915] VLR 383; Nickmar Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 44; Optus Communications Pty Ltd v Telstra Corporation Ltd [1995] FCA 254; Peat Marwick Hungerfords v Executors Trustee Australia Ltd (Olsson J, 25 October 1995, unreported); Southern Equities Corporation Ltd (in liq) v Arthur Anderson & Co (No 5) [2001] SASC 335; Telstra Corporation Ltd v Australis Media Holdings Pty Ltd (McLelland CJ in Eq, 10 February 1997, unreported); Trade Practices Commission v Sterling (1979) 36 FLR 244; Vardas v South British Insurance Co Ltd [1984] 2 NSWLR 652; Weir v Greening [1957] VR 296; Wran v Australian Broadcasting Commission [1984] 3 NSWLR 241, considered.

HARRIS SCARFE LTD (RECEIVERS & MANAGERS APPOINTED) IN LIQ & ORS v ERNST & YOUNG & ORS (No 10)
[2006] SASC 325
Civil

DEBELLE J. This is an application for discovery and inspection of a confidential agreement recording the terms of settlement between parties to a major commercial action. The parties to the document concede that the document is relevant. However, they have produced it for inspection with a number of clauses masked to cover them up. The issue is whether the entire document should be produced for inspection to the other parties in the action, that is to say, whether it should be produced for inspection in an unmasked form.
The Plaintiffs
The first plaintiff Harris Scarfe Limited operated a substantial department store in Adelaide. It also had other retail outlets. The second plaintiff Harris Scarfe Wholesale Pty Ltd was a wholesale purchaser of stock on behalf of Harris Scarfe Limited. The third plaintiff Harris Scarfe Holdings Limited was the holding company of the first two plaintiffs. On 6 April 2001 a receiver was appointed of all three companies. On 3 January 2002 a resolution for the voluntary winding up of those three companies was carried at a meeting of creditors.
The fourth plaintiff Australian and New Zealand Banking Group Limited (“the ANZ Bank”) was at all material times the banker and principal financier of the Harris Scarfe Group.
The Defendant Auditors
The defendants are firms of chartered accountants. The first defendant Ernst & Young carried out the audit of the accounts of the companies in the Harris Scarfe Group for the purposes of complying with the corporations legislation for the year ending 31 July 1996 and a half yearly review and audit of the Group for the financial year ending 31 July 1997. Coopers and Lybrand and their successors in business, PricewaterhouseCoopers, are the second and third defendants. They conducted half-yearly reviews and audits of the Harris Scarfe Group for the financial years ending 31 July 1998 and 31 July 1999. It is convenient to refer to the second and third defendants as PricewaterhouseCoopers.
The Plaintiffs’ Claim
The plaintiffs allege that at all material times from 1996 the chief financial officer of the Harris Scarfe Group instigated a scheme to adjust the financial records of the Group so that assets were overstated and liabilities and expenses underestimated thereby causing an overstatement both of profits and net assets. The effects of this accounting manipulation were substantial.
In this action the plaintiffs allege that the defendants negligently conducted the audits in that they failed to identify the fraudulent accounting and failed to identify what in fact was the true financial position in each of the respective periods. The plaintiffs allege that in preparing the half yearly reports and the audit opinions each of the defendants acted negligently, acted in breach of contract and engaged in misleading and deceptive conduct contrary to the s 56 of the Fair Trading Act 1987. They allege that the audits and half yearly reports failed to disclose the true financial position to the Harris Scarfe Group. They further allege that the breaches caused the directors of the plaintiff companies to hold mistaken beliefs as to the state of the accounts of the respective companies so that they held a mistaken view of the overall financial position of those companies and that those mistaken beliefs in turn caused the directors to trade in ignorance of the true financial position of the company. It is further alleged that the ANZ Bank, as a result of its mistaken beliefs as to the true financial position of the Group, continued to provide financial accommodation and made further loans to the Harris Scarfe Group which would not have been made had the true position been known.
The plaintiffs allege that, had they known the true financial position, they would have acted differently in making decisions as to the trading operations of the Group. They further allege that, had the true position been known, a controller would have been appointed to the Harris Scarfe Group at an early point of time, that controller being either an administrator, receiver or liquidator. It is not necessary for present purposes to examine the allegations in any greater detail.
The assessment by the Harris Scarfe plaintiffs of their loss is based on the difference between the net assets surplus of each plaintiff as shown in the accounts and the net asset deficiency in fact, that is to say, the plaintiffs claim the deterioration in the asset position of the Group from the date when the true financial position ought to have been disclosed until the time when it was in fact disclosed, a controller was appointed and the assets realised. That loss, including the loss of the ANZ Bank, is said to be in excess of $250M. The plaintiffs have given particulars of that loss. The plaintiffs claim damages from all three defendants. They claim that Ernst & Young are liable for losses from September 1996 to April 2001 and that PricewaterhouseCoopers are liable for losses from March 1998 to April 2001. The plaintiffs therefore seek to recover losses for the period March 1998 and April 2001 from both Ernst & Young and PricewaterhouseCoopers. Expressed another way, the plaintiffs allege that Ernst &Young are solely liable for losses to March 1998. The plaintiffs then allege that Ernst & Young and PricewaterhouseCoopers are both liable for the losses thereafter. Ernst & Young and PricewaterhouseCoopers have filed contribution claims against each other.
A Partial Settlement
The hearing of the action was listed to commence before Bleby J on 16 October 2006. On 14 September 2006 the plaintiffs and Ernst & Young executed an agreement by which they compromised the plaintiffs’ claim against Ernst & Young (“the settlement agreement”). On or about the same day they informed PricewaterhouseCoopers of that fact.
An Application To Produce Documents
At a management conference before me on 28 September reference was made to the settlement as between the plaintiffs and Ernst & Young and to the fact that the terms of settlement were confidential. There was some discussion as to the question of disclosure of part or of the whole of the settlement agreement. Included in the directions made that day I ordered:
1. That upon the plaintiffs completing their agreement to compromise the action with the first defendant, the plaintiffs shall forthwith give notice in writing of that fact to the second and third defendants.
2. That, if the second and third defendants seek discovery of the terms of the said compromise, they shall within 2 days thereafter file and deliver an application to that effect with supporting affidavits and proffer an undertaking to observe any obligation as to confidentiality.
On 4 October PricewaterhouseCoopers applied for an order for further and better discovery. Before making that application, PricewaterhouseCoopers had sought discovery of the document or documents recording the terms of the settlement as between the plaintiffs and Ernst & Young.
The plaintiffs tendered an affidavit sworn on 12 October 2006 of Ms J. R. Warner, a member of the firm of solicitors acting for the plaintiffs. She deposed to an intention of the plaintiffs to file a supplementary list of documents which will discover three documents. Each document is dated 14 September 2006. The documents were described in this way:
Agreement – Settlement Agreement between Harris Scarfe Holdings Limited (Receivers and Managers Appointed) (in liquidation), Australia and New Zealand Banking Group Limited and Ernst & Young (Reg) (executed in three counterparts), masked in respect of irrelevant portions
Deed Poll entered into by Ernst & Young (Reg) in favour of Harris Scarfe Holdings Limited (Receivers and Managers Appointed) (in liquidation), Australia and New Zealand Banking Group Limited, the entities listed in Schedule 1 and Bruce James Carter and John Menzies Spark, masked in respect of irrelevant portions
Deed Poll entered into by Harris Scarfe Holdings Limited (Receivers and Managers Appointed) (in liquidation), Australia and New Zealand Banking Group Limited and the entities listed in Schedule 1 in favour of Ernst & Young (Reg) and the Former Partners (executed in two counterparts), masked in respect of irrelevant portions
As is apparent from that description of each of the documents Ernst & Young was prepared to disclose copies of each of the documents with portions of the documents masked. After identifying the three documents, Ms Warner deposes to the fact that the masked portions of the documents are irrelevant. She said:
3. I have reviewed the documents listed above and caused them to be masked in respect of those portions of the documents that I consider to be irrelevant to the issues arising on the pleadings in these proceedings.
4. The unmasked parts of these documents disclose, among other things, the settlement amount, the application of the settlement amount to the particular periods in respect of which losses were claimed, the nature of the compromise (which is effected by covenants not to sue) and the breadth of the claims compromised.
The plaintiffs and Ernst & Young both rely on that affidavit.
The parties were able to agree the persons to whom the masked copies of the documents were to be shown. However, there was a dispute between them concerning two matters. The first was that PricewaterhouseCoopers sought to have the whole document disclosed in an unmasked form. The second concerned the terms of an undertaking as to confidentiality to be given on behalf of PricewaterhouseCoopers.
At the request of Bleby J, I heard the application for further and better discovery. This course was adopted to avoid any risk of a breach of the rules of procedural fairness should Bleby J inspect documents to determine their relevance and PricewaterhouseCoopers not inspect them. The issue as to the terms of the undertaking to preserve the confidentiality of the terms of settlement was readily resolved. However, the question whether the whole of the settlement agreement should be disclosed to PricewaterhouseCoopers led to extensive argument. Events dictated that the argument be presented at short hearings over several days.
The hearing began on 12 October. Counsel for both the plaintiffs and Ernst & Young conceded that parts of the settlement agreement were relevant acknowledging that the amount for which Ernst & Young had settled the claim would be relevant when assessing any claim for damages against PricewaterhouseCoopers. They stated that the unmasked portions of the documents were the only relevant parts of the documents which dealt with that issue. They therefore contended that the document should be produced for inspection with the irrelevant parts masked. They contended that the affidavit of Ms Warner be accepted as conclusive evidence of the fact that the masked portions of the document were irrelevant. They added that I should not examine the documents (masked or unmasked) for the purpose of determining whether the masked portions were irrelevant. In the course of argument, they modified that last submission to contend that, while I might inspect the documents in their masked form, I should not inspect unmasked copies of the documents. At this stage neither PricewaterhouseCoopers nor I had seen the documents either in their masked or unmasked form.
On conceding that I might examine them as masked, the documents were handed to me in their masked form. I examined them. That examination disclosed that the operation of Clause 3 was subject to Clause 8.1.3, one of the masked clauses. That fact immediately raised a question whether some or all of the masked portions of the documents were relevant because they affected the meaning of the unmasked portions. I informed the parties of this view and asked to see the whole document. While they resisted that course, reiterating their contention that I should accept Ms Warner’s affidavit evidence that what had been masked was irrelevant, the plaintiffs and Ernst & Young handed me an unmasked copy of the agreement. I then inspected that document and concluded that I wished to hear argument on the question whether some of the masked clauses should not have been masked. I expressed the view that procedural fairness required that, on giving an appropriate undertaking to preserve the confidentiality of the masked clauses, counsel for PricewaterhouseCoopers should be permitted to see the whole of the document in an unmasked form. Alternatively, I would hear counsel for the plaintiffs and Ernst & Young and determine whether relevance required disclosure of the masked clauses. Counsel adopted the former course. Upon undertakings as to confidentiality being provided, the masked copy of the settlement agreement and the deed polls was handed to counsel for PricewaterhouseCoopers.
The hearing was adjourned. If counsel instructed to act for PricewaterhouseCoopers at the trial of the action were permitted to examine the documents in an unmasked form but ultimately the Court ordered that only the masked documents could be shown to PricewaterhouseCoopers, there was a real potential that they would no longer be able to act. To avoid that difficulty, PricewaterhouseCoopers instructed new counsel, Mr T L Stanley, to argue the question whether these documents should be produced to PricewaterhouseCoopers in their entirety. There was a very brief hearing on 13 October when Mr Stanley announced his appearance. The issues could not then be argued. The application was adjourned to 16 October. Mr Stanley appeared on the adjourned hearing on 16 October. After he had given an undertaking not to disclose the masked material to his instructing solicitor nor to any other person, he was shown the documents in their entirety and unmasked.
Order To Produce Documents
On the afternoon of 16 October I heard argument on the question whether the documents should be produced masked or unmasked. Mr Stanley contended that nominated clauses in the settlement agreement should be unmasked. Those clauses are listed in the confidential part of these reasons. Although he initially asked to have certain clauses in the deed polls unmasked, he did not press that part of the application. The application, therefore, concerned only those clauses in the settlement agreement which Mr Stanley had listed. The plaintiffs and Ernst & Young opposed the application. On the morning of 18 October, I granted the application to unmask the nominated clauses. I said that I would publish reasons for my decision. These are those reasons.
The plaintiffs and Ernst & Young applied for leave to appeal. I made directions as to the hearing of that application and ordered that it be heard on 24 October. Upon the application of the plaintiffs and Ernst & Young, I ordered a stay of my order until midnight on 24 October 2006.
The Issues
The issues in this application must be examined on the footing that the settlement agreement clearly contained relevant material and for that reason had to be discovered. That is common ground. The question, therefore, is not whether the settlement agreement should be discovered. Instead, the question is whether it should be produced for inspection in its entirety, that is to say, without any of the clauses in the agreement being masked. The plaintiffs and Ernst & Young oppose that course on the ground that the masked clauses are confidential and irrelevant.
PricewaterhouseCoopers has agreed with the plaintiffs and Ernst & Young a list of persons who might inspect the document and the form undertakings to preserve the confidentiality of the documents. Those undertakings have been given by or on behalf of the persons who are at liberty to see the documents. The steps necessary to preserve the confidentiality of the documents have, therefore, been put into place. The issues relating to confidentiality can, therefore, be put to one side. The only issue is whether the production of the whole document containing relevant material can be resisted on the ground that the masked clauses are said to be irrelevant.
Central to the resolution of the issues between the parties was the question whether I was at liberty to inspect the settlement agreement to determine the issue of relevance. That involved the question whether I would accept the affidavit of Ms Warner as conclusive on that issue.
An Accepted Practice
It is a well established and accepted practice that, where a discoverable document contains material which is both relevant and irrelevant, the document can be produced for inspection with the irrelevant parts of the documents sealed up or covered in some way. The practice has existed for more than 100 years: GE Capital Corporate Finance Group Ltd v Bankers Trust Co [1995] 1 WLR 172 at 176, 177. The history of the practice is described by McPherson J in Curlex Manufacturing Pty Ltd v Carlingford Australia General Insurance Ltd [1987] 2 Qd R 335, a judgment described by Hoffmann LJ in GE Capital at 176 as “masterly”. The use of that practice is not the issue between the parties. The question is whether the Court should accept as conclusive the affidavit of the party producing the document that the masked portion of the document is irrelevant or whether the Court itself should inspect the document to determine that question.

In submitting that the question of relevance was conclusively determined by the affidavit of Ms Warner, both the plaintiffs and Ernst & Young relied on the decision of the Court of Appeal in GE Capital where it was held that the affidavit is conclusive unless the Court can be satisfied that the affidavit does not truly state the position. In GE Capital, Hoffmann LJ referred to remarks in Bray’s Digest of the Law of Discovery, 2nd edition, (1910) at 55-56 on the practice of sealing up or covering parts of a document claimed to be irrelevant. Hoffmann LJ said at 174:
It has long been the practice that a party is entitled to seal up or cover up parts of a document which he claims to be irrelevant. Bray’s Digest of the Law of Discovery, 2^nd ed. (1910), pp. 55-56 puts the matter succinctly:
“Generally speaking, any part of a document may be sealed up or otherwise concealed under the same conditions as a whole document may be withheld from production; the party’s oath for this purpose is as valid in the one case as in the other. The practice is either to schedule to the affidavit of documents those parts only which are relevant, or to schedule the whole document and to seal up those parts which are sworn to be irrelevant;…”
The oath of the party giving discovery is conclusive, ‘unless the court can be satisfied – not on a conflict of affidavits, but either from the documents produced or from anything in the affidavit made by the defendant, or by any admission by him in the pleadings, or necessarily from the circumstances of the case – that the affidavit does not truly state that which it ought to state:’ per Cotton L.J. in Jones v Andrews (1888) 58 L.T. 601, 604.
Later (at 175) Hoffmann LJ stated that the irrelevant part of a document may be covered provided that it does not destroy the sense of the rest. He said:
The Peruvian Guano test must be applied to the information contained in the covered-up part of the document, regardless of its physical or grammatical relationship to the rest. Relevant and irrelevant information may, as in this case, be contained in the same sentence. Provided that the irrelevant part can be covered without destroying the sense of the rest or making it misleading, a party is permitted to do so. In Jones v Andrews (1888) 58 LT 601 an application to require a party to uncover parts of sentences of which the rest had been disclosed was, on the facts, unsuccessful (cf Carew v White (1842) 5 Beav 172, 49 ER 542). (Emphasis added.)
Leggatt LJ expressed the same view in these terms:
The present case is not about privilege: it is about relevance. The plaintiffs are obliged to disclose the relevant parts of documents, but not the irrelevant. There can be no argument that in doing so they were in some way waiving any right not to disclose each of the documents as a whole. For over a century litigants have been permitted to cover up or blank out irrelevant parts of documents. The court will not ordinarily disregard the oath of the party that the parts concealed do not relate to the matters in question.
Dillon LJ agreed with Hoffmann LJ. The decision in GE Capital has been followed and applied by Olsson J in Peat Marwick Hungerfords v Executor Trustee Australia Ltd (Olsson J, 25 October 1995, unreported) and by Bleby J in Addstead Pty Ltd (in liq) v Simmons [2004] SASC 260 at [6] to [9]. For the reasons which follow, I do not believe that GE Capital represents the law in this State.
I repeat that the question is not whether the settlement agreement should be discovered but whether the whole of the agreement should be produced for inspection in an unmasked form. The plaintiffs and Ernst & Young are obliged to discover the agreement because clauses in it are relevant. They object to production of the whole of the document claiming that particular clauses are irrelevant and they seek to mask those clauses. As a general rule, the whole of a discovered document is produced for inspection. As Bray notes in The Principles and Practice of Discovery (1885) at 234:
The mere fact however that any part of a generally relevant document is irrelevant does not necessarily entitle the party to conceal that part. In every document there may be much which is not strictly relevant but the party is not therefore entitled to cover up such part unless there is some reason why he should not be compelled to produce it for inspection: nor is the court under any obligation to read through documents to ascertain the relevancy of any part of them: Luscombe v. Steer, 37 L.J. Ch. pp. 120, 121: but see Caton v. Lewis and Lafone v. Falkland Islands Co. post.
Where there are issues as to confidentiality, irrelevant parts of a document will as a general rule be masked.
Rule 59.04
Rule 59.04 of the Supreme Court Rules 1987 provides:
59.04 Where an application for production is objected to, the Court may inspect the document for the purposes of deciding the validity of the objection.
The rule is to be read with Rule 59.03 which provides:
59.03 An order for the production of any document or copy thereof shall not be made unless the Court is of the opinion that the order is necessary for disposing fairly and expeditiously of the action and is not injurious to the public interest.
Rule 59.04 is expressed in unequivocal terms. It invests the court with a wide and unfettered discretion to inspect a document for the purpose of determining the validity of an objection to the production of part or whole of a document. The rule is expressed in terms which enable the court to exercise the discretion to inspect if the objection to production is made on either the ground of relevance or on the ground of privilege. The Court may, therefore, order production if it is necessary for the disposing fairly and expeditiously of the action and is not injurious to the public interest. On the face of Rule 59.04 there is no bar to the Court inspecting the document. The history of the rule reinforces that conclusion.
The origins of Rule 59.04 can be traced to the introduction in 1894 of Order XXXI, Rule 19A(2) of the Rules of the Supreme Court 1883 (UK). That Rule was in these terms:
Where on an application for an order for inspection privilege is claimed for any document, it shall be lawful for the Court or a judge to inspect the document for the purpose of deciding as to the validity of the claim of privilege.
In Ehrmann v Ehrmann [1896] 2 Ch 826 Stirling J held that the word “privilege” in Rule 19A(2) should not be construed in a narrow sense so that it included any ground on which inspection is resisted. It therefore included a claim that a document was irrelevant. Thus, on a motion asking for the unsealing of sealed up portions of documents produced for inspection, Stirling J inspected the documents himself to determine whether a claim that the sealed sections were irrelevant had been justly made. In reaching that conclusion Stirling J rejected an argument that he was bound by the affidavit of the party producing the documents that the sealed up portions were irrelevant, noting that the object of the Rule was to free the court from that practice. He said:
Cases have occurred in which the person making an affidavit has claimed privilege from production on a ground which was strongly suspected by the Court to be unfounded; but the Court, being bound by the affidavit according to the old practice, was unable, before the trial, to ascertain whether the suspicions which might be formed with regard to the truth of the affidavit were or were not well founded. I remember one case in which production was resisted before the late Master of the Rolls on the ground that the documents related exclusively to the case of the defendant, and he made a proper affidavit to that effect. At the trial, when those documents were produced, the case was decided in favour of the plaintiff, to a large extent on those very documents; and there are other cases in which similar objections to discovery have been made, and have proved to be unfounded. I believe it was the object of the rule to free the Court from the fetters imposed by the old practice, and enable it to be determined at once whether or no the objection which is sought to be raised is well or ill founded. If that be the object of the rule, it seems to me that an objection to production on the ground of irrelevancy is just as much within the mischief as an objection that the document in question was a communication which fell within the doctrine as to professional privilege, or that it was one which related exclusively to the defendant’s own case.
The decision in Ehrmann v Ehrmann was later affirmed by the Court of Appeal in Birmingham & Midland Motor Omnibus Co Ltd v London and North Western Railway Co [1913] 3 KB 850 at 858 where it was said that Rule 19A(2) was “to be read widely”.
To the extent that the reasoning of Hoffmann LJ in GE Capital was based on Jones v Andrews (1888) 58 LT 601 it should be noted that Jones v Andrews was decided before the amendment of the Supreme Court Rules in 1894.
Order 31, Rule 19A(2) of the English Rule was later introduced into the Rules of this Court. In the 1947 Rules of Court, that Rule had become Order 31, Rule 17. It was in these terms:
17. Where, on an application for an order for inspection, privilege is claimed for any document, it shall be lawful for the Court or a Judge to inspect the document for the purpose of deciding as to the validity of the claim of privilege.
The terms of the Rule have since become wider. On 12 December 1968, Rule 31 was amended and the power of the Judge to inspect was expressed in Order 31, Rule 22 in these terms:
22. (1) No order for the production of any documents for inspection or to the Court shall be made under any of the foregoing Rules unless the Court is of opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.
(2) Where on an application under this Order for production of any document for inspection or to the Court privilege from such production is claimed or objection is made to such production on any other ground, the Court may inspect the document for the purpose of deciding whether the claim or objection is valid.
That Rule was expressed in wider terms than its predecessors. The power to inspect was exercisable both on an application for production of a document for inspection and where objection had been taken on the ground of privilege or on some other ground. The Court, therefore, had power to inspect a document to determine its relevance. That power was subject to the order being necessary for disposing fairly of the cause or matter or to save costs. When the Supreme Court Rules were substantially amended in 1987, Rules 59.03 and 59.04 were introduced in their present form. They are to the same effect as Rule 22(1) and (2).
The Court Can Inspect Disputed Documents
The terms in which Rule 59.04 is expressed leave no doubt that, on an application for production of a document the Court or a Judge may inspect a document to determine whether it should be produced for inspection. If the English Rule 19A(2) was to be read widely, there can be no doubt that the more liberal terms of Rule 59.04 are also to be read widely. Rule 59.04 does not prescribe any conditions precedent which must be satisfied before the document can be inspected. There will be cases where, on the face of the document, it is apparent that the masking or sealing up has been properly carried out. In other cases, it will not and it is in those cases that inspection is legitimate. Rule 59.04 has been made so that a court can determine for itself whether the objection to the production of the document is justified. This conclusion is consistent with the intent and purpose of the Rule and with the practice in other jurisdictions in Australia. It is for these reasons that I respectfully disagree with Olsson J in Peat Marwick Hungerfords and Bleby J in Addstead.
The wide terms in which Rule 59.04 are expressed is sufficient authority for this Court to exercise the power to inspect. Reference to the practice in other jurisdictions reinforces that conclusion.
A Common Practice
It is common practice in Australia for judges to inspect documents for the purpose of ruling upon an objection to the production of a document for which a claim for privilege has been made and to inspect confidential documents for the purpose of determining whether they should be produced for inspection. I will briefly note the practice in some jurisdictions.
In the Lion Rolling Mills Pty Ltd v Noyes Bros (Melbourne) Pty Ltd [1915] VLR 383 Madden CJ applied like reasoning to that in Ehrmann v Ehrmann (which had been cited to him) when holding that the court should inspect documents to determine whether a claim for privilege had been properly made. In doing so, Madden CJ was not prepared to treat as conclusive an affidavit of a party that the documents were privileged and should not be produced for inspection. The Supreme Court of Victoria then had a rule in like terms to Rule 19A(2) of the English Rules. Madden CJ said:
Now, I cannot see for what purpose that Rule 19(a)(2) was introduced unless it was to enable the Judge to do in Chambers what he could always do at trial. It would certainly save a great deal of time and trouble. I consider I am now in the position in which I should be were I the Judge at the trial and this question arose there between counsel. The defendant cannot be hurt by my doing what I should do there, and looking at these documents, for his secret is in my keeping as to what the contents of the documents really are. I shall therefore in this case look at the documents in question.
Madden CJ examined the documents and held they were privileged. That is still the practice in courts in Victoria: see Weir v Greening [1957] VR 296 at 298 to 299 where, after inspection, a claim for privilege was upheld, and LT and KT Conlon v LensworthInterstate (Vic) Pty Ltd [1970] VR 293 where, after the court had inspected the documents, the claim for privilege was rejected.
The desirability of the court inspecting documents the subject of a dispute as to production was expressed in unequivocal terms by the Full Court of the Supreme Court of Victoria in Mobil Oil Australia Ltd v Guina Developments Pty Ltd [1996] 2 VR 34. The issue was whether relevant confidential documents should be produced for inspection. Delivering the judgment of the court, Hayne J first noted the limits upon the entitlement to inspection. He said (at 38):
While it may readily be accepted that a party is ordinarily entitled to discovery and inspection of all discoverable documents in the possession or control of the opposite party (save those for which a valid claim for privilege from production is claimed) it is important to bear steadily in mind that discovery is but a tool to be used in the pursuit of justice and that the right to discovery and inspection is not without its limits. The first and most obvious limit is that a party does not have a right to inspect documents that are discovered if there is a valid claim to privilege from production (as e.g. on the grounds of legal professional privilege). Secondly, because the law recognises that the assertion of compulsive power requiring production must be balanced against the needs of justice, a party inspecting the documents of the opposite party may not use them except for the purposes of the action in which discovery is made.
Where it is said that the documents are confidential, it may be accepted that the fact that the documents are confidential will not ordinarily be a sufficient reason to deny inspection by the opposite party. In most cases, the fact that the documents may not be used except for the purposes of the litigation concerned will be sufficient protection to the party producing them. But where, as here, the party obtaining discovery is a trade rival of the person whose secrets it is proposed should be revealed by discovery and inspection, other considerations arise.
Hayne J then referred (at 39) to the clear necessity of inspecting documents for the purpose of determining what they contain. He said:
It is only upon consideration of exactly what is in the documents that a decision can be made about what orders should be made for inspection by or on behalf of the plaintiff.
After referring to the need for arrangements to be made to strike a fair balance between the competing interests of the parties seeking inspection and the party claiming confidentiality, Hayne J stated the desirability of inspecting documents in these terms (at 40):
But they are arrangements that are made and should be made when doing so would strike a fair balance between the competing interests of the party seeking inspection and the party claiming confidentiality. No more specific rule can be laid down – each case will fall for determination according to its own facts. In particular the nature and the content of the disputed documents is a matter that will usually, if not invariably, be of great importance in forming a conclusion and, if that is so, it will be appropriate for the judge to inspect the documents concerned.
I do not understand those remarks to suggest that it should be an invariable practice that the court should inspect the documents. In some cases it will be possible to determine the question whether documents should be produced for inspection without examining the documents. However, where the decision whether a document is relevant, confidential or privileged can only be determined after a consideration of exactly what is in the document, the court should inspect the document.
Another decision to the same effect as Mobil Oil Australia is the decision of the House of Lords in National Science Research Council v Nassé [1980] AC 1028. In that case the question was whether confidential documents which had been discovered should be produced for inspection. The documents were relevant. The issue was whether the production of the documents was necessary in order to dispose fairly of the proceedings. Their Lordships held that, in order to determine whether production was necessary notwithstanding the confidentiality of the documents, the Tribunal in that case should inspect the documents and permit irrelevant parts of the documents to be covered up: see [1980] AC 1028 at 1066-1067, 1072, 1077-1078, 1085, 1089-1090.
The practice in New South Wales is similar to the Victorian practice. In Grant v Downs [1974] 2 NSWLR 401 at 407 Rath J said that the authorities show that:
[T]he Court has freely availed itself to the power to inspect documents on an application for production before trial.
The power to inspect was affirmed on appeal in Grant v Downs (1976) 135 CLR 674 at 689 by Stephen, Mason and Murphy JJ who said:
The Court has power to examine the documents for itself, a power which has perhaps been exercised too sparingly in the past, springing possibly from a misplaced reluctance to go behind the formal claim of privilege. It should not be forgotten that in many instances the character of the documents the subject of the claim will illuminate the purpose for which they were bought into existence.
In Wran v Australian Broadcasting Commission [1984] 3 NSWLR 241 at 271 Hunt J reaffirmed the desirability of the court inspecting documents to determine disputed claims for privilege. He said:
Part 23, r 12, is expressed in very general terms. Previously, a court would not inspect the documents which were the subject of a disputed claim of privilege unless the affidavit of discovery demonstrated some error in the claim: see, for example, Birmingham & Midland Motor Omnibus case, (at 855, 856, 858); Westminster Airways Ltd v Kuwait Oil Co Ltd [1951] 1 KB 134 at 146. Rule 13, or its equivalent, has been interpreted as placing the judge hearing the application for inspection before the trial in the same position as a judge at the trial who is called upon to determine a claim for privilege made at the trial, when the usual course followed is that the judge inspects the document in question: Lion Rolling Mills Pty Ltd v Noyes Bros (Melbourne) Pty Ltd [1915] VR 383 at 387; Weir v Greening [1957] VR 296 at 299; Grant v Downs [1974] 2 NSWLR 401 at 405-407. This more liberal approach to inspection by the court when a claim of privilege is challenged received the specific approval of the High Court upon appeal in the last of these three cases (reported at (1976) 135 CLR 674 at 689), when it was stated that the character of the documents themselves will in many cases illuminate the purpose for which they were brought into existence.
Of course, all of these cases were concerned with legal professional privilege. But the same is true also of other privileges.
See also Vardas v South British Insurance Co Ltd [1984] 2 NSWLR 652 at 658; Nickmar Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 44 at 46.

In Telstra Corporation Ltd v Australis Media Holdings Pty Ltd (McLelland CJ in Eq, 10 February 1997, unreported) McLelland CJ inspected masked documents by consent for the purpose of determining whether the masked portions were relevant. In considering the issues he said:
There is a serious risk that too assiduous a masking of documents on the grounds of irrelevance will create gaps affecting the ready comprehensibility of the remaining portions of the document and of the context in which those portions appear. If for this, or any other, reason, masking on the ground of alleged irrelevance would detract from a proper understanding of the meaning and significance of the admittedly relevant parts of the document, then such masking is not justified.
That passage serves to underline the force of the remarks of Hayne J as to the necessity to examine the document.
The practice of a court inspecting documents to determine disputed claims for privilege applies in the Supreme Court of the Australian Capital Territory: Kelly v Commonwealth of Australia (1980) 39 FLR 372 per Blackburn CJ at 373. The practice also applies in the Federal Court of Australia. Before the introduction of new rules in 1979 Lockhart J said: Trade Practices Commission v Sterling (1979) 36 FLR 244 at 246:
It is not open to doubt that the court has power, in a proper case, to inspect documents where a claim or privilege is made to resist an application for inspection of documents by the opposite party.
Order 15 Rule 13 of the current Federal Court Rules provides that the court may inspect the documents for the purposes of determining the validity of a claim for privilege or an objection to production on any other ground. That rule plainly includes an objection to production on the ground of relevance.
To determine an objection to production in Optus Communications Pty Ltd v Telstra Corporation Ltd [1995] FCA 254 Lockhart J referred to the practice of masking irrelevant parts of a document and said it was permissible only when supported by affidavits. However, he added, “But it is for the court in the exercise of its discretion to decide in a particular case whether this ground has been established.” That qualification clearly implies that the Court will inspect the documents to decide that question. A recent example of examinations by a judge of documents to determine whether masking had been properly undertaken of privileged documents in Candacal Pty Ltd v Industry Research & Development Board (2005) 223 ALR 284.
It has also been the practice in this court for judges to examine documents for the purpose of determining disputed claims for privilege, be that a claim for legal professional privilege or a claim for public immunity privilege. An example of the latter is Adelaide Brighton Cement v State of South Australia (1999) 75 SASR 209.
In New Zealand it is common practice for judges to inspect documents for the purpose of determining disputed claims for privilege: Guardian Royal Exchange Assurance of NZ Ltd v Stuart [1985] 1 NZLR 596 at 599 where Cooke J noted:
High Court Judges now appear to be adopting this practice quite commonly in disputed privilege claims. Experience suggests that its advantage in being likely to lead to a more just decision outweighs the disadvantage that only the Judge and not the other side sees the documents if the claim to privilege is upheld. Accordingly, in the field of legal professional privilege at least, I think that in general a Judge who is in any real doubt and is asked by one of the parties to inspect should not hesitate to do so.
In Esso Australia Resources Ltd v Commissioner of Taxation (1999) 201 CLR 49 at 70 Gleeson CJ, Gaudron and Gummow JJ reaffirmed the views expressed in the joint judgment in Grant v Downs as to the utility of a court examining documents in cases where there is a disputed claim for production of the documents. Their Honours said:
Although it has no direct bearing upon the issue now under consideration, reference should be made to a point emphasised both in the joint judgment in Grant v Downs and by Cooke J in Guardian Royal Exchange Assurance of New Zealand Ltd v Stuart. A claim for privilege is not conclusively established by the use of a verbal formula. A court has power to examine documents in cases where there is a disputed claim, and it should not be hesitant to exercise such a power. In appropriate cases, there is also power to allow cross-examination of a deponent of an affidavit claiming privilege. (Citations omitted.)
There is, therefore, a very substantial body of authority pointing to the conclusion that the Court should not be hesitant to exercise its power to examine documents on disputed claims for production.
Although most of the cases to which I have referred concern objections to the production of privileged documents, it is apparent from the decisions in Mobil Oil Australia Ltd v Guina Developments Pty Ltd and National Research Council v Nassé that the Court should also inspect documents to determine whether confidential documents should be produced for inspection. There is no rational reason why the Court should not adopt the same procedure for determining issues such as the production of masked clauses in a discovered document. As the decision in Ehrmann v Ehrmann demonstrates, there is no reason in principle why the court should not exercise that power in relation to a discovered document where an objection is made to the production of part of the document on the ground that that part is irrelevant. This Court is clearly invested by Rule 59.04 with a discretion with power to inspect to determine disputed questions as to production of documents. That power should not be fettered in the way which the plaintiffs and Ernst & Young seek.
The Practical Considerations
In addition, there are practical considerations for not circumscribing the power of the court to inspect documents to determine objections to production on the ground of relevance. In GE Capital, Hoffmann LJ stated (at 174) that the court should only inspect where it was apparent that the affidavit did not truly state the position. That conclusion could be reached, he said, not because of a conflict on the affidavits, but where it appeared from the circumstances of the case, that is to say, either from the documents produced, from anything said in the affidavit objecting to production, or from the pleadings or other relevant circumstance. With respect, that is a test which is extraordinarily difficult, if not impossible, to discharge, especially where, as here, the document comprises separate clauses and some only of those clauses are relevant. It is not at all uncommon for a document recording the terms of an agreement to consist of a number of separate clauses standing independently of one another, yet at the same time, some of those clauses qualify the operation of others. Where a clause in an agreement, say, expressly provides that the operation of that clause is subject to another in the same agreement, the interaction between the clauses is apparent. Disclosure of the first clause will indicate the relevance of the later clause. In other cases, the operation of one clause may be qualified by another later clause and the fact of the qualification will not be apparent unless both clauses are available for inspection. In this latter case, the masking of the latter clause will conceal the true operation and effect of the earlier clause. For this reason the test which Hoffmann LJ adopted has a real capacity to enable a party to fail to disclose all relevant clauses.
That conclusion is reinforced when regard is had to the test expressed by Hoffmann LJ in GE Capital when he said at 175 that irrelevant material could be masked “provided that the irrelevant part can be covered without destroying the sense of the rest or making it misleading”. The question immediately arises as to how a judge might determine whether a document is misleading without inspecting the document. It is simply not possible to determine whether disclosure of the unmasked section only is misleading unless the judge has inspected the whole of the document. To reiterate the remarks of Hayne J in Mobil Australia at 39:
It is only upon consideration of exactly what is in the documents that a decision can be made about what orders should be made for inspection by or on behalf of the plaintiff.
Furthermore, while the unmasked part of the document may appear to make sense, the masking could conceal words which alter the sense of the unmasked words. It is, therefore, quite unrealistic to suppose that it is possible to determine whether a document makes sense or is misleading unless the whole document is examined. As Cox J said in Legal Services Commission v Trotter (1990) 54 SASR 74 at 85 “Not all of Justice’s balancing exercises are best carried out blindfolded”. The fact that the contents of a document might only be known by inspection of the documents is not a phenomenon peculiar to claims for confidentiality or privilege. Generally speaking, it is only after an inspection of exactly what is in the documents that a decision can be made whether clauses are relevant or irrelevant. In my view, a court abdicates its function of balancing the competing interests of the parties unless it examines a document to determine what is relevant.
In Addstead, Bleby J reaffirmed what in Southern Equities Corporation Ltd (in liq) v Arthur Andersen & Co (No. 5) [2001] SASC 335 at [17] he had described as an “uncompromising ethical obligation” to make true and honest disclosure of relevant documents. With respect, I entirely endorse that phrase which properly expresses the undoubted obligation of parties making discovery. However, experience demonstrates that that obligation is not always either properly or fully discharged. It is for that reason that the court has been invested with the power to inspect documents on an objection being made to the production of documents. In addition, while legal practitioners undoubtedly are subject to “an uncompromising ethical obligation” to make true and honest disclosure of relevant documents, it is unrealistic, if not naïve, to believe that that obligation is always honoured. I do not suggest that the parties in this case have deliberately ignored that obligation. However, in substantial litigation of this kind where the stakes are high and legal practitioners have a natural desire that their client should prevail in the litigation, there is a real capacity for an unconscious departure from the uncompromising ethical obligation. Examination of the document by the judge is a means by which the interests of the parties are fairly balanced and the interests of justice served.
The Court, therefore, has power to inspect the documents for the purpose of determining whether parts of a document have been properly masked. There may be instances where it is difficult to determine relevance but that is not a reason for denying the power to inspect. The next question is whether I should treat the affidavit of Ms Warner as conclusive on the issue of relevance. I am not prepared to do so. Ms Warner does no more than assert that the masked clauses are irrelevant. I am not prepared to accept that bare assertion notwithstanding that Ms Warner might conscientiously believe it to be true. In my view, this is a case where the court is obliged to examine the document in order fairly and sensibly to adjudicate the issue between the parties. That is the only realistic course. As the settlement agreement contains clauses which are on any view relevant and as it will be difficult to determine from the examination of a masked document whether the masked clauses are in fact relevant or irrelevant, this is a proper case for the court to inspect the document in its entirety to determine whether the masked clauses are relevant or irrelevant. In any event, it is proper for the court to examine the settlement agreement as masked in order to determine whether the whole document should be produced for an inspection in an unmasked form. That is another means of testing the assertions in Ms Warner’s affidavit. The fact that Clause 3 of the unmasked clauses refers to the masked clauses is a further reason for not accepting Ms Warner’s affidavit as conclusive. It was, therefore, both necessary and proper to examine the agreement in an unmasked form to determine whether the claim for irrelevance in Ms Warner’s affidavit had properly been made. I therefore called for the settlement agreement in an unmasked form and was provided with a copy.
Are The Masked Clauses Relevant?
**Confidential Section**
Conclusion
For these reasons I allowed the application of PricewaterhouseCoopers for an order that certain clauses be unmasked so that PricewaterhouseCoopers is at liberty to inspect them.
Given the régime which exists to preserve the confidentiality of the terms in which the plaintiffs and Ernst & Young have compromised the action, it is appropriate that, at this stage, the judgment be published in two forms. The first will be a complete copy of these reasons. It will be published to the plaintiffs and Ernst & Young and to Mr Stanley who remains bound by his undertaking to preserve the confidentiality of the terms of the documents he has inspected. The second form will be published with one section covered up in order to preserve the confidentiality of the terms of the compromise and of the clauses which are at present masked. The covered portion of the reasons will be marked “confidential”. The parties are at liberty to apply at a later stage to have the whole document published without any portion being covered in any way.