Hood Sweeney Technology Pty Ltd v Equant Australia Pty Ltd - [2009] SASC 298

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
HOOD SWEENEY TECHNOLOGY PTY LTD v EQUANT AUSTRALIA PTY LTD
[2009] SASC 298
Judgment of Judge Withers a Master of the Supreme Court
23 September 2009
PROCEDURE
Application for pre-action investigation.
Supreme Court Rules 2006 r 32, referred to.
Belcar Pty Ltd v Premier Automotive Group Australia Pty Ltd (2007) 249 LSJS 403, applied.
Kinross v South Australian Health Commission & Ors (1995) 182 LSJS 167; Gerard Industries Pty Ltd v Wee (1986) 131 LSJS 185, considered.

HOOD SWEENEY TECHNOLOGY PTY LTD v EQUANT AUSTRALIA PTY LTD
[2009] SASC 298

JUDGE WITHERS.           By an interlocutory application filed on 18 May 2009 the plaintiff sought that the Court order the defendant to disclose to the Court and the plaintiff documents referred to in an annexed Schedule, that it produce copies of same to the plaintiff and that it verify by affidavit any list of documents filed by way of disclosure. The application was made pursuant to r 32 of the Supreme Court Rules 2006 (SCR 32). Annexed to the application was a Schedule which sets out the documents in respect of which pre-action disclosure was sought. The documents are as follows:
SCHEDULE
1.The tender document submitted by Vault IT Pty Ltd (“Vault IT”) in response to the “Request for Proposal, Field Services Requirements Adelaide, South Australia” issued by the respondent [defendant] and dated 24 February 2009 (“the RFP”).
2.Documents recording, evidencing or referring to the decision, or the reasons for the decision, to accept the bid submitted by Vault IT in response to the RFP, including, but not limited to:
2.1     Assessments of Vault IT’s response against the criteria specified in the RFP.
2.2     The evaluation of Vault IT’s response in accordance with the evaluation process described in the RFP.
3.Correspondence between Mr Tony Peake, Mr Frank Bruzzaniti, Mr Kohde Burford, Vault IT or Axis Computing Pty Ltd on the one hand, and representatives of the respondent [defendant] (including but not limited to Mr Matthew Breckon and Mr Damien Haddad) on the other, relating to the provision, or potential provision, by Vault IT of field services work for the respondent [defendant] in South Australia.
4.Documents recording, evidencing or referring to discussions or communications between Mr Peake, Mr Bruzzaniti, Mr Burford, Vault IT or Axis Computing Pty Ltd on the one hand, Mr Tony Peake, Mr Frank Bruzzaniti, Mr Kohde Burford, Vault IT or Axis Computing Pty Ltd on the one hand, and representatives of the respondent [defendant] (including but not limited to Mr Matthew Breckon and Mr Damien Haddad) on the other, relating to the provision, or potential provision, by Vault IT of field services work for the respondent [defendant] in South Australia. Such documents include but are not limited to:
4.1     Internal memoranda and emails.
4.2     Manuscript notes of meetings or conversations.
4.3     Electronic and hard copy calendar or diary entries.
SCR 32 is in the following terms:
[6R 32]     Investigation
32 (1) If the Court is satisfied, on application by any person (the plaintiff) that the plaintiff may have a good cause of action and requires further information—
(a)     to determine whether a cause of action exists; or
(b)     to formulate the claim properly; or
(c)     to determine against whom the claim lies,
the Court may exercise the investigative powers conferred by this rule in anticipation of an action.
(2) The Court may, if satisfied that a person may be in possession of evidentiary material relevant to the possible cause of action, make an order imposing one or more of the following requirements—
(a)     to disclose to the Court or to the plaintiff whether the person is or has been in possession of relevant evidentiary material and, if so, to disclose full particulars of relevant evidentiary material that is, or has been, in the person’s possession;
(b)     if the person is in possession of relevant evidentiary material, to produce it to the Court or to the plaintiff;
(c)     to verify the person’s response to the order by affidavit.
Sub-paragraphs (3), (4) and (5) are not relevant to the current consideration. This rule has supplanted r 60 of the Supreme Court Rules 1987, which relevantly in paragraph 1 is in the following terms:
60.01          (1)   Orders for discovery against a non party and before action    The Court may make an order for disclosure and production of documents:
(a)     by a party to proceedings seeking such an order against a person who is not a party;
(b)     by any person seeking such an order against another person where both are likely to be parties to subsequent proceedings.
In the matter of Kinross v South Australian Health Commission & Ors (1995) 182 LSJS 167 at 169, his Honour Judge Burley referred with approval to a passage from Lunn’s, Civil Procedure South Australia at 60.01.5 where the author noted that:
In Gerard Industries Pty Ltd v Wee (1986) 131 LSJS 185 (Full Court): 40 SASR 329 (at first instance) it was held in relation to O 31 r 31 [of the 1947 Rules];
(1)    It is sufficient if the discovery sought is relevant, and necessary for the fair conduct of a party’s case or for the saving of costs.
(2)   The Court must balance fairly the cost of what is sought to be done against the benefit to be achieved.
(3)   The discovery need only be of assistance in determining whether a genuine basis of claim exists, and not decisive of it.
(4)   There must be some grounds for the application, ie some foundation that discovery is necessary, and not merely a speculation and a hope that there might be a cause of action. An arguable case must be shown.
His Honour went on to say at 169:
I agree with the learned author that those matters need to be considered in relation to the exercise of the discretion under rule 60.01. On many applications for discovery before action, and this is one of them, the plaintiff needs to pursue what appear to be conflicting lines of argument. On the one hand the plaintiff must demonstrate that she and the defendants “are likely to be parties to subsequent proceedings”, but, on the other hand part of the demonstrated need to make the application relies upon the contention that the plaintiff (by her next friend) is unsure as to whether she has a good cause of action against the defendants or any of them and needs to obtain pre-action discovery to assist her in deciding whether or not to bring substantive proceedings and, if so, upon what basis. These lines of argument only have the appearance of conflict. They are not mutually exclusive because in a properly made application for discovery before action, the plaintiff may be genuinely uncertain for good reason, as to the course to be pursued although there is a likelihood that litigation will be commenced.
His Honour Judge Burley had cause to consider the provisions of 6R 32 in the matter of Belcar Pty Ltd v Premier Automotive Group Australia Pty Ltd (2007) 249 LSJS 403. In that matter he firstly considered the meaning of “satisfied” as used in r 32. At [10], his Honour said:
[10] In my opinion, the decisions in the Robertson v Police and Blyth v Blyth are more applicable to a Rule of Court which has for its purpose the regulation of civil proceedings. Both of those decisions invite a consideration of the balance of probabilities. In my opinion, the use of the word “satisfied” in r 32 means that the Court must be satisfied on the balance of probabilities as to the matters required to be established by the applicant.
In considering the requirement that the Court be satisfied on the balance of probabilities that “the plaintiff may have a good cause of action”, his Honour said at [49]:
[49] I turn now to the essential question identified above. I must be satisfied on the balance of probabilities that the plaintiff may have a good cause of action. “May” is a relative word. It embraces, at one end of the spectrum, the concept of a slight possibility and, at the other end, the concept of a near certainty. Where is the bar to be set with respect to this rule? Either end of the spectrum is impractical: the bar would be too low at one end and too high at the other. Consequently, I must look to setting the bar somewhere between the two extremes, bearing in mind the purpose of the rule, the rights of the parties and the efficient conduct of litigation.
[50] A useful purpose is to be served by allowing pre-action discovery where there is doubt that a claim may be maintained. In my opinion, to meet the objectives of the rule, the bar should not be set too high. Nevertheless, as I have said earlier in these reasons, a respondent to an application should not be subjected to the process and a subsequent order if the claimed entitlement is based largely on surmise, speculation or conjecture. (See Gerard Industries v Wee [(1986) 43 SASR 562] and Rush v Commissioner of Police (2006) 150 FCR 165).
In my reasons for decision in the matter of Waikerie Producers Limited (In liq) v KPMG delivered 10 July 2007 in Action No 550 of 2007, I said in considering r 32, at [21] as follows:
[21] In my view the requirement that the plaintiff may have a good cause of action is met if the plaintiff can show that on the circumstances known to it there is reasonable cause to suspect that it has or may have an arguable claim against the defendant. In many ways this is similar to the requirements set out in Gerard Industries v Wee in item 4 where it was noted that there must be some grounds for the action, that is to say, “An arguable case must be shown”.
See the discussion earlier referred to in Gerard Industries v Wee (supra).
If a plaintiff for pre-action investigation and disclosure pursuant to 6R 32 can satisfy the Court:
(a)that there is reasonable cause to believe that the plaintiff may have a good cause of action; and
(b)that the defendant may be in possession of material of evidentiary value to a determination by the plaintiff as to whether that good cause of action can be supported by evidence;
then that plaintiff will ordinarily have met the requirements for the application of Rule 32 although the Court will still retain a discretion on whether or not it is appropriate to make an order in all the circumstances.
I turn now to the facts of this particular matter.
The only evidence provided to the Court was that of the chief executive officer of the plaintiff, a Mr McGuinness, by affidavit filed in support of the application on 18 May 2009. The following summary of the evidentiary position is drawn from that affidavit.
The plaintiff is a company that provides a broad range of IT services to businesses. The defendant is a subsidiary of France Télécom and is the Australian arm of a global business. The defendant is commonly referred to in the affidavit as “Orange”. The plaintiff has provided IT services to the defendant from 2004 to 30 April 2009. Those services were thereafter provided by a company known as Vault IT.
Mr Peake is a former director and shareholder of the plaintiff. Before that he was a director and major shareholder of a company known as Technology Partners. The defendant was a client of Technology Partners before 2004.
The plaintiff in 2004 allegedly at the request of Mr Peake purchased a co-director’s share in Technology Partners and pursuant to arrangements at that time Technology Partners then became part of the business of the plaintiff. Mr Peake was appointed a director of the plaintiff and Mr Peake’s company Axis, in respect of which he and his wife each held one share, became a shareholder in the plaintiff.
Vault IT was incorporated on 5 January 2009. Its sole shareholder and director was a Mr Burford. Vault IT successfully tendered for the defendant’s IT services contract, commencing that work on 1 May 2009.
Mr Burford is a former employee of Mr Peake and Technology Partners. He was engaged by that organisation at age 16 in 2002 to work on a contract basis for Technology Partners. His employment was transferred to the plaintiff with Mr Peake when Technology Partners became part of the plaintiff’s business. Mr Burford left his employ with the plaintiff in August 2007. He thereafter, at least for some of the time, worked as a mobile telephone salesman with Crazy Johns. He was so working at the time of Vault IT tendering for the contract to perform the defendant’s IT services. It appears he was continuing to work in that role at the time of the handover of the business from the plaintiff to Vault IT.
Mr Bruzzaniti is a former employee of Peake and Technology Partners. He came with them to the plaintiff when that association occurred. He left the plaintiff’s employ in September 2008.
From early 2007 to 30 June 2008 discussions took place between officers of the plaintiff and Peake in relation to his exit from the plaintiff and its business. It is asserted that the plaintiff was not satisfied with Peake’s performance as managing director. The discussions were protracted and not entirely pleasant. At paragraph 17 Mr McGuinness says “ … the separation was not wholly amicable”.
In any event as a result of these discussions an agreement was reached. In June 2008 three agreements were entered into whereby Axis sold its shares in the plaintiff to various persons and companies, Mr Peake stepped down as a director of the plaintiff and Mrs Peake, who had been employed within the plaintiff, was made redundant. Some ongoing consultancy work was agreed.
These arrangements were recorded in three agreements:
(a)a Share Sale Agreement dated 30 June 2008 involving Axis, the plaintiff, Mr and Mrs Peake, and others;
(b)a Consultancy Agreement dated 1 July 2008 between the plaintiff and Axis; and
(c)a Confidentiality Agreement dated 1 July 2008 between the plaintiff and Peake.
In essence Axis sold its shares in the plaintiff to various persons for $550,000.00. The share sale price was calculated on the past value of work performed by the plaintiff over a period of time and in anticipation that this work would continue to be performed by the plaintiff in the future. Accordingly, the value of the work performed by the plaintiff in supporting and providing IT services to the defendant formed part of that calculation.
The Share Sale Agreement contained, amongst other things, restraints on Axis and Mr and Mrs Peake. These restraints are summarised at paragraph 22 of the affidavit of Mr McGuinness as follows:
22.In return for the cash payment, Axis and Mr Peake (and Mrs Peake) agreed to (among other things) the restraints at clauses 6.2 and 6.3 of the Share Sale Agreement. The covenants by Axis and by Mr (and Mrs) Peake at clause 6.3 included that:
22.1   They would “not solicit, canvass or secure the custom of any person who is at the Completion Date, or was previously a customer of [HST] or the Business, for a period of 2 years from the Completion Date”;
22.2   They must not “disclose to any person or use to its advantage, or to the detriment of the Purchasers or [HST] or cause to be so used or disclosed…any confidential information relating to the Business, its organisation, finances, transactions or affairs…”;
22.3   They must not “without the prior written consent of the Purchasers, solicit, employ or engage the services of any of the employees or contractors to the Business on the Completion Date…for a period of 2 years from the Completion Date”.
The Consultancy Agreement provided for Axis to manage the service contract with the defendant and other accounts as may be agreed. That work was to be performed by Peake or such other person approved by the plaintiff. The duration was to be two years. That Consultancy Agreement also provided certain restraints, a summary of which is provided at paragraph 24 of the affidavit of Mr McGuinness as follows:
24.The Consultancy Agreement included certain covenants including that:
24.1 The Consultant should not perform work for other organisations if it created any conflict of interest with HST (clause 3.1); and
24.2 The Consultant could not, during or after the term of the Consultancy Agreement, use, publish, divulge or communicate to any person any Confidential Information (as defined) concerning the business or transactions or affairs of HST (see clause 4.2).
The Confidentiality Agreement contained a covenant that Peake “must not disclose the Confidential Information [as defined in clause 1] or suffer or permit it to be disclosed to any person whatsoever both during and after the Consultant’s performance of the Services [under the Consultancy Agreement]”.
At paragraph 27 of his affidavit, Mr McGuinness describes the relationship between the defendant and the plaintiff during the period of the provision of services as “very satisfactory”. In 2007 the plaintiff won the Asia Pacific Award for the best service provider to the defendant.
In January 2009 the plaintiff was advised that the defendant intended to put out to tender the provision of further IT services. It appears there was no formal contract in place between the plaintiff and the defendant. In any event, the plaintiff was told that three parties would be invited to tender. A request for a proposal was provided by the defendant to the plaintiff on 25 February 2009. The plaintiff submitted its tender proposal on 16 March 2009.
The plaintiff was subsequently advised that the only competing tender was from Vault IT. The third company that had been invited to tender was a company called Interactive, which the plaintiff knew to be a well-known and recognised IT company based in Sydney with a significant presence in South Australia. As it turned out Interactive decided not to submit a tender.
The Request for Proposal provided by the defendant was a sophisticated document requiring the provision of a substantial amount of information. Both the Request for Proposal and the plaintiff’s proposal are exhibited to the affidavit of Mr McGuinness. Mr McGuinness attests that he had been told by an officer of the defendant that following receipt of proposals it would take approximately six weeks for the defendant to evaluate competing proposals and to make a decision on the successful tenderer. It was only two weeks after the plaintiff submitted its proposal that it was advised that it had been unsuccessful and that the service contract would be awarded to Vault IT. When he sought an explanation why the contract had been so awarded, he was advised that Vault IT had won because it was more flexible and cheaper.
In paragraphs 36 and 37, Mr McGuinness sets out some of the requirements of the Request for Proposal. They are substantial. As Mr McGuinness had not heard of Vault IT he caused an ASIC search to be conducted, As a result of this he discovered that Mr Burford was the sole director and shareholder of the company.
In a letter from solicitors for Mr Peake to the plaintiff’s solicitors of 7 May 2009, which is exhibited to his affidavit as “GKM15”, those solicitors advised that Mr Peake had since 1 May 2009 assisted Mr Burford on a number of issues including:
44.1“advising Burford to obtain general and professional indemnity insurance;
44.2advising Burford to obtain an ADSL connection so Burford can receive emails at the Orange site;
44.3advising Burford to obtain helpdesk software to track calls;
44.4advising Burford to purchase a server computer and assisting him with obtaining a quotation;
44.5advising Burford to obtain business cards;
44.6emailing Burford copies of pro-forma petty cash and car mileage forms;
44.7emailing Burford a pro-forma business plan from the internet;
44.8spending some of his free time at the client (Orange) premises documenting daily and weekly procedures such as ordering stationary (sic) and timesheets … These voluntary activities will cease in the next two weeks when Vault’s personnel commence their employment.”

Mr McGuinness then asserts in his affidavit that not having those essential facilities in place at the time of providing the proposal to the defendant having regard to the detailed requirements of the Request for Proposal combined with Mr Burford’s lack of experience and expertise gives good cause for the plaintiff to suspect that there are others standing behind the proposal put forward by Vault IT and that their presence and involvement was the real cause for the decision to award the contract to Vault IT.
Mr McGuinness then refers to some emails. He notes that Mr Bruzzaniti, who had worked for Peake for a number of years, attended at the handover meeting between the plaintiff and Vault IT and the defendant that occurred on 1 May 2009 and indicated that he would be working for Mr Burford. Emails had been sent to Peake and Bruzzaniti amongst others on 30 April 2009 referring to a job “coming up on 7 May”. The plaintiff suggested that an email would not have been sent to Peake unless it was known that he was going to be involved in providing services.
In the affidavit the plaintiff asserts that it was investigating potential claims against Peake and Axis for breach of their express obligations of confidentiality in the Share Sale Agreement, the Consultancy Agreement and the Confidentiality Agreement. It was also investigating potential claims against Mr Bruzzaniti in relation to breach of covenants in his employment contract. It was also considering possible equitable claims against Peake and Axis for breach of confidence arising from the misuse of confidential information about the plaintiff and its clients, in particular the defendant. Further, the plaintiff indicated that it might seek to bring claims against Burford and/or the defendant if the evidence disclosed that they had induced Peake and/or Bruzzaniti to breach their duties to the plaintiff. The plaintiff also considered that it may have a claim against the defendant if it appeared from the evidentiary material that the tender process had been a sham.
Counsel for the plaintiff submitted that in these circumstances the plaintiff had met the requirement that it had reasonable cause to suspect that it may have a good cause of action against one or all of the persons described and that, further, the defendant was likely to be in possession of evidentiary material that may be of value to the plaintiff in relation to those potential claims. He argued that the threshold test was low and the power of the Court wide. I agree with those submissions.
As to category 1 of the documents sought, the plaintiff argued that Vault IT’s tender documents should contain information about the personnel proposed to do the work, together with the identification of any proposed sub-contractors. That material might well provide evidence as to the involvement of Peake or Bruzzaniti or both and as to their potential breaches of the covenants they had provided to the plaintiff. The tender document itself from its form and structure might well give support to the contention or disclose that it had been prepared by Peake.
As to the documents in paragraph 2 of the Schedule these should disclose how Vault IT’s services were to be delivered and by whom. These may well be relevant or of evidentiary value to the same matters as Category 1 documents. That material may also be of evidentiary value in determining whether or not the plaintiff may have a good cause of action against Orange in relation to the costs of the tender process.
The correspondence sought in paragraph 3 of the Schedule and the evidence of communication sought in paragraph 4 may well be of evidentiary value in determining the extent, if any, of the roles of Peake, Axis and Bruzzaniti in Vault IT securing the services contract.
The plaintiff accepts that the defendant would be entitled to any proper costs incurred by it in providing the information. The plaintiff argued that as a substantial worldwide business it could reasonably be expected that the defendant would have maintained proper records and documents in a conveniently accessible form in respect of the tender process such that there should be no unduly onerous burden placed on the defendant in providing the information sought.
In arguing against the making of any order the defendant asserted that the plaintiff’s contemplated claims were no more than conjecture, speculation, hope and unwarranted suspicion. It was argued that there was no or at least an inadequate foundation for the Court to form the belief that pre-action disclosure was warranted.
The defendant submitted that before the Court should make an order under SCR 32 it should firstly be satisfied as to precisely what cause or causes of action the plaintiff was asserting it might have and in respect of which evidentiary material was sought. The defendant argued that the plaintiff’s failure to provide a draft statement of claim identifying the “gaps” that it sought to fill with information from the evidentiary material it was seeking to access was a factor that ought to be taken into account by the Court as indicating that the plaintiff’s claims or potential claims were conjecture, speculation and unwarranted hope.
Counsel for the defendant then undertook an analysis of the potential claims the plaintiff might have against Peake and Axis insofar as they might flow from a breach of those three agreements to which reference has earlier been made. In essence he submitted that the evidence provided was insufficient for the Court to be satisfied that the plaintiff’s suspicions were more than mere conjecture. In paragraph 30 of its written submissions the defendant said:
30.… This is not a case of requiring information to fill some defined gaps. Rather, it is a case of a party not knowing whether it has any basis at all, beyond conjecture, for any particular cause of action.
In my view the defendant in this matter seeks to set the bar too high for the Court to exercise its discretion to make an order. In my view the circumstances disclosed, including:
§the history of the provision of IT services to the defendant by Peake and Technology Services involving Burford and Bruzzaniti;
§the joining of Peake and Axis with the plaintiff for a period and the provision of services to the defendant by the plaintiff during that time;
§the disjoinder of the plaintiff and Peake and Axis in less than happy circumstances;
§the restraint clauses in the three agreements recording that disjoinder and its terms;
§the change by the defendant from accepting its IT services as it had done over a number of years to putting the same out to tender;
§the fact that the defendant accepted only two tenderers for its services, one of which, namely Vault IT, appeared to be a company that on the surface at least lacked any or sufficient substance or exposure in the IT services industry that might cast it as an appropriate competitor and provider of services;
§the apparent involvement of Bruzzaniti and Peake disclosed by the emails;
§the fact that Peake after 1 May 2009 was providing information and assistance to Vault IT to put in place a number of very basic and ordinary office procedures and facilities that could reasonably be expected would have been in place in any company having the capacity to secure the defendant’s IT services contract;
are sufficient when combined to provide reasonable cause to believe that the plaintiff may well have good causes of action against the nominated persons and bodies and further that the defendant may have evidentiary material of value to the plaintiff in determining whether or not it does in fact have such causes of action.
Accordingly, I am satisfied in terms of r 32 that the plaintiff may have good causes of action against the persons named and that it requires further information to determine whether those causes of action exist or to determine against whom any of those causes of action may lie.
Further, I am satisfied that the defendant may be in possession of evidentiary material relevant to the possible causes of action. Accordingly I will make the orders sought on the application.
For the foregoing reasons the orders of the Court will be:
1.That the defendant disclose to the Court whether it is or has been in possession of any evidentiary material falling within the compass of the Schedule to the application by filing and serving a list of documents setting out such evidentiary material within 28 days of the date of this order being served on it.
2.That the defendant at the request and at the cost of the plaintiff produce copies of the said documents to the plaintiff within 14 days of the same being requested.
3.That the reasonable costs of complying with this order be paid to the defendant by the plaintiff.
4.That the costs of the application be reserved.
I am not prepared to order that any list of documents filed pursuant to this order be verified by affidavit. No material has been filed that could reasonably cause the Court to find that the justice of the case required such an order to be made.