Idoport Pty Ltd v National Australia Bank Ltd

[2001] NSWSC 222

CITATION:	Idoport Pty. Ltd. & Anor. v. National Australia Bank Ltd. & Ors. [2001] NSWSC 222
CURRENT JURISDICTION:	Equity Divsion Commercial List
FILE NUMBER(S):	SC 50113/98
HEARING DATE(S):	21 and 22 March 2001
JUDGMENT DATE:	2 April 2001
PARTIES :	Idoport Pty. Limited - 1st plaintiff Market Holdings Pty. Ltd. - 2nd plaintiff National Australia Bank Ltd. - 1st defendant National Market Group Ltd. - 2nd defendant National Australia Financial Management Ltd. - 3rd defendant Australian Market Automated Quotation (Ausmaq) System Ltd. - 4th defendant Glenn L. L. Barnes - 5th defendant Francis J. Cicutto - 6th defendant David M. Krasnostein - 7th defendant Kevin F. Courtney - 8th defendant Russell A. McKimm - 9th defendant
JUDGMENT OF:	Hodgson CJinEq at 1

COUNSEL :	Mr. R. Margo SC with Mr. M. Dicker for plaintiff Mr. T. Bathrust QC with Mr. P. Wood for defendants
SOLICITORS:	Withnell Hetherington, Sydney, for plaintiffs Freehills, Sydney, for defendants
CATCHWORDS:	EVIDENCE - Hearsay - Interlocutory proceedings - Whether unfairly prejudicial - PRIVILEGE - Legal professional - Illegal or improper purpose - Whether abuse of process 'fraud' within s.125 of Evidence Act 1995.
CASES CITED:	Evidence Act ss.9, 75, 118, 119, 125, 135, 136.
DECISION:	See end of judgment

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

CORAM: HODGSON, CJ in Eq.

Monday 2nd April 2001

NO. 50113 OF 1998
IDOPORT PTY. LIMITED & ANOR. V. NATIONAL AUSTRALIA BANK LIMITED & ORS.

JUDGMENT

1 In the course of discovery in these proceedings, the plaintiffs inadvertently discovered a number of documents in respect of which they claim legal professional privilege. It is common ground that, because of the plaintiffs’ inadvertence, legal professional privilege has not been waived. However, the defendants claim that the plaintiffs are not entitled to the benefit of legal professional privilege in relation to two documents: first, a facsimile of one page dated 21st April 1998 from Mr. Maconochie, the principal of the first plaintiff (which is identified in many of the documents in the case as JMG) and the second plaintiff (which I will call MH), to Mr. Garnsey QC; and a letter of two pages dated 9th July 1998, with a one page annexure, from Mr. Maconochie to his solicitors Holding Redlich. The basis of the defendants’ claim is that the letters evidence an abuse of process, and so are not protected by ss.118 or 119 of the Evidence Act 1995, or alternatively are within the exception in s.125 of that Act.

2   I am dealing with an application by the plaintiffs, now brought by an Amended Notice of Motion dated 21st March 2001, for orders for return of these documents, and the destruction of documents which the defendants may have prepared relating to them.

OUTLINE OF FACTS

3   The application is made by Notice of Motion in proceedings No. 50113 of 1998 in the Commercial List, commenced on or about 24th September 1998, brought by JMG & MH against a number of defendants: National Australia Bank Limited (NAB); National Markets Group Limited (NMG), a wholly owned subsidiary of NAB; National Australia Financial Management Limited (NAFM), a wholly owned subsidiary of NAB; Australian Market Automated Quotation (AUSMAQ) System Limited (AUSMAQ System), a wholly owned subsidiary of NAB; Glenn Barnes (a senior employee of NAB, and formerly a director of NMG and AUSMAQ System); Frank Cicutto (Chief Executive Officer of NAB, and formerly a director of NMG and AUSMAQ System); David Krasnostein (General Counsel of NAB, and currently a director of NMG and AUSMAQ System); Kevin Courtney (not an employee of NAB, and currently a director or NMG and AUSMAQ System); and Russell McKimm (not an employee of NAB, and currently a director of NMG and AUSMAQ System). There are associated proceedings No.50026 of 1999, commenced on 1st March 1999, brought by JMG and MH against Don Argus, formerly CEO of NAB.

4   Both proceedings relate to transactions concerning what has been called the AUSMAQ service, which broadly is a system for providing automatic securities trading services, which had been developed by Mr. Maconochie.

5   A series of agreements were entered into on 13th September 1996, whereby NMG acquired from MH and others shares in AUSMAQ System, together with intellectual property associated with the AUSMAQ service. One agreement was a Consulting Agreement, whereby NMG retained the services of JMG, which in turn agreed to procure the services of Mr. Maconochie and also Christopher Hume (a consultant based in the UK), and two other named consultants. The agreement provided for a performance bonus to JMG, guaranteed by NAB: this bonus in effect would have given JMG 33% of the revenue of the venture. This performance bonus amounted to the main consideration for the agreements, and was apparently considered as being worth some millions of dollars.

6   In the main proceedings, the plaintiffs allege against the corporate defendants misleading and deceptive conduct, through alleged representations made during negotiations, especially to the effect that NMG would operate independently of NAB, and also as to the role of JMG and Mr. Maconochie in that operation; breaches of contract, especially in alleged failure to properly commercialise the AUSMAQ service and to accord JMG and Mr. Maconochie a proper role in the venture; and breaches of fiduciary duty, especially fiduciary duties owed by NAB and NMG to JMG.

7   The plaintiffs also allege against the individual defendants in the main proceedings, and against Mr. Argus in the other proceedings, that they participated in the misleading and deceptive conduct and in breaches of fiduciary duty, and procured breaches of contract.

8   In substance, the defendants allege that the bringing of those proceedings against the various individual defendants amounts to an abuse of process.

9   Following the making of the agreements in September 1996, JMG retained Mr. Hume’s services as a consultant under an agreement dated 18th October 1996 with Mr. Hume’s company Graspnovel Limited, and in a document dated 7th November 1996, Mr. Maconochie and Mr. Hume agreed that Mr. Hume should receive 47.5% of the European royalties. After disputes arose and after the main proceedings had been commenced, there was a subsequent agreement made by a letter dated 2nd October 1998 that Graspnovel would receive 15% of the realised assets of JMG.

10   It appears that by about the middle of 1997, Mr. Maconochie was dissatisfied with the way the agreements were being implemented, and in particular with what he saw as obstruction by NAB and its officers in the proper development of the business, and in relation to JMG’s role in that development. From about August 1997 onwards, there were a large number of letters from Mr. Maconochie to officers of NMG and NAB complaining about this, and in particular complaining that the Board of NMG was not exercising independent judgment in the development of its business, but rather simply following the instructions of NAB.

11   Some of those letters incorporated material drafted by Mr. Hume. I believe it is fair to say that the overall thrust of those letters, at least until about March or April 1998, was to urge the recipients to change their ways and to adopt a course seen by Mr. Maconochie as conducive to the interests of NMG and thus of JMG.

12   On 13th March 1998, Mr. Maconochie wrote to Mr. Argus, then Group Managing Director of NAB, requesting a meeting. That letter concluded as follows:

Way forward
Your Bank's officers are clearly uncomfortable with the Bank’s contract with my company, JMG. They have chosen to stay with this nagging discomfort, and try to ride out the inevitable protests from JMG as they have imposed their will, largely regardless of the contract. This Bank policy, presumably implemented without your prior knowledge, has led to significant problems, a situation not of my making, and which has done, and continues to do, substantial damage to Ausmaq and its business. The resulting situation is nobody's (sic) best interests. It makes a mockery of the representations made to myself and my colleague Christopher Hume in 1996 by the Bank's representatives, Richard McKimm and Simon Moore, of the common goal of profitability and the agreed split of roles between JMG and the Bank that induced me to make the transaction with the Bank. The actions of the Bank officers involved in Ausmaq are in danger of destroying any credibility the Bank might have left in its dealings with myself, JMG and Ausmaq.

There is a better way forward. Change is possible. If you are uncomfortable with the original agreements because, in retrospect, you have found them unworkable within the Bank's culture, then you may wish to seek to change them for something, that fits you a little better. I should like to hear your views on this when we meet.

Conclusion
Some of your subordinates appear to believe, mistakenly, that if they ignore my representations for long enough, their problem, which is also the Bank's problem, will go away and they can continue on as they have done. In their positions, they should know better.

It would be remiss of me not to draw this situation to your personal attention, and to give you the opportunity to lake the lead before the problems worsen and to work out a better way forward. That is why I hare accepted your invitation to meet with you.

13   Mr. Argus replied by a letter dated 23rd March 1998, agreeing that it would be timely to discuss a change to the original agreement, but declining a meeting with Mr. Maconochie, and referring Mr. Maconochie to Mr. Krasnostein, General Counsel of NAB. Mr. Maconochie responded with a letter dated 30th March 1998, which included the following paragraph:

Your suggestion to sit down and discuss in a constructive way the resolution of this unsatisfactory situation is both welcome and constructive. Thank you also for assigning David Krasnostein to the matter. I believe it will be more constructive and apposite if David was to meet with someone other than myself. I have therefore asked John Garnsey QC (02 9220 9870) to arrange a meeting with David at Mr. Garney’s Chambers, in Sydney as you suggest.

14   Mr. Garnsey and Mr. Krasnostein met on 16th April 1998, and it appears that at that time Mr. Garnsey provided Mr. Krasnostein with a nineteen page without prejudice letter written by him bearing that date. This and some other without prejudice material has been admitted by consent for the purposes of this application, and I have made orders with a view to preserving that privilege for other purposes: cf BT Australasia Pty. Limited v. State of NSW, Sackville, J., FCA 29/9/98. In referring to this material, I will not disclose the contents any more than is necessary for the purposes of this judgment. However, it is pertinent to note that this letter set out various contentions of Mr. Maconochie and JMG, including allegations that NAB and NMG and also executives who approved or participated in conduct complained of were exposed to the risk of liability for breach of contract, breach of fiduciary duty, and misleading and deceptive conduct, whether as principals or accessories.

15   Mr. Maconochie sent a copy of Mr. Garnsey’s letter, along with other material, to Mr. Barnes, Mr. Courtney and Mr. McKimm, under cover of a letter dated 21st April 1998. That letter to each of those persons contained the following paragraphs:

Given your personal exposure, and considering that your own personal legal position may not necessarily coincide with that of the companies, you may decide it is prudent to seek your own legal counsel’s opinion rather than relying solely on the legal advice obtained by the companies. I have therefore as a courtesy included a copy of the Consulting Agreement that may assist you in this regard. I have no objection if your own legal counsel wishes to contact Mr. Garnsey QC (02 9220 9870) directly to clarify any point.

I believe that the wisest course is to avoid litigation and I would hope that such a tedious process can be avoided. However, you may be completely assured that I shall not hesitate to litigate should that prove necessary to fully assert and protect my rights and financial interests.

16   It appears that Mr. Hume saw a draft of these letters, and in a facsimile dated 20th April 1998 to Mr. Maconochie, Mr. Hume stated that he thought it imperative that Mr. Garnsey see and approve the letters. He also suggested inclusion of the last sentence in the above quote, and also the following further sentence, which was apparently not adopted by Mr. Maconochie:

It is my understanding that the law requires, in matters concerning allegations of breaches of this type, that your personal legal costs are for your personal account and that it is illegal for the companies concerned to reimburse you unless and until you are exonerated.

17   Mr. Maconochie’s facsimile went on:

I still think, as we discussed last night, that it may well be worth hitting Barnes with one of these at the same time. The more of these guys we hit, and the more of them called on Argus and bleat into his ear, the more pressure we put on him.

18   One of the documents which is the subject of this application is a facsimile dated 21st April 1998 from Mr. Maconochie to Mr. Garnsey, in relation to these letters.

19   Mr. Barnes replied to the letter to him by a letter dated 23rd April 1998, in the following terms:

I am in receipt of your 21 April letter.

A formal reply to Mr. Garnsey’s correspondence is being drafted and will be sent to him in due course.

Henceforth, and in light of Mr. Garnsey’s letter, we request that you correspond through your lawyer Mr. Garnsey. He should address his correspondence, in the case of National Markets Group or its subsidiaries, to Ms. Maureen McGrath, General Counsel, and in the name of National Australia Bank or myself, addressed to Mr. Krasnostein, Group General Counsel, National Australia Bank.

20   Mr. Maconochie replied to Mr. Barnes in a letter dated 30th April 1998, which included the following paragraphs:

I think you may have missed the point of my letter, and perhaps I should have marked it PERSONAL.

The allegations, interalia, relate to breaches of contract and the Trade Practices Act and your personal participation in breaches of fiduciary duty owed to JMG. In such circumstances, your employer, or employers as the case may be where you may hold a number of statutory positions, are normally prevented as a matter of law from advising you or otherwise assisting you in any way, financially or otherwise, at least until the conclusion of any proceedings that may become necessary to assert or enforce my rights.

In respect of your own position therefore it would be inappropriate for me to correspond with any Bank officer, including the ones you nominate.

21   On the same day, Mr. Maconochie also wrote letters to Mr. McKimm and Mr. Courtney, both of which included the following paragraphs:

Further to my letter to you of 21 April 1998, the allegations, interalia , relate to breaches of contract and the Trade Practices Act and your personal participation in breaches of fiduciary duty owed to JMG. In such circumstances, your employer, or employers as the case may be where you may hold a number of statutory positions, in this case as a director of NMG and AUSMAQ, and possibly the Bark also if you have made arrangements directly with them, for example, regarding tenure of your position as a director in Bank-owned subsidiaries, are normally prevented as a matter of law from advising you or otherwise assisting you in any way, financially or otherwise, at least until the conclusion of any proceedings that may become necessary to assert, or enforce my rights.

I have pointed out to Mr Barnes that in respect of his position personally in this situation, and this applies to you and certain other Bank officers also, it would therefore be inappropriate for me to correspond with any Bank officer, including the ones he has nominated.

You will of course be familiar with the insurance arrangements effected by the relevant companies. I attach some relevant details from the December 1997 Board papers. Unfortunately, as I am sure you are aware, it would not normally be possible for you to avail yourself of the insurance coverage until your costs exceed the $200,000 uninsured deductible. This is due to the NAB Group's insurance programs being arranged on a "last resort protection” basis (as distinct from the arrangements I previously had on a "first line of defence basis"), and the NAB's policy of reliance on self insurance, risk identification and control. This unfortunate situation seems to have slipped through the net.

22   Mr. Hume commented on these letters in a facsimile dated 30th April 1998, in the following terms:

Well done. You certainly put Thursday to excellent use.

As you said, these people still seem complacent. We still need to pour in the fire. I don't think the message will get across until we sue them individually.

My guess is Argus won’t take your call/arrange a meeting on Friday. So off to court we go.

I think your idea of actioning Crassnostein (sic) in the first wave is a good one. Let’s take him out of the game. Probably sensible to do likewise with any others of the crazy gang at NAB who raise their heads above the parapet.

1 have a UOB Board meeting at 5pm Sydney time Friday which will probably last two hours or so. Apart from that I'm available at Walstead/on my mobile until I catch the big bird to Melbourne on Sunday night our time.

You and J. Garnsey have captured the initiative for us. We have to strike while we have the chance. My guess is we’ll never be in better shape than now. We have to make it count, in tens of millions of dollars minimum.

23   On 5th May 1998, Mr. Maconochie wrote to Mr. Cicutto, and this letter contained paragraphs in similar terms to the quoted paragraphs in his letter to Mr. Barnes of 30th April.

24   On 15th May 1998, Mr. Machonocie again wrote to Mr. Barnes, and also to Mr. Cicutto, and these letters also contained allegations of personal liability, and allegations of conflict of interest.

25   By 15th June 1998, it appears that a draft Statement of Claim had been prepared, and Mr. Hume provided some comments and suggestions for it, some of which appear to have been adopted. A copy of the proposed Statement of Claim was sent by Mr. Maconochie to Mr. Argus on 22nd June 1998.

26   On 6th July 1998, Mr. Maconochie’s solicitors Holding Redlich wrote to NMG and AUSMAQ System, alleging breaches of JMG’s rights. On 8th July 1998, Freehill Hollingdale & Page wrote to Holding Redlich, referring to this correspondence, and continuing:

You have no doubt been informed by your clients that we act for the above companies. We require you to urgently explain on what basis you consider it appropriate for you to correspond with our clients directly.

In the meantime, we remind you that any correspondence you wish to address to our clients must be directed to us.

27   On 9th July 1998, Mr. Hume sent a facsimile to Mr. Maconochie, apparently in relation to a proposed response to this letter, as follows:

1. Freehills. I think we can use our response to spell out with calm menace just what different charges face the different individuals. Breeze, Barnes, Cicutto and Argus can all face different allegations concerning their various actions and times in charge. McKimm can face allegations on conflict of interest re Cash and Shares. Maybe we can hit Hemingway re failure, as former senior partner of E&Y, to spot the irregularities of the annual reports/capitalisation/control of Ausmaq cash etc. How about citing Cliff for deception re the Melbourne Brokers?

We already know we have to make the case to Freehills that they cannot represent all parties. How about using this opportunity to spell out the full horrors for the individuals, maximise their anxiety, and maximise stress on their internal relations and particularly isolate Kras, who advised them? Coolly, calmly, clinically, accurately, comprehensively, unarguably and with unstoppable menace. How about a sentence to the effect that we understand that advice given by Kras had been particularly dangerous in encouraging individuals to expose themselves to serious criminal charges? How about pointing out that Kras faces more charges than anyone else and cannot possibly advise either the Bank, or other individuals involved, or in fact instruct Freehills sensibly given his huge personal exposure. Maybe it would be enough to wonder about that in print, and to express our amazement.

Let's stack it right up them as hard as we can, and maximise this opportunity to cause internal disruption.

We've been given a free shot, and time to think about it. Let's really king hit them. We may not get another chance like this.

2. Business Plan. I like the idea of including Ausmaqs/ NMG's claims against the Bank/individuals as assets of the companies which must be exploited. Let's include a budget for it. Let's also mirror that budget with letters of demand requiring action within seven days to the companies and individuals. Plus include in the business plan all the international projects we discussed.

28   The second document which is the subject of this application is a letter from Mr. Maconochie to Holding Redlich, dated 9th July 1998, apparently relating to the response to the letter from Freehill Hollingdale & Page. In fact, on the same day, 9th July 1998, Holding Redlich did write to Freehill Hollingdale & Page in the following terms:

We acknowledge receipt of your letter of 8 July, 1998.

By a without prejudice letter dated 25 June, 1998 the Group General Counsel of National Australia Bank Limited, Mr. David Krasnostein, advised our clients’ counsel, Mr. John Garnsey QC, that a Mr. Peter Perry of your firm was authorised to accept service of process on behalf of “all proposed defendants”. Apart from that communication, our clients have not been advised that your firm acts for the corporations specified in the first paragraph of your letter or for any other corporations related to or associated with National Australia Bank Limited or any of its or their officers.

In fact, officers of National Markets Group Limited have had ample opportunity to advised representatives of our clients that lawyers have been engaged on its behalf but have declined to do so. Rather, officers of that company and the other corporations referred to in the first paragraph of your letter have held direct negotiations and discussions with our clients and their counsel. Indeed, Mr. Krasnostein’s letter of 25 June states that he and other officers of National Australia Bank Limited would be “pleased to meet again” with representatives of our clients, without any mention of any involvement of your firm.

We are accordingly very surprised at the contents of your letter.

In the circumstances, would you please confirm that you do in fact have instructions to act on behalf of National Markets Group Limited, Australian Market Automated Quotation System Limited and AUSMAQ New Zealand Limited.

In addition, would you please advise us as to whether you have instructions to act on behalf of National Australia Bank Limited, National Australia Financial Management Limited, Mr. G. Barnes, Mr. F. Cicutto, Mr. D. Krasnostein, Mr. K. Courtney and/or Mr. R. McKimm.

Your prompt response would be appreciated in order that we can then ensure the appropriate correspondence is addressed to your firm.

29   On 20th July 1998, Mr. Maconochie wrote to NMG and AUSMAQ System, asserting inter alia that there were conflicts of interest involved in Freehill Hollingdale & Page acting for NAB and NMG. On the same day, Mr. Maconochie wrote to Mr. Barnes, enclosing a copy of the letter to NMG and AUSMAQ Systems, and concluding:

Please notify me of the solicitors who will be acting for you. The obvious conflict of interest would seem to have been any lawyer on the payroll of National Australia Bank Limited, or the firm of Freehill Hollingdale & Page, acting for you.

30   As noted earlier, the main proceedings were commenced in September 1998.

ISSUES

31   There is one preliminary issue which I will need to determine concerning the admissibility of evidence. Mr. Hetherington, solicitor for the defendants, has sworn an affidavit to the effect that he has been informed of various matters by Mr. Maconochie and believes them to be true. Mr. Machonochie himself did not give evidence on the application. That evidence has been objected to by the defendants, and my decision on its admissibility is to be made in conjunction with my decision of the application.

32 Next, there are some distinct legal issues which can be considered apart from the actual circumstances of this case. These involve construing relevant sections of the Evidence Act, in particular ss.118, 119 and 125, which are in the following terms:

118. Evidence is not to be adduced if, on objection by a client, the court finds that adducing the evidence would result in disclosure of:
(a) a confidential communication made between the client and a lawyer, or
(b) a confidential communication made between 2 or more lawyers acting for the client, or
(c) the contents of a confidential document (whether delivered or not) prepared by the client or a lawyer,
for the dominant purpose of the lawyer, or one or more of the lawyers, providing legal advice to the client.

119. Evidence is not to be adduced if, on objection by a client, the court finds that adducing the evidence would result in disclosure of:
(a) a confidential communication between the client and another person, or between a lawyer acting for the client and another person, that was made, or
(b) the contents of a confidential document (whether delivered or not) that was prepared,
for the dominant purpose of the client being provided with professional legal services relating to an Australian or overseas proceeding (including the proceeding before the court), or an anticipated or pending Australian or overseas proceeding, in which the client is or may be, or was or might have been, a party.

125(1) This Division does not prevent the adducing of evidence of:
(a) a communication made or the contents of a document prepared by a client or lawyer (or both), or a party who is not represented in the proceeding by a lawyer, in furtherance of the commission of a fraud or an offence or the commission of an act that renders a person liable to a civil penalty, or
(b) a communication or the contents of a document that the client or lawyer (or both), or the party, knew or ought reasonably to have known was made or prepared in furtherance of a deliberate abuse of a power.
(2) For the purposes of this section, if the commission of the fraud, offence or act, or the abuse of power, is a fact in issue and there are reasonable grounds for finding that:
(a) the fraud, offence or act, or the abuse of power, was committed, and
(b) a communication was made or document prepared in furtherance of the commission of the fraud, offence or act or the abuse of power,
the court may find that the communication was so made or the document so prepared.
(3) In this section:
"power" means a power conferred by or under an Australian law.

33 One issue is whether an improper purpose of the kind alleged in this case would, if sufficiently shown, prevent the application of s.118 and/or s.119; or whether those sections would apply, but privilege would be lost because of the exceptions provided in s.125.

34 The other question is whether an abuse of process is an improper purpose which would either prevent ss.118 and/or 119 applying in the first place, or would provide an exception pursuant to s.125.

35   Finally, it will be necessary to consider the application of these sections to the circumstances of this case.

EVIDENCE ON INFORMATION AND BELIEF

36   Questions concerning the existence of legal professional privilege may be final proceedings, at least in form, as was the case in Commissioner of Australian Federal Police v. Propend Finance Pty. Ltd. (1997) 18 CLR 501 and Watson v. McLernon Group (Insurances) Pty. Ltd. (2000) NSWSC 306. However, the matter before me is interlocutory in form, and both sides agree that it is interlocutory in substance. That is, my decision will not be a final determination of the rights of the parties in relation to the matter in dispute, and, should circumstances change or evidence emerge which could not reasonably have been presented at the hearing before me, the matter could be re-litigated. In those circumstances, s.75 of the Evidence Act applies, and the question is whether the evidence on information and belief should be excluded or restricted under s.135 or s.136 of the Evidence Act. Those three sections are in the following terms:

75. In an interlocutory proceeding, the hearsay rule does not apply to evidence if the party who adduces it also adduces evidence of its source.

135. The court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might:
(a) be unfairly prejudicial to a party, or
(b) be misleading or confusing, or
(c) cause or result in undue waste of time.

136 The court may limit the use to be made of evidence if there is a danger that a particular use of the evidence might:
(a) be unfairly prejudicial to a party, or
(b) be misleading or confusing.

Submissions

37   A written outline of submissions was provided by the defendants.

38   It was submitted that the evidence was unfairly prejudicial, because of the inability to cross-examine and because the reliability of the evidence could not be properly challenged. I was referred to Commonwealth of Australia v. McLean (1996) 41 NSWLR 389, where Handley and Beazley, JJA said:

The present difficulties have arisen because s.64 read with s.62 now allows first-hand hearsay. The first ruling allows hearsay from Mrs. McLean about events witnessed by the plaintiff as proof those events had occurred. The weight to be given to such evidence depends on the honesty and reliability of the person who made the representation, and the person giving the evidence.

A party against whom such evidence is tendered must be free to challenge any link in the chain, or the chain as a whole. It would be unfairly prejudicial within s.135(a) for evidence to be tendered against a party who could not contest it.

39   It was noted that McHugh JA in Papakosmas v. The Queen (1999) 196 CLR 297 at 325-6 expressed reservations concerning that approach, and McHugh JA’s reservations were referred to by Sheller JA, with whose judgment Meagher JA agreed, in Ordukaya v. Hicks (2000) NSWCA 180 at pars.33-40. However, it was submitted that McLean was binding upon me.

40   It was submitted that the plaintiffs made a deliberate forensic choice to adduce hearsay evidence, and no acceptable reason was advanced for not adducing direct evidence: cf Tucker v. Hospital Corporation of Australia Pty. Ltd., Hidden J, 6/5/66. Further, the evidence was in the form of assertions expressed in a general way: cf Guide Dog Owners’ Friends Association Inc. v. Guide Dog Association of NSW & ACT (1998) 154 ALR 527 at 532; Gordon v. Pike (No.1), Beaumont J, FCA 1/9/95; Deputy Commissioner of Taxation v. Ahearn (No.2) (1988) 2 Qd.R. 158 at 164.

41 Furthermore, it was submitted that the evidence was misleading or confusing, within s.135(b): Hughes Aircraft Systems International v. Air Services Australia (1997) 80 FCR 276 at 283. The material avoided relevant issues, and, in relation to insurance, asserted reliance on the individual’s insurance in a way apparently inconsistent with Mr. Maconochie’s own letters: cf South Sydney District Rugby League Football Club Ltd. v. News Limited (No.5) (2000) FCA 1270 pars.6-9.

42   Mr. Wood made oral submissions for the defendants on this matter. He submitted there was no justification for Mr. Maconochie not to give evidence: to do so would not have in any way negated privilege, the Court could ensure that issues concerning the main case were not trespassed upon, and likewise any question of self-incrimination could be adequately dealt with.

43 In any event, Mr. Wood submitted, the material was not admissible under s.75 because, having regard to Mr. Hetherington’s oral evidence, the source was not appropriately identified. In fact, the source of the information was not Mr. Maconochie, as asserted by Mr. Hetherington, but rather material prepared by Mr. Dicker apparently on Mr. Maconochie’s instructions. Even if identifying the material prepared by Mr. Dicker qualified as identifying the source, the nature of the source meant that the evidence did not have the reliability to give it probative value which would weigh significantly under s.135.

44 Mr. Margo SC for the plaintiffs has provided written submissions on the matter, which I will leave with the papers. In short, it was submitted that there was no risk of unfair prejudice under s.135 in this case.

Decision

45 It does appear from Mr. Hetherington’s oral evidence that the information, on the basis of which he felt able to swear the affidavit, was not contained in a direct communication to him by Mr. Maconochie, but rather was provided by the submission of draft affidavits prepared by Mr. Dicker of Counsel on Mr. Maconochie’s instructions. That material was subsequently confirmed by an e-mail from Mr. Maconochie, but it appears that that e-mail was received by Mr. Hetherington after he had sworn the affidavit, although before he authorised its distribution. I think that, in those circumstances, the affidavit did not identify the source of the information as it should have done; but that source is now identified by the whole of the evidence which has been given on that matter. Section 75 is not restricted to evidence on affidavit. Accordingly, in my opinion, s.75 is satisfied, and the question is whether the evidence should be excluded or limited under s.135 or s.136.

46   I accept that I am bound by the Court of Appeal decision in McLean, but the passage quoted by the defendants could be misleading if read in isolation. In that case, the Court of Appeal agreed with the decision of the trial judge to allow hearsay, holding that the hearsay should not have been excluded under s.135. What they were discussing, when they made the statement in the quotation, was whether the trial judge was correct in disallowing evidence tendered by the other side tending to discredit the hearsay evidence. What their Honours were saying was that it would be unfairly prejudicial if the other side was prevented from challenging the hearsay evidence by the evidence which the other side wished to tender. Read in that way, in my opinion, the statement quoted does not suggest that the inability to cross-examine the maker of the hearsay statement necessarily makes the hearsay evidence unfairly prejudicial.

47   In the present case, it appears that there was a deliberate tactical decision that Mr. Maconochie’s evidence should be given by way of hearsay, and that cross-examination of Mr. Maconochie should be avoided. In my opinion, the possibility that Mr. Maconochie would have been cross-examined on privileged material, and subject to possible adverse findings on credit on the basis of far less material than will be available to the judge in the main case, is a plausible ground for the course which was taken. I would not consider that, in those circumstances, Mr. Maconochie’s avoidance of cross-examination itself involves unfair prejudice.

48 In my opinion, the material has some probative value. It is in general terms, and plainly carries very much less weight than if it had been on oath by Mr. Maconochie and if Mr. Maconochie had been subject to cross-examination. However, Mr. Maconochie has waived privilege in relation to the provision of information to Mr. Hetherington for the affidavit, and can be cross-examined in the main proceedings on the information he provided to Mr. Hetherington. In my opinion, I can deal with any prejudicial effect that the evidence might have, and I do not think its rejection under s.135 is justified.

49 Turning to s.136, it might be possible to limit the effect of the evidence to treating it as some evidence of what Mr. Maconochie would say on oath at a hearing in which the purpose of the communications was directly in issue for determination by a court. However, I do not think there would be much advantage in taking that course, and on the whole, I see no real basis for restricting the effect of the evidence. As I have said, I do not consider it of very much weight, and I will be careful to avoid giving it any prejudicial effect, particularly any unfairly prejudicial effect.

legal principles

50 It is common ground that, by virtue of Pt.23 r.1 of the Supreme Court Rules, the question of whether these documents are privileged falls to be determined in accordance with the Evidence Act: cf Mann v. Carnell (1999) 74 ALJR 378 at 383.

Submissions

51   Mr. Bathurst QC for the defendants provided written submissions, which I will leave with the papers.

52   He submitted that it is an abuse of process to bring proceedings, not in order to prosecute them to a conclusion, but in order to use them as a means of obtaining some advantage for which they are not designed, or some collateral advantage beyond what the law offers: Williams v. Spautz (1992) 174 CLR 509 at 526-7. It is sufficient that this improper purpose be the predominant purpose: Spautz at 529, 537; and if it is, it does not matter that the moving party has a prima facie case: Spautz at 522. Where proceedings are brought to obtain a compromise of a claim, it will be an abuse unless the proceedings are brought to vindicate a claim, and the compromise is of that claim and not of some other claim: Flower & Hart v. White Industries (Qld) Pty. Limited (1999) 87 FCR 134 at 150.

53 Next, Mr. Bathurst submitted that if, in communicating with a solicitor, the client had the predominant purpose of furthering such an abuse of process, the communications would not fall within s.118 or s.119 in the first place. Communication to facilitate such a future wrong-doing lacks the professional confidence necessary to constitute a confidential communication within the meaning of those sections: see Carter v. Northmore Hale Davy & Leake (1995) 183 CLR 121 at 134-5, 163; Propend at 545, 556. Where the client does not reveal the purpose for seeking the advice, the client reposes no confidence, as the state of facts which is the foundation of the supposed confidence does not exist; and where the purpose is revealed, there is no solicitor/client relationship, as it cannot be the legal adviser’s business to further a client’s illegal object: R v. Cox & Railton (1884) 14 QBD 153 at 168.

54 Alternatively, Mr. Bathurst submitted that such an abuse of process is a “fraud” within s.125 of the Evidence Act, as this includes communications made in furtherance of an illegal object (Varawa v. Howard Smith & Co. Ltd. (1910) 10 CLR 382 at 386, R v. Bell: Ex parte Lees (1980) 146 CLR 141 at 145) and communications made for the purposes of frustrating the law (Ex parte Lees at 156, Propend at 546). Fraud includes all forms of fraud and dishonesty such as fraudulent breaches of trust, fraudulent conspiracy, trickery and sham contrivances (Crescent Farm (Sydcup) Sports Ltd. v. Sterling Offices Ltd. (1972) Ch. 553 at 565) and “embraces a range of legal wrongs that have deception, deliberate abuse or misuse of legal powers, or deliberate use of illegal duty at their heart” (Southern Equities Corporation Ltd. (In Liquidation) v. Arthur Andersen & Co. (1997) 70 SASR 166 at 174. An abuse of process is a fraud in this sense: Rouse v. IOOF Australia Trustees (1999) SASC 127 at pars.104-114; Citicorp Australia Limited v. Sirillo (2000) SASC 219 at par.20. Mr. Bathurst further submitted that s.9(1) of the Evidence Act meant that “fraud” in s.125 should not be read as narrowing the general law test.

55 Alternatively, Mr. Bathurst submitted that an abuse of process of this kind was “a deliberate abuse of a power” within the meaning of s.125(1)(b) of the Evidence Act. In s.125(3), “power” is defined to mean a power conferred by or under an Australian law, and cl.9 of the dictionary makes it clear that this extends to any law (whether written or unwritten) of or in force in the Commonwealth or any State or Territory. There was in this case deliberate abuse of the power conferred by Australian law to bring proceedings: the abuse was deliberate, because the acts in question were deliberate acts.

56   Mr. Margo SC for the plaintiffs also provided written submissions, which I will leave with the papers.

57 He submitted that, having regard to the terms of s.125, s.118 should be read as applying to any communications which were intended to be confidential and which in fact were for the predominant purpose of obtaining legal advice, whether or not there was some further improper purpose: the question of improper purpose is dealt with in s.125.

58 Mr. Margo submitted that the word “fraud” in s.125 does not encompass all non-crime categories that fell within the common law fraud/crime exception. This is shown by the provisions of s.125(1)(b), which treat deliberate abuse of power as a distinct category (cf Attorney-General for the Northern Territory v. Kearney (1985) 158 CLR 500). Certainly in this case, Mr. Margo submitted, where the claims against the individual defendants were not spurious, and the alleged predominant purpose outside the scope of the process was not fraudulent, the abuse in this case could not constitute “fraud” within the meaning of s.125.

59 Mr. Margo submitted that the so-called power to bring legal proceedings was not the kind of power referred to in s.125(1)(b); and in any event, to be deliberate, there had to be knowledge that the power was being abused.

Decision

60 In my opinion, the existence of s.125 supports the view that a communication may be a confidential communication for the dominant purpose of a lawyer providing legal advice to the client, within s.118, even though the client has the further purpose of using that legal advice in the furtherance of some fraud. Of course, there may be cases where an improper purpose in the client prevents s.118 operating at all; but in my opinion, they will be cases where the improper purpose is not to be pursued through the legal advice which is being sought. For example, if a client seeks advice from a solicitor in order to give the appearance that things are being done properly, but without the intention to use the advice in furtherance of an improper purpose or otherwise, then the situation will not fall within s.118 at all. However, in my opinion, if the predominant purpose is to get legal advice, then s.118 is engaged even if the client intends to use the legal advice in furtherance of a fraud or some other improper purpose. The question will then be whether s.125 operates to deprive the client of legal professional privilege.

61 The situation may not be the same in relation to s.119. If the proceeding for which legal services are to be provided is a proceeding that would itself be an abuse of process by the client, then it may be arguable that this is not a proceeding to which s.119 applies, so that it would not be necessary to consider the application of s.125. I do not think I need to pursue this question, because it does seem clear that, subject to questions about improper purpose, the communications in this case were for the dominant purpose of the lawyer providing legal advice to the client, so that s.118 applies.

62 Turning to s.125, there is force in Mr. Bathurst’s submission that s.9(1) of the Act means that s.125 should not be read as narrowing the definition of improper conduct which displaces legal professional privilege, from that which would have been applicable at general law; and the South Australian cases referred to by Mr. Bathurst are authority for the proposition that abuse of process is conduct which would exclude privilege at common law.

63 However, the relevant report of the Australian Law Reform Commission makes it clear that a deliberate decision was made not to exclude legal professional privilege wherever the communication was for an unlawful purpose, but to restrict the exception to cases of fraud and deliberate abuse of power. The fact that deliberate abuse of power, which would have been a purpose excluding privilege at general law, is dealt with separately in paragraphs (b) of s.125(1), supports the view that “fraud” in paragraph (1) is not intended to cover all purposes which excluded privilege at general law. My conclusion on the facts of this case makes it unnecessary to come to a final view, but my tentative opinion is that “fraud” as used in s.125 does require an element of dishonesty; and unless an abuse of process can be characterised as dishonest, I do not think it falls within the provisions of s.125.

64 Even though the commencement of legal proceedings may affect a defendant’s rights in such a way that the right to commence proceedings might be characterised as a power in the Hohfeldian sense, I do not think that that is the kind of power referred to in s.125(1)(b) of the Evidence Act. In my opinion, s.125(1)(b) is referring to a power to affect more directly the rights of other people. Furthermore, I think the word “deliberate” requires that the client know that the acts in question are an abuse of power, not merely that the client deliberately do acts which, unknown to the client, are in fact an abuse of power.

APPLICATION TO THIS CASE
Submissions

65   Mr. Bathurst submitted that there was at least a prima facie case that Mr. Maconochie’s predominant purpose, and thereby the plaintiffs’ predominant purpose, in threatening proceedings against individual defendants, and then commencing proceedings against them, was to induce these defendants to put pressure on a third party, namely NAB, to settle claims brought by the plaintiffs. In respect of Mr. Krasnostein, Mr. Maconochie had a further improper purpose, namely to prevent Mr. Krasnostein from acting in his role as General Counsel advising NAB and other defendants. Mr. Bathurst submitted that this was shown by the correspondence between Mr. Maconochie and Mr. Hume, and correspondence between Mr. Maconochie and individual defendants.

66   Mr. Bathurst submitted that the first time Mr. Maconochie corresponded directly with individual defendants was in the letters of 21st April 1998, which referred to those defendants’ “personal exposure” and “personal legal position”. Mr. Maconochie’s predominant purpose could be inferred from Mr. Hume’s facsimile dated 21st April 1998, and also Mr. Maconochie’s facsimile to Mr. Garnsey of the same day, one of the subject documents. This was confirmed by Mr. Hume’s facsimile of 30th April 1998, and Mr. Maconochie’s letters of 30th April 1998, alleging that their employers were prevented from assisting them, and referring to problems with insurance coverage. Mr. Bathurst referred to other facsimiles from Mr. Hume to Mr. Maconochie, in particular the one of 9th July 1998.

67   Mr. Margo SC for the plaintiffs, also provided written submissions. He pointed out that the correspondence of April 1998 followed a long series of letters, in which Mr. Maconochie became increasingly frustrated and desperate, as he saw his idea, the result of some years of development, being squandered. Although individual directors were not written to until April 1998, the earlier correspondence did contain allegations against the directors personally. By April 1998, Mr. Garnsey was involved, and there is no suggestion in this application that there was not a reasonable cause of action against the individual directors. From the time the plaintiffs began seeking redress, redress was always sought against the companies and the individual defendants. There were commercial reasons why this should be so: NAB was a party to the consulting agreement only as a guarantor of the performance bonus, and NAB claim that this does not extend to a guarantee of unliquidated damages. Because of NMG’s limited assets, it was reasonable for the plaintiffs to seek redress against the individual assets of the directors and also their insurers.

68 In relation to a suggestion that the plaintiffs had no standing to suggest any conflict of interests as between the different defendants, Mr. Margo submitted that, under s.241 of the Corporations Law as it then was, a corporation could not indemnify directors if they were liable for actions in breach of fiduciary duty to the corporation.

69   In reply, Mr. Bathurst submitted that, although the question of liability of individuals was raised in Mr. Garnsey’s letter, Mr. Maconochie’s letters to individual defendants were sent off without waiting for any response to Mr. Garnsey’s letter. It was plain that the individual directors had no duties to creditors of any of the defendant corporations, on the basis of which the plaintiffs could complain directly against the directors in reliance on breaches of fiduciary duty: see Spies v. R. (2000) HCA 43.

Decision

70   In my opinion, there are reasonable grounds to believe that Mr. Maconochie, and therefore the plaintiffs, did target the individual defendants at least partly in order to put pressure on them, and in particular to put pressure on them to bring about a settlement of the plaintiffs’ claims. I do not attribute Mr. Hume’s intentions, as disclosed in his correspondence, to Mr. Maconochie; but Mr. Maconochie’s own actions give reasonable grounds for thinking that, to some extent at least, he did share Mr. Hume’s intentions. Furthermore, the claims of conflicts of interest preventing the same lawyers acting for all the defendants, and the allegations concerning the insurance of individual directors, give further reasonable grounds for this conclusion. In my opinion, the former claims are not shown to be reasonably based, and it is not suggested that they had the support of legal advice. There are also reasonable grounds to believe that Mr. Maconochie, and therefore the plaintiffs, did target Mr. Krasnostein at least partly in order to prevent him acting in his role as General Counsel advising the NAB and the other defendants.

71   However, in my opinion this does not amount to reasonable grounds for finding that the communications were in furtherance of an abuse of process. Claims were made, consistently from the start, of breaches of duty by individual directors. Those claims were and are supported by legal advice, and are not shown to be unreasonable. The claims against individual directors could possibly contribute to recovery, if NMG was liquidated and NAB found not to be liable: I do not think Mr. Maconochie’s allegations that directors would not have the benefit of insurance in respect of the first $200,000.00 is inconsistent with this.

72   In all those circumstances, even without reference to the evidence on information and belief, I do not think there are reasonable grounds to find that Mr. Maconochie made the communications in furtherance of an abuse of process, that is, the bringing of legal proceedings for the predominant purpose of putting pressure on individuals to cause the corporate defendants to settle claims which the plaintiffs had against the corporate defendants, and/or preventing Mr. Krasnostein advising the defendants. There are reasonable grounds to believe that Mr. Maconochie also had the purpose of pursuing legal claims against those individuals, to conclusion if necessary, and of putting pressure on them to bring about a settlement of all claims, and that other purposes were not predominant over this purpose. I do not believe the evidence before me on the application would justify an inference of abuse of process against Mr. Maconochie, even if he himself were to give no evidence about the matter in proceedings in which these questions were directly in issue.

73 Furthermore, I do not think the material gives reasonable grounds for finding that Mr. Maconochie, and therefore the plaintiffs, had some dishonest purpose which could amount to fraud within the meaning of s.125 of the Evidence Act.

74   For those reasons, in my opinion the claim for legal professional privilege is made out. I would propose to grant remedies along the lines of those sought, although if there is some dispute about the details, I would be prepared to hear submissions about the details. It seems clear that the defendants will have to pay the plaintiffs’ costs of the application.

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Last Modified: 04/03/2001