John Moran v Eistream (Australia) Pty Limited

[2006] NSWSC 79

CITATION:	John Moran v Eistream (Australia) Pty Limited [2006] NSWSC 79 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	14/02/2006
JUDGMENT DATE :	14 February 2006
JUDGMENT OF:	Bergin J
DECISION:	See paragraph 34
CATCHWORDS:	[DISCOVERY] - Conclusive nature of affidavit of discovery - Exceptions - Test to be applied when it is alleged there has been a misconception of the case
CASES CITED:	Attorney-General v Emerson (1882) 10 QBD 191 British Association of Glass Bottle Manufacturers v Nettlefold [1912] 1 KB 369; [1912] AC 709 Mulley v Manifold (1959) 103 CLR 341
PARTIES:	John Moran (Plaintiff) EiStream (Australia) Pty Limited ACN 095 854 372 (Defendant)
FILE NUMBER(S):	SC 50167/2004
COUNSEL:	M Bevan (Plaintiff) T Saunders (Defendant)
SOLICITORS:	Phillips Fox (Plaintiff) Allens Arthur Robinson (Defendant)

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

BERGIN J

14 FEBRUARY 2006

50167/04 JOHN MORAN v EISTREAM (AUSTRALIA) PTY LIMITED

JUDGMENT

1 The plaintiff, John Moran, was employed by the defendant, Eistream (Australia) Pty Limited, as Vice President/General Manager Asia Pacific Region from 2001. Prior to that, from 1978, he worked for Kodak Australasia Pty Limited in various positions under a contract of employment with Kodak’s parent company, Eastman Kodak Inc. The plaintiff was employed as General Manager of Kodak’s software business when it started up and from about April 1999 he was employed as the Vice President of the Eastman Software Business for the Greater Pacific Region. The plaintiff was a member of the defendant’s Board from about 2001.

2 The defendant terminated the plaintiff’s employment on 21 November 2002 without notice. The plaintiff sues the defendant for damages, inter alia, for breach of contract. He also seeks declaratory relief in relation to the terms of the contract and seeks rectification of some of the terms of the letter of appointment. The plaintiff claims that his termination was a direct result of and/or caused by the defendant’s decision, together with that of its parent company, to restructure its operations and that in those circumstances he should have had the benefit of a redundancy package. There are also claims for damages for alleged breaches of the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987.

3 The defendant denies that the plaintiff is entitled to the relief sought and claims, in paragraph 43 of the defence, that by reason of matters that came to its knowledge post termination of the contract, it would have been justified to terminate the plaintiff’s employment on the basis of alleged misconduct. One of the matters particularised is that the plaintiff, contrary to generally accepted accounting principles adopted by the defendant, declared as revenue the sale of software to an entity identified as Easy Solution Inc (in Korea) in full knowledge that it should not have been declared as revenue for accounting purposes (the justification claim).

4 The defendant’s parent company is Global 360 Inc, formerly Eistream Inc. The senior Vice President of the parent company is Richard Allen McDaniel. Gary Allan Cook is the Vice President and Director of Sales of the defendant and has held those positions since the termination of the plaintiff’s employment on 21 November 2002. These proceedings are listed for hearing on 1 May 2006 for six days.

Plaintiff’s motion

5 The plaintiff by motion filed 6 February 2006 seeks the following orders:

(1) That the defendant file a further supplementary list of documents giving discovery pursuant to order 1(d) and 1(e) of the short minutes of order made on 28 October 2005 by 22 February 2006;

(2) The defendant discover to the plaintiff an unmasked copy of document number AAR016.001.0190 by 22 February 2006;

(3) Inspection and copying of the documents referred to in the defendant’s further supplementary list of documents (pursuant to order 1 above) is to be completed by 28 February 2006;

(4) The time permitted for the plaintiff to file and serve his evidence in reply be extended to 31 March 2006;

(5) The costs of the directions hearing on 3 February 2006 and the plaintiff’s notice of motion filed on 6 February 2006 by paid by the defendant.

6 This motion was heard as a special fixture today when Mr C Bevan, of counsel, appeared for the plaintiff and Mr T Saunders, of counsel, appeared for the defendant. The plaintiff relies upon the affidavits of Simone Rees, solicitor, sworn 21 October 2005, 3 February 2006 and 10 February 2006. The defendant resists the orders and relies on the affidavits of Luke Matthew Gattuso, solicitor, sworn 26 October 2005 and 7 February 2006.

Discovery history

7 The defendant has filed five Lists of Documents. After the first three were filed the plaintiff filed a Motion for further discovery, which motion was returnable before Einstein J as the Commercial List judge on 28 October 2005. On that occasion the parties settled their differences and consent orders were made in the form of annexure G to Ms Rees’ affidavit of 3 February 2006.

8 On 25 November 2005 the solicitors for the defendant served on the plaintiff’s solicitors a fourth List of Documents verified by affidavit of Gary Cook affirmed on 25 November 2005. Mr Cook’s affidavit states, in the usual way, the various aspects of his enquiries and his beliefs that there were no other documents in relation to the issues between the parties for discovery. After the fourth List was served the solicitors for the plaintiff wrote to the solicitors for the defendant on 7 December 2005 indicating that they had reviewed the documents identified in the List and it was apparent to them that the defendant had again failed to comply with its discovery obligations in respect of some of the categories of documents. In respect of category 2 the following was said:

[Y]our client has discovered approximately 6 to 8 documents relating to the closure of the Sydney office. These documents comprise a limited number of e-mail exchanges mostly between Gary Cook and Rich McDaniel.

The closure of the Sydney office was referred to by Gary Cook as early as 5 November 2002 (see e-mail from Gary Cook to Rich McDaniel dated 5 November 2002) and it is simply untenable that an entire office can be closed and redundancies can be implemented with only the documents that your client has discovered.

As the actual closure occurred in April 2003 and plans to implement the closure were clearly made known from as early as November 2002 the documents fall within the dates set out in Category Two being the period from 1 January 2002 to 30 June 2003.

9 On 12 December 2005 the defendant’s solicitors advised that they were to take instructions from the officer of the client who would not be returning until 14 December 2005. On 13 December 2005 the plaintiff’s solicitors again wrote to the defendant’s solicitors in respect of a number of matters that they had discovered in respect of some of the documents that had been provided. That letter included the following:

Notwithstanding the conduct of your client in its continued and ongoing refusal to comply with its discovery obligations for the most part of these proceedings we remain hopeful that your client will, this time, comply with its discovery obligations. Your client’s compliance would enable both parties to avoid the costs that would be associated with having to re-list the matter to seek appropriate discovery orders and/or a further revision of the timetable.

10 On 14 December 2005 the defendant’s solicitors wrote to the plaintiff’s solicitors in respect of a the marked document the subject of the order 2 sought in the Notice of Motion. The defendant’s solicitors advised that the contents of the first two pages were discovered because they included reference to matters which may fall within the further categories but that they had masked several preceding e-mails because they related only to “maintenance and software transfer pricing”. In respect of the restructure issue the letter went on to say:

Restructure/reorganisation documents.
We have been informed that there exists an archive directory of soft/copy documents which, notwithstanding extensive searches by our client, had been overlooked in the discovery process. We are instructed that it appears to contain some further documents in relation to the closure of the Sydney office which may be discoverable. We are also instructed that there may be some further documents in relation to the termination of employment of (other persons named) which may also be discoverable, and our client is currently checking its files in this respect.

The solicitors then indicated that they would provide any further documents and list as soon as possible.

11 On 15 December 2005 the plaintiff’s solicitors responded to the defendant’s solicitors indicating their dissatisfaction in relation to the masked document and expressing their “serious concerns” about the conduct of the defendant in respect of its continuing alleged failure to meet its discovery obligations. It was on 12 January 2006 that the defendant’s solicitors served a Supplementary List of Documents with, I am informed, an additional 289 documents for discovery.

The emails

12 The plaintiff relied upon an email from Mr Cook to Mr McDaniel dated 5 November 2002 and a response from Mr McDaniel to Mr Cook of 6 November 2002. In the first e-mail Mr Cook referred to his understanding that “Australia would take level 1 calls and all other support resources would be consolidated in the US” and that was something that Mr Cook “was able to glean from” the conversations of the previous week. Mr Cook also noted that the officer of the parent company believed he had more information than he actually had and that his “planning process” was more evolved than it was. Mr Cook advised that he was keen to participate in the planning, transition and the future of the company and that while Mr McDaniel had passed him information relevant to the region “we have not had a planning session nor have I evolved plans on my own nor do I believe I should have.” Mr Cook also advised Mr McDaniel “[b]efore last Thursday I had no idea that we were planning to close the Sydney office nor did I know that we were planning to make redundant our only marketing resource.”

13 Mr Cook advised Mr McDaniel that he had identified the support organisation for possible cuts but that he did not know how far along that idea had evolved. Mr McDaniel responded by e-mail apparently from America and said suggested that it was hoped Mr Cook could “offer a ‘rabbit out of the hat’ trick” for their dilemma.

14 Mr McDaniel’s e-mail then referred to his discussions with his colleague in the parent company and continued:

I discussed with him on several occasions the need to initially direct you toward establishment of the direct sales model and stabilization of the current customer base and pipeline. This, because you have been out of Australasia for a time and needed to be reacquainted with the area and our business. Most of the planning to date has been in Sonny’s head. We have done little or no formal planning around this restructure, mostly due to the fact none of us knows the organization, customer aps, partners or end users very well. The support consultation plan for GAR and EAMER was made known to us only in the last week or 10 days. Until then we were working on the idea of cutting John and then looking for opportunities to downsize people and/or facilities as we went forward with a stronger direct sales model. My knowledge of the support center planned for Melbourne was barely in advance of telling you. In spite of my info request of John Moran, we still don’t have the facts necessary, e.g. KIDMS head count.

With respect to Julia, we will reexamine the situation and perhaps consider a downsized facility in Sydney. We will certainly discuss it further before making the final decision and depend greatly on your participation overall in shaping the restructured organisation. See you in Sydney.

The “Sonny” referred to in the e-mail is apparently a principal of the parent company.

15 Mr Bevan submitted initially that there were no further e-mails between Mr McDaniel and Mr Cook after 6 November 2002. That is clearly erroneous and as I apprehend what occurred this afternoon Mr Bevan withdrew that submission. There are such e-mails, some of which have been provided in Ex C. The first e-mail is dated 28 November 2002, in which Mr Cook writes to Mr McDaniel with a suggestion for the announcement of Mr Cook’s appointment to replace Mr Moran. There is then an e-mail of 3 December 2002, apparently from Melbourne staff, to another member of the defendant’s company relating to Mr Moran’s termination and his financial entitlements. On 3 December 2002 Mr Cook sent an e-mail to Mr McDaniel indicating that he, Mr McDaniel, and one other person may wish to go over the spreadsheet that had been provided in respect of those entitlements. The next e-mail is 19 March 2003 in which Mr Cook writes to Mr McDaniel in relation to the potential options for the restructure. Mr Cook advised Mr McDaniel that the figures that were included in the e-mail were provided to assist Mr McDaniel to prepare for his meeting with Sonny. On 22 April 2003 a further e-mail from Mr Cook to Mr McDaniel advised that Mr Cook had spoken with Andrew Busittel about the changes that Sonny wanted implemented.

16 On 29 April 2003 Mr Cook wrote again to Mr McDaniel attaching letters for two employees advising that he would call Mr McDaniel on the way to the airport the following day. This e-mail sets out a plan of how Mr McDaniel and/or Mr Cook were going to advise the staff of what was happening in the restructure and how the redundancies were to occur. That e-mail includes the statement: “The spin is that we needed to restructure because of the new accounting system and to improve profitability”. Mr Cook then says: “I would like for you to think about this before my call so that you can give me the flavour that you would like to have passed onto the staff”.

17 The next e-mail is dated 1 May 2003 from Mr McDaniel to Andrew Busittel, with a copy to Mr Cook. The subject is “What is the plan for GAR”. Mr McDaniel is responding to Mr Busittel’s e-mail of 30 April in which Mr Busittel was asking questions about the way in which the business was to be restructured, in particular, “where Sonny wants to take the business”. Mr McDaniel responded:

I appreciate the concern and would feel more capable of addressing your questions verbally than through e-mail. I will plan to be on a call with you as soon as possible, however, I will offer comments on a few of your statements below now.

18 Mr McDaniel responded to some of the questions posed by Mr Busittel. He suggested to Mr Busittel that he should feel free “to discuss” the matters with Mr Cook or with Mr McDaniel as he thought necessary and that he and Mr Cook would share developments with Mr Busittel as they occurred. He then suggested that he would set up a time to have some discussions. There are two other e-mails in Ex C relating to the restructure and leasing arrangements or property arrangements for the change to the business.

The masked document

19 The masked document, Ex B confidential, was inspected by me for the purpose of ruling on its admissibility and the application for it to be unmasked and discovered. That document consists of five pages of a series of e-mails, the first two pages of which have been disclosed. The content of the e-mail has some information within it that is regarded as commercially sensitive by the defendant and for the purposes of this application it is not necessary for me to set out the content of it ensuring that, at least at this stage, that sensitivity can be accommodated.

20 The three pages that are masked deal with transfer prices, that is sale prices, for maintenance and software between the defendant and the parent company and/or the defendant and entities throughout the region that might be described as agents. The e-mail includes reference to the application of those prices to the 2002 statement of accounts to “see what difference the uplift would make”. It also refers to the basis upon which the defendant is approaching its accounting methodology and what it uses as a measure for its baseline. Expressions of opinion appear in respect of adjustments to the accounts the previous year so that they would not blur the impact of the transfer price increases. The total of software sales in 2002 is then identified and there is an expression of an opinion as to what has to be done in relation to the profit of the company. There is then a statement of what is excluded from these considerations, including a reference to what is happening in Korea. Observations are made about the position of the company having regard to the accounting principles that have been applied to transfer prices for maintenance and software. There is also mention of a regulatory issue.

Principles

21 The principles applicable to this application may be stated shortly as follows:

· the affidavit of discovery is conclusive except where it can be shown there is insufficiency of discovery;

· insufficiency of discovery is able to be established from:

Ø the pleadings, the affidavit of documents itself or documents referred to therein;

Ø any other source that constitutes an admission of the existence of a discoverable document not thus far discovered;

Ø the apparent exclusion of documents from discovery by a party under a misconception of the case; or

Ø British Association of Glass Bottle Manufacturers v Nettlefold [1912] 1 KB 369; [1912] AC 709; Mulley v Manifold (1959) 103 CLR 341.

22 In British Association of Glass Bottle Manufacturers v Nettlefold [1912] AC 709, Viscount Haldane, at 713, adopted the language used in Attorney-General v Emerson (1882) 10 QBD 191 that the Court has to be “reasonably certain” that there has been a misconception. In Mulley v Manifold Menzies J, at 343, in referring to Nettlefold, said that: “it is sufficient if it appears that a party has excluded documents under a misconception of the case”. The test of reasonable certainty as developed in Mulley v Manifold seems to me to be the test of proof on the balance of probabilities. A party seeking further discovery based on an alleged misconception of the case has to establish, on the balance of probabilities, that there has been such misconception.

23 Mr Bevan submitted that the concept of relevance in discovery needs to be understood and applied in a broad sense: Seidler & Anor v John Fairfax & Sons [1983] 2 NSWLR 390 at 392. The plaintiff submitted that in this case the court is entitled to go behind the affidavit of discovery on the basis that documents have been excluded from discovery under a misconception of the case. Mr Bevan relies upon a number of facts to establish the existence of the alleged misconception. Firstly, it is submitted that Mr Cook has had five attempts at getting discovery right and he has failed to do so. The existence of the five lists of the documents is, it is submitted, prima facie evidence that this defendant does not understand its obligations and has misconceived the case. Additionally, Mr Bevan submitted that it is only after the plaintiff has complained that the defendant has been brought to book to comply with its obligations, the plaintiff having to put on the Motion that was before the court on 28 October 2005. No doubt the plaintiff would ask rhetorically “what would have happened if he had not kept at the defendant in the circumstances?” On one view of the evidence he would be left with many fewer documents than the 289 that were discovered in January of this year.

24 The admission contained in the letter from the defendant’s solicitors to the plaintiff’s solicitors on 14 December 2005, that there were probably archive directories of soft copy documents in existence, is relied upon by Mr Bevan to submit that this admission was causally related to the plaintiff’s complaints in December 2005 about the inadequacy of the list of documents that had been produced in November 2005, pursuant to the court consent orders in October 2005. Further, Mr Bevan relied upon the content of the e-mail of 6 November 2002 and submitted that it is inconceivable that there would be no documents in the form of an e-mail after that communication between America and Australia (Mr McDaniel and Mr Cook respectively) relating to the very matters that were the subject of that e-mail, the proposed restructure and the “cutting” of Mr Moran from the employment of the defendant.

25 Mr Bevan submitted that it is consistent with commercial common sense that these officers of the parent company and the defendant would be communicating by email because of the time difference between the United States of America and Australia and because of the way in which it appears these men communicated in the e-mail of 6 November 2002. Mr Bevan also submitted that it is hard to believe that they would have stopped communicating about these very important issues for three weeks. Further, Mr Bevan relies upon the masking of the masked document. He submitted that regard should be paid to the fact that such document should have been discovered because it is relevant to the justification claim. That masking, he submits, is a clear indication that the defendant misconceived the case and thus did not realise that the masked portion of the document should be made available to the plaintiff as a relevant document to the issue of justification. I should, therefore, deal with that document.

The masked document

26 It seems to me that once the defendant put on the justification claim, that the plaintiff had misconducted himself in such a fashion that the defendant would have been entitled to summarily dismiss him and linked that justification to the way in which the plaintiff brought to account the proceeds of sale of the software to the Korean company, Easy Solution Inc, the plaintiff was entitled to have access to documents in respect of what is said to be the generally accepted accounting principles adopted by the defendant and the manner in which they had been applied. It is alleged that the plaintiff well knew that he should not have done what he did for accounting purposes because he must have known the generally accepted accounting principles that had been adopted by the plaintiff.

27 Mr Saunders submitted that the content of the masked portion of the document does not relate to the sale of software to Easy Solution Inc but to sales between subsidiary and parent and the bringing of those revenues to account. There are aspects of that document that deal specifically with that very matter, but there are other aspects within it that relate to the approach being adopted by the defendant to its accounts. The plaintiff is entitled to look at that document and to have it discovered in respect of the allegation that he had knowledge of what it was the defendant did in respect of its accounting generally and, in particular, in relation to Easy Solution Inc. The plaintiff should not be limited just to that one transaction because it is a claim that the plaintiff well knew of certain aspects of the defendant’s accounting approaches.

28 I am satisfied that that document should be discovered, that is, that the masked portions of the document should be discovered. Mr Bevan submitted, therefore, that the defendant had misconceived the case in respect of the justification claim and the court can have no confidence that the defendant has not misconceived the case in respect of the restructure issue. Indeed, he submitted that all of the matters to which I have referred put together would satisfy me that the defendant has misconceived the restructure issue in the case.

Misconception of the case

29 Mr Saunders submitted that there is no basis upon which the court could conclude there has been any misconception by the defendant of the case and its obligations. He submitted that it is patently obvious that the defendant is fully aware of the restructure/reorganisation issue and has discovered many documents relating to that issue. The contents of Ex C, to which I have referred, are some of them. He submitted that the Court could not have any degree of satisfaction that there has been a misconception of that issue, and that what is really occurring here is that the plaintiff has a suspicion, because of an absence of documents, that there must be more. He submitted that what can be inferred clearly, and irresistibly, is that these officers of the parent and the defendant worked concurrently with e-mails and personal meetings in which oral discussions occurred without records.

30 Mr Saunders relied upon the content of the e-mail of 6 November 2002 and in particular the reference to the plans being in “Sonny’s head”. He submitted that it is clear that no one informed Mr Cook about what was happening either orally or in writing. Mr Cook appeared to be surprised at the extent to which plans had gone forward and advised Mr McDaniel of that in his e-mail of 5 November. Mr Saunders also relied upon the reference in the last paragraph of the 6 November e-mail in which Mr McDaniel said that they would “discuss” things when they met.

31 That theme is continued in the other e-mails to which I have referred that form part of Ex C. Mr McDaniel advised Mr Busittel that he would much prefer to speak to him face to face but was willing to give some of the answers in the e-mail. The defendant submitted that another plausible and reasonable explanation is that from about 10 November or so Mr McDaniel was planning and then travelling to Australia to meet face to face with Mr Moran to terminate him. It was submitted that during that period it is obvious that they would not be sending as many e-mails as they might normally from America to Australia.

32 This is what might reasonably be described as a borderline case. On the one hand the plaintiff utilises the inadequacy of previous discovery to submit that there is misconception and, on the other, the defendant submits that the numerous lists demonstrate beyond doubt that the defendant is fully aware of its obligations and of the appropriate understanding of the case.

33 It seems to me to be very odd that there would be no further e-mails between Mr McDaniel and Mr Cook, particularly having regard to the distance between those two men and the time difference between Australia and the United States. But, when one has regard to Mr McDaniel’s apparent caution of putting things in the e-mail, I am not satisfied that the defendant has excluded documents because it is under a misconception of the case. It obviously knows that the restructure issue is an important one in this case. It has provided documentation in respect of that issue since June 2005. Indeed, the majority of the e-mails in Ex C were discovered prior to January and the fifth list. There is a continuing obligation on the defendant to discover documents and I have no doubt that if there are any further documents they will be discovered having regard to the five lists already produced by the defendant. The way I see the five lists is that the defendant, with the benefit of its solicitors, has pursued further searches. It seems also that the plaintiff’s terrier-like approach to obtaining further documents has assisted with the further discovery. I understand that there have been 1200 documents produced on discovery and according to the defendant’s counsel there have been approximately 10,000 documents reviewed. That having been said, no one can rest in respect of this issue until the trial is concluded.

34 In all the circumstances I am not satisfied that the plaintiff has established that there is an apparent exclusion of documents from discovery under a misconception of the case. That was the basis of the plaintiffs’ application and I am not satisfied that it has been made out. In all those circumstances:

(1) I refuse to make the order in paragraph 1 of the notice of motion;

(2) I make the order in paragraph 2 of the notice of motion, such document is to be kept confidential until the parties agree otherwise or an order is made by the court;

(3) I direct that the plaintiff serve his evidence in reply by 28 February 2006.

Costs

35 This is an application for costs brought by the defendant for an order that the plaintiff pay the defendant’s costs of the motion. Mr Bevan submitted the alternative should be that there be no order as to costs or that costs be costs in the cause. The masked document is pivotal to that submission. Mr Bevan submitted the parties would have been here in any event to argue about the orders sought in paragraph 2 of the Motion. That is true. Each party has had a measure of success but Mr Saunders submitted that the majority of the day has been spent on the orders sought in paragraph 1 of the Motion.

36 I am not satisfied that one can dissect it in that way. The masked document was a feature to the other aspects of the Motion and the additional documents that took some time to produce which were important to my decision to refuse the order in paragraph 1 of the Motion were not produced until after I suggested a search be made.

37 It seems to me that the fairest result is that costs of the Motion be costs in the cause. I therefore order that costs of today’s motion be costs in the cause.

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24/02/2006 - Amendment to file number on front sheet - Paragraph(s) Front sheet