Lochard Energy (Iona Operations Holding) Pty Ltd and Ors v EnergyAustralia Investments Pty Ltd and Ors
[2018] VSC 539
•27 September 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S ECI 2017 00122
BETWEEN:
| LOCHARD ENERGY (IONA OPERATIONS HOLDING) PTY LTD (ACN 608 441 041) AND OTHERS (according to the Schedule) | Plaintiffs |
| v | |
| ENERGYAUSTRALIA INVESTMENTS PTY LTD (ACN 113 121 592) AND OTHERS (according to the Schedule) | Defendants |
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JUDGE: | Daly AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 10 September 2018 |
DATE OF RULING: | 27 September 2018 |
CASE MAY BE CITED AS: | Lochard Energy (Iona Operations Holding) Pty Ltd & Ors v EnergyAustralia Investments Pty Ltd & Ors |
MEDIUM NEUTRAL CITATION: | [2018] VSC 539 |
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PRACTICE AND PROCEDURE – Confidentiality – Claim by purchaser of a gas storage facility against vendor for misleading and deceptive conduct and breach of warranty – Large damages claim – Whether the parties are trade rivals – Whether nature of information concerned and competitive relationship between the parties warrants documents being subject to a confidentiality regime – Documents directly relevant to issues in the proceeding – Documents confidential and commercially sensitive – Third party interests – Confidentiality regime imposed – IOOF Holdings Ltd v Maurice Blackburn Pty Ltd (No 2) [2016] VSC 594 applied
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr P G Liondas with Ms G Coleman | King + Wood Mallesons |
| For the Defendants | Mr N D Hopkins QC with Mr C Young | Minter Ellison |
| For AGL Energy Ltd | Mr R J Harris | Herbert Smith Freehills |
HER HONOUR:
This application arises out of the discovery process in this proceeding. The plaintiffs (‘Lochard’), are the owners and operators of a gas storage facility located near Port Campbell, Victoria (‘Iona facility’). The defendants (‘EnergyAustralia’), sold the Iona facility to Lochard following a competitive tender process in late 2015. The Iona facility was purchased for the sum of $1,780,486,161.43, with completion of the transaction taking place on 1 December 2015. The sale took place following a due diligence process characteristic of infrastructure investments of this nature and scale. Lochard is a wholly owned subsidiary of the Queensland Investment Corporation (‘QIC’). QIC was the bidder for the Iona facility, and has produced documents for Lochard to discover in this proceeding.
On 19 March 2017, Lochard issued this proceeding against EnergyAustralia, alleging that EnergyAustralia had made misleading representations about the daily withdrawal capacity from the Iona facility.[1] This was said to affect the ability of Lochard to perform its obligations under storage and supply contracts with its customers, including EnergyAustralia, and if Lochard had been aware of the true withdrawal capacity of the Iona facility, it would have offered a substantially lower price for the Iona facility. The claim for damages is in the sum of $967,000,000, or alternatively, $780,000,000, representing the difference in the price that Lochard paid for the Iona facility and what it says is the true value of the Iona facility.
[1]The withdrawal capacity of the Iona facility represents the volume of gas which may be able to be withdrawn from the Iona facility by Lochard’s customers on any given day in ordinary geological and weather conditions.
Clearly, the question of what Lochard would have paid for the Iona facility if it knew what it now says to be the true position regarding the withdrawal capacity of the Iona facility is relevant to the question of Lochard’s reliance upon any representations made by EnergyAustralia, as well as the quantum of Lochard’s claim for damages.
As one might expect, the discovery process in this proceeding is substantial, and has taken some time to complete. In late 2017, I made orders concerning the scope of the discovery required to be provided by Lochard. Since then, Lochard has discovered some 60,000 documents. During the course of the discovery process the issue of the confidentiality of a number of documents discovered by Lochard (approximately 3,500 documents) has been outstanding and subject to ongoing negotiation between the parties.[2] An interim confidentiality regime was agreed between the parties on or about 20 April 2018, whereby Lochard’s solicitors would provide to EnergyAustralia’s legal representatives and experts, documents on an ‘external adviser only’ (‘EAO’) basis, and would provide reasons to support Lochard’s claims for confidentiality.
[2]Given concessions made by Lochard with respect to a number of categories of documents, the number of confidential documents may well now be substantially less than 3,500.
As a result of the above process, the issues in dispute between the parties have narrowed somewhat. The current application concerns two issues. First, whether four categories of documents should be subject to a confidentiality regime, and, secondly, the terms of any such confidentiality regime. In relation to the latter issue, EnergyAustralia contends that the terms of the confidentiality regime Lochard seeks to impose upon any internal EnergyAustralia personnel are oppressive restrictions which would have the potential to limit the ability of those employees to fulfil their responsibilities to EnergyAustralia, or for that matter, any other potential employer in the energy industry.
The specific categories of documents over which confidentiality is sought (‘confidential documents’) include the following:
(a) the internal rates of return (‘IRR’) considered and targeted by QIC as part of the bid process (‘IRR documents’);
(b) information relating to the contracting strategy and price strategy for the Iona business, contained in documents which were brought into existence before completion of Lochard’s purchase of the Iona facility (‘Contracting and Price Strategy documents’);
(c) information relating to the terms of contracts, including pricing, with customers of the Iona facility other than EnergyAustralia, which contracts were entered into before completion on the Iona business. There is only one such contract: a Gas Storage Services Agreement dated 26 November 2015 (that is, four days prior to completion) between Lochard and AGL Energy Ltd (‘AGL’) (‘AGL GSSA’); and
(d) QIC’s analysis (undertaken itself, as well as commissioned by it) of competing available gas storage options and the likely cost of any services offered by those competing options) (‘competing storage option documents’).
Approximately fifteen documents containing information which falls within one or more of the above categories were provided by the parties to the Court for review, including the AGL GSSA, and the GSSA between Lochard and EnergyAustralia (‘GSSA’). A number of documents contained information that fell within different categories: that is, they contained IRR information, contracting and pricing strategy information, information concerning the terms of the AGL GSSA, and information concerning competing gas storage options. The documents provided are clearly relevant to the issues in the proceeding: for example, one of the documents in which some information is sought by Lochard to be inspected on an EAO basis is titled: ‘Project Tiger: Final Investment Recommendation – September 2015’. This document is not only relevant, it could be considered to be a critical document.
In relation to 6(c) above, the solicitors for AGL, Herbert Smith Freehills, applied for, and was granted, leave for AGL to intervene in the application, and filed an affidavit sworn by Ms Phaedra Deckart, the General Manager, Energy Supply and Origination of AGL. Ms Deckart had been directly involved in the negotiations with QIC regarding the terms of the AGL GSSA prior to the completion of the sale of the Iona facility. Following the service of Ms Deckart’s affidavit, EnergyAustralia did not press for inspection of the AGL GSSA itself otherwise than on an EAO basis, but did press for inspection of documents referring to the terms of the AGL GSSA (‘AGL terms documents’).
Lochard’s written outline of submissions describes the nature of the competitive relationship between Lochard and EnergyAustralia (described as ‘EA’ below), as follows:
Since the time EA sold the Facility, EA has been both a customer and a competitor of the first plaintiff (Lochard):
(a)Following the sale of the Facility, EA became the Facility’s largest customer. Lochard has entered into a Gas Storage Services Agreement with EA (EA GSSA) which has a [X] year term (due to expire in [X]), and an option to extend under certain conditions. The prices for the gas on extension of the option are set in the EA GSSA. There is also the prospect that the EA and the plaintiffs will enter into further or different arrangements concerning the Facility in the future. For example, in November 2017 EA and Lochard entered into an agreement for the sale of additional temporary gas storage.
(b)They are competitors in the area of gas storage, and with respect to the purchase (or potential purchase) of similar storage assets.
QIC also competes with the EA group of companies in bidding for and acquiring large energy-related assets. For example, both the EA Group and QIC participated in the transaction process for Ecogen Energy, a company that owns gas-fired power stations. EA was ultimately successful in the process and acquired the company in April 2018.
Lochard seeks to limit the inspection of the confidential documents to solicitors, counsel and experts retained by EnergyAustralia for the purpose of this proceeding. The proposed confidentiality regime provides for EnergyAustralia to nominate, in addition to EnergyAustralia’s external advisers, nominated instructors from within EnergyAustralia. Lochard’s proposed confidentiality regime seeks to impose the following restriction on nominated instructors:
A nominated instructor must not be involved in any way in any commercial dealings that they know, or reasonably suspect, involve the Lochard parties (if they are a nominated instructor for the EnergyAustralia parties) or the EnergyAustralia parties (if they are a nominated instructor for the Lochard parties) apart from providing instructions or other assistance in connection with these proceedings, or as otherwise agreed, commencing from the time they are approved as a nominated instructor and ending three years after the end date (being the finalisation of this proceeding) and in the case of a nominated instructor for the EnergyAustralia parties, must also not be involved in any decision relating to the exercise of rights under the EA Gas Storage Service Agreement dated 1 December 2015 while that agreement is on foot.
Lochard submitted that inspection of the confidential documents be on an EAO basis, or alternatively, to identified EnergyAustralia personnel on the terms referred to above, for the following reasons:
(a) first, Lochard (and QIC) and EnergyAustralia are trade rivals in the sense that they compete or deal with each other in a way which would enable one party to use the confidential information of the other to the disadvantage of the other;
(b) it is not necessary that a party in the position of Lochard prove with near certainty that the confidential documents could be used to its detriment;
(c) once the relevant trade rivalry and confidentiality has been established, it is necessary, as a practical matter, for the party seeking inspection to specifically explain the necessity for particular personnel to see the information, which EnergyAustralia has not done; and
(d) it is commonplace that, as demonstrated by a review of the authorities, if access is granted to internal personnel because a pressing need for inspection is demonstrated, for restrictions to be imposed to limit the ability of individuals to participate in competitive decision-making going forward.
EnergyAustralia rejects the contention that QIC and EnergyAustralia are trade rivals in the relevant sense. In the transaction which is the subject of this proceeding, the parties were in a vendor/purchaser relationship. EnergyAustralia accepts that it and Lochard are now in a customer/supplier relationship, but says that Lochard overstates the impact of this relationship upon confidentiality issues, given that the current contract between them will not expire for some years time, such that the prospect of there being ongoing negotiations concerning price are limited. Further, EnergyAustralia submitted that the information in the confidential documents is not only directly relevant to the issues in the proceeding, at least with respect to Lochard’s loss and damage claim, but is in fact arguably critical to that claim. EnergyAustralia also submitted that, given the changes in the energy industry over recent years, the confidential information is unlikely to be current.
EnergyAustralia also contends that the terms set out in paragraph 10 above impose overly burdensome restrictions on the internal EnergyAustralia personnel it wishes to seek instructions from for the purpose of this proceeding. These instructors include the following:
(a) Keith Edwards, Special Project Consultant for EnergyAustralia since 2017, who has responsibility for the management of EnergyAustralia’s defence of this proceeding;
(b) Nick Ryan, Head of Legal, Enterprise, a senior in-house counsel employed by EnergyAustralia with primary responsibility for this proceeding within EnergyAustralia’s legal team;
(c) Matthew Bruers, Commercial Advisory Leader, Corporate for EnergyAustralia. The team he manages specialises in the development of financial models that underpin valuations used in investment cases;
(d) Sam Magee, Head of Commercial, Corporate Department; and
(e) Deanna Wang, Commercial Lead NextGen.
EnergyAustralia conceded that inspection of the AGL terms documents (but not the remaining confidential documents), should be limited to the personnel listed above.
The parties relied upon extensive affidavit evidence and reasonably detailed submissions in support of their respective positions. These reasons will not traverse in any detail the evidence and submissions, save to the extent necessary for the purpose of these reasons. The parties’ evidence and submissions were filed on a confidential basis, and referred to and exhibited a selection of confidential documents. Further, some expedition in the resolution of the issues in this application is warranted, given that the dispute concerning the appropriate confidentiality regime is to some extent delaying the finalisation of the discovery process, which has now been under way for about a year.
Lochard relied upon the following affidavits in support of its application:
(a) an affidavit sworn by Dominic Gatto, the solicitor for Lochard, on 22 March 2018, which provided an overview of the relationship between QIC, Lochard, and EnergyAustralia, and further details and arguments in support of Lochard’s proposed confidentiality regime;
(b) an affidavit sworn by Benjamin Kiely, another solicitor for Lochard, on 28 August 2018. This affidavit provided further details of the discovery process and the disputes between the parties concerning confidentiality, and the current scope of the dispute. Mr Kiely exhibited twelve sample documents for consideration of the Court, with three sample documents being provided in each category;
(c) an affidavit affirmed by Paul DeSouza, a partner in the Global Infrastructure team at QIC on 28 August 2018. Mr DeSouza has responsibility for managing funds held by QIC on behalf of clients, and is involved in deciding how and in what assets client funds should be invested. He gave evidence as to the nature and scale of QIC’s investment activities, the commercial sensitivity of QIC’s investment approach, strategy, return hurdles, and methodology and the interest of QIC in investing in large energy related infrastructure assets, possibly in competition with EnergyAustralia. He also described the function of the IRR as a key determinant of bid valuations, including segmental IRR, and the relevance of the information about competing gas storage options to the bidding process, as well as why he believed that such information coming into EnergyAustralia’s hands could give EnergyAustralia a competitive advantage over QIC; and
(d) an affidavit affirmed by Kon Fah Wong, a general manager at Lochard, on 29 August 2018. Mr Wong is responsible for, among other things, the negotiation of Lochard’s contracts with its customers, including EnergyAustralia, and for business development opportunities. Mr Wong provided further details of the function and operations of the Iona facility, and the nature of the contracts entered into with customers of the Iona facility, including EnergyAustralia. Mr Wong also deposed as to the ongoing commercial relationship between Lochard and EnergyAustralia with respect to the Iona facility, and deposed as to the commercial sensitivity of the contracting and pricing strategy documents, the AGL terms documents, and the competing storage options documents.
EnergyAustralia relied upon the following evidence in opposition to the confidentiality regime advanced by Lochard:
(a) an affidavit sworn by Christopher Douglas, the solicitor for EnergyAustralia on 11 April 2018. Mr Douglas deposed that he did not consider the proposed confidentiality regime would be sufficient to enable his firm to properly take instructions from EnergyAustralia regarding Lochard’s claim for loss and damage;
(b) a further affidavit sworn by Christopher Douglas on 5 September 2018, where he deposed as to his specialisation in matters and disputes concerning the Eastern Australian natural gas market, and his view that the Eastern Australian gas market has undergone a period of significant transition and change since QIC prepared its bid for the Iona facility in 2015. Mr Douglas referred to a recent transaction where EnergyAustralia outbid QIC for an energy asset, and deposed that prior to the matter being referred to in the media, EnergyAustralia was not aware with any certainty that QIC was also bidding for those assets. He exhibited some further sample documents for review by the Court;
(c) an affidavit sworn by Matthew Bruers on 5 September 2018. Mr Bruers is employed by EnergyAustralia in the role of Commercial Advisory Leader, Corporate, and manages a team specialising in the development of financial models that underpin valuations used in investment cases. He was extensively involved in the sale of the Iona facility, including the analysis of bid prices received by EnergyAustralia. He has been asked by Mr Douglas to assist the solicitors for EnergyAustralia with the analysis of Lochard’s purchase price for the purpose of this proceeding. Mr Bruers commented upon the redacted documents provided to him, and the impact of those redactions upon his ability to understand how QIC calculated its bid for the Iona facility; and
(d) an affidavit sworn by Toby Brown, a principal of the Brattle Group, which has been retained by the solicitors for EnergyAustralia in this proceeding. Dr Brown is an economic consultant specialising in the energy sector. Dr Brown provided a discussion of the economic basis for the discount rate in discounted cash flow monitoring, and the relationship between this discount rate and the expected IRR. Dr Brown commented upon Mr DeSouza’s affidavit, stating that Mr DeSouza ‘appears to have confused the concepts of IRR and discount rate’. He deposed as follows:
Paragraphs 29 and 35 of the DeSouza affidavit are incorrect to suggest that if EA were to know the discount rate used by QIC in valuing Iona, this would provide EA with an advantage in competing with QIC in future asset sales. Knowledge of the Iona discount rate provides no information about QIC’s discount rate for future investments. Furthermore, knowledge of the discount rate to be used by QIC in a future sale process would provide no information about QIC’s likely bid unless EA also had information about QIC’s cash flow projections.
Lochard filed and served two affidavits in reply on 7 September 2018 by Mr Wong and Mr DeSouza. Mr Wong took issue with Mr Douglas’ statements to the effect that the Eastern Australian gas market has gone through significant change in the period 2015 to 2018. He deposed that Mr Douglas had relied upon data from the regulators showing fluctuations in the demand for and supply of gas. Mr Wong noted that the Iona facility provides gas storage facilities. While Iona customers use gas stored at the Iona facility to manage peaks and troughs in gas supply, these services are provided pursuant to medium to long term contracts which do not fluctuate with annual changes in gas supply and demand. Mr Wong also commented upon the sample documents put into evidence by EnergyAustralia.
In Mr DeSouza’s second affidavit, Mr DeSouza took issue with the evidence of Mr Brown. He deposed as follows:
In my experience, in competitive bid processes, commercial investors acquiring infrastructure assets do not follow the academic and theoretical approach to valuation (and competitor analysis) in the way suggested by Dr Brown in the Brown affidavit.
Mr DeSouza then went on to explain further the significance of IRR targets to valuing assets, and the reason why investors generally keep their IRR targets confidential.
Finally, AGL relied upon the affidavit of Ms Deckart, the General Manager, Energy Supply and Origination of AGL, sworn on 7 September 2018. Ms Deckart is responsible for all aspects of electricity, coal, gas, LNG and renewable supply and origination. Prior to October 2017, she held the position of Head of Wholesale Gas at AGL, and was directly involved in the negotiations of the key commercial terms of the AGL GSSA with representatives of QIC in 2015. She gave evidence with respect to the following matters:
(a) competition between AGL and EnergyAustralia in the Australian gas and electricity markets;
(b) current negotiations between EnergyAustralia and AGL;
(c) overview of the use of gas storage services in the market and the AGL GSSA;
(d) the confidential and highly commercially sensitive character of the AGL GSSA;
(e) the fragility of the confidential information; and
(f) the confidential nature and commercial sensitivity of the AGL terms documents.
There was no dispute between the parties regarding the applicable principles concerning disputes of this nature: rather, the dispute concerned their application to the current case. Counsel for Lochard emphasised statements in the authorities concerning the risk of harm where information is disclosed and cannot be forgotten, such that there is a risk of inadvertent use of that information in later transactions. Senior counsel for EnergyAustralia submitted that Lochard’s assertion that EnergyAustralia is a ‘trade rival’ is somewhat overstated, and that, given that the confidential documents came into existence in 2015, their currency (or lack thereof) did not justify the onerous restrictions sought to be imposed upon that information.
A useful summary of the relevant principles, including references to the key authorities, is to be found in the decision of Besanko J in AstraZeneca AB and Anor v Medis Pharma Pty Ltd,[3] as follows:[4]
[3][2014] FCA 549.
[4]Ibid, [10].
(1)The onus of establishing a claim for confidentiality is on the party making the claim: Alphapharm Pty Ltd v Lundbeck Australia Pty Ltd [2006] FCA 1358 (‘Alphapharm v Lundbeck Australia’), at [17] per Lindgren J.
(2)The question of whether a claim for confidentiality should be upheld or refused involves a balancing exercise in which the competing considerations are the risk of inadvertent or accidental disclosure on the one hand, and the benefits of a party having access to relevant information so that appropriate advice can be given to the client and informed instructions received from the client, on the other: Conor Medsystems at [9] per Finkelstein J, referring to Warner-Lambert Co v Glaxo Laboratories Limited [1975] RPC 354, at 356 per Buckley LJ.
(3)In determining where the balance lies in a particular case, a number of matters are relevant, including the following:
(i)the nature and content of the confidential information: Mobil Oil Australia Ltd and Another v Guina Developments Pty Ltd and Another (1996) 33 IPR 82, at 87-88 per Hayne JA (as his Honour then was);
(ii)the extent to which, if the confidential information is disclosed to a particular person, that person will have occasion to use the information to further a party’s commercial interests: Conor Medsystems, at [15]; Alphapharm Pty Ltd v Lundbeck Australia, at [20]. In this context, involvement or lack of involvement in competitive decision-making will be relevant. It will also be relevant to consider whether the person to whom it is proposed to disclose the information owes or may owe contractual, statutory or fiduciary duties to their principal in relation to competitive decisions: Luxottica Retail Australia Pty Ltd v Specsavers Pty Ltd (No 3) [2011] FCA 793, at [52] per Perram J;
(iii)the professional attributes of the persons to whom it is proposed to disclose the information and the extent to which they have participated in confidentiality clubs in the past: Conor Medsystems at [15]; Interpharma Pty Ltd v Commissioner of Patents [2008] FCA 1422 (‘Interpharma v Commissioner of Patents’), at [4]-[7] per Sunburg J;
(iv)the extent to which the Court can be satisfied that, if confidential information is released to a person, that person, or the organisation for which the person works, has in place a security system that will protect the confidentiality of the information: Interpharma v Commissioner of Patents, at [11]-[12];
(v)undertakings given by the proposed recipient of the confidential information or the party seeking disclosure to meet any loss caused by inadvertent or accidental disclosure: Conor Medsystems at [15]; Interpharma v Commissioner of Patents, at [13];
(vi)although the above five matters are directed, primarily at least, to the risk of inadvertent or accidental disclosure of the confidential information and the likely loss if that occurs, on the other side of the equation, it is relevant to consider the extent to which a party’s ability to seek advice and provide instructions may be hampered if a claim for confidentiality is upheld. In this context, it is worth noting that a claim for confidentiality in relation to certain persons is not necessarily to be upheld because there is already one person able to seek advice and provide instructions. It may be appropriate for a number of people from within an organisation to have access to confidential information in order to seek appropriate advice and provide informed instructions, particularly in the case of a large organisation and complex litigation. Whether that is so or not depends on the outcome of weighing the relevant factors.[5]
[5]Ibid [10].
The parties also relied upon the following statement of Elliott J in IOOF Holdings Ltd v Maurice Blackburn Pty Ltd (No 2),[6] (‘IOOF’) regarding the factors to be taken into account in the balancing exercise, being:[7]
[6][2016] VSC 594.
[7]Ibid, [10]-[11].
(1) The degree of relevance of the document or documents.
(2)The extent to which the document or documents are confidential, including whether the information has already been disclosed in the proceeding.
(3)The use to which the information might be put once it is known, such as by an opposing party who is a trade rival or is also an opposing party in another proceeding (or an anticipated or pending proceeding).
(4)The utility or procedural fairness, or otherwise, of imposing restrictions or conditions, including limiting production to certain persons upon the provision of confidentiality undertakings.
(5)Any other matters relevant to the due administration of justice, including ensuring compliance with the overarching purpose in the Civil Procedure Act 2010 (Vic).
Whatever form of restrictions or conditions might be ordered, such orders would, ordinarily, be subject to review as the proceeding progresses to, or is the subject of, a trial. This ensures that the orders made are in the interests of justice based on the particular circumstances extant from time to time.[8]
[8]Ibid [10].
I should add here, in relation to the last point, not only is the position amenable to review over the course of the proceeding, it will be necessary to do so prior to trial, when the question of tendering confidential documents into evidence may arise.
Prior to turning to the individual categories of documents, I would make the following general observations regarding the issues in this application.
First, I accept that the information in the confidential documents, including information which Lochard is prepared to allow EnergyAustralia to inspect without any specific restriction, is by its very character confidential. The question is really whether any greater protection than that conferred by the usual implied undertaking with respect to discovered documents is warranted by reason of the risk of harm to Lochard, QIC, and/or AGL of any disclosure of that information to EnergyAustralia personnel, and the terms of any such protection.
Second, I accept that, for present purposes, Lochard (and QIC) and EnergyAustralia are ‘trade rivals’ in the relevant sense, both in terms of being current and potential bidders for infrastructure assets in the energy industry, and given that EnergyAustralia is a long term customer of Lochard with respect to the services provided by Iona facility. While I doubt that the extent of the rivalry goes so far as contended for by Lochard, I accept Lochard’s submissions to the effect that there are no closed categories of trade rivalry when considering issues of confidentiality. Rather, again, the real issue is whether disclosure of any confidential documents, or any category of confidential documents, to EnergyAustralia personnel carries with it the risk that the disclosure might cause harm to the commercial interests of QIC, Lochard, and/or AGL.
Third, I also accept the evidence and submissions advanced by Lochard that the information in the confidential documents is unlikely to be stale, notwithstanding that the documents were brought into existence in 2015. While I accept that a lay observer of the energy industry might consider the industry to be in a state of flux, I accept the evidence relied upon by Lochard (and AGL) that the type of information sought to be protected by Lochard, such as projected cash flows and rates of return generated by long term contracts maintains its currency, at least in the medium term. The evidence relied upon by Lochard is to the effect that the pricing and other financial information used in QIC’s modelling is reasonably stable.
Fourth, while the evidence relied upon by Lochard and QIC was criticised by EnergyAustralia as being vague and qualified, I consider that any qualifications in that evidence stems from an abundance of caution. While there is some qualifying language used in the affidavits, the overall thrust of the evidence is that the information is largely current, and is commercially sensitive. While the assertions regarding the potential commercial advantage to EnergyAustralia of any disclosure of confidential information are somewhat conclusionary, in the end, these are all matters which feed into the balancing exercise. Further, the evidence of Ms Deckart of AGL can only be described as direct, focussed, and highly persuasive.
Fifth, I accept that Dr Brown’s evidence concerning the significance and use of IRR and discounted cash flows has been largely rebutted by the reply evidence of Mr DeSouza, although these issues might be a matter for debate between experts at trial. However, I also accept Mr Bruers’ evidence that he is well qualified to evaluate information concerning QIC’s bidding strategy, that he cannot fully understand how QIC put its bid together without seeing IRR information and details of projected cash flows, and, while he does not say that it is absolutely essential that he review this information, I can infer from his role and expertise that he would be a valuable instructor to EnergyAustralia’s lawyers and experts. However, it is otherwise not clear from the evidence why, apart from Mr Bruers, any additional EnergyAustralia commercial personnel need to see the confidential documents, although I can infer that it would be helpful for Mr Edwards and the internal legal counsel to do so.
Sixth, I accept that imposing an EAO regime with respect to a substantial number of otherwise directly relevant documents is not to be lightly undertaken. After all, Lochard is the plaintiff in the proceeding, and makes a substantial claim for damages.[9] Restricting access to discovered documents to lawyers and experts alone can be cumbersome and inconvenient, and representatives of a party may often have a greater awareness of the relevance and significance of particular information than lawyers. Further, ultimately it is a matter for the client to give instructions to the lawyers, and a client’s ability to provide informed instructions should not be lightly impeded.
[9]While this is in no way determinative of the matter, it is noteworthy that in Mobil Oil Australia Ltd and anor v Guina Developments Pty Ltd and Anor {1996] 2 VR 34, considered to be the leading authority in this field, the party claiming confidentiality was the defendant: that is, the party brought to court, not the party initiating the action. See also Co-operative Bulk Handling Ltd v Brookfield Rail Pty Ltd (No 2) [2014] WASC 38, [8].
Seventh, the proposed confidentiality regime to be imposed upon nominated instructors seems to me to be far too onerous and open ended. This proceeding is still in the discovery stages, and could probably not realistically proceed to trial until the second half of 2019. Further delays could result from reserved judgments, and appeals. I am confident that it is possible to craft a less onerous, but still effective protocol.
Finally, the authorities make it clear that questions concerning the status of documents and access to documents can be revisited during the course of the proceeding, if warranted. Indeed, while judgment in this application was reserved, in Cargill Australia Ltd v Viterra Malt Pty Ltd (No 16),[10] Elliott J reversed a decision he had made a few weeks earlier during the course of the trial to limit access to confidential documents to external legal advisors only.[11]
[10][2018] VSC 529.
[11]Cargill Australia Ltd v Viterra Malt Pty Ltd (No 13) [2018] VSC 478.
In summary, the dilemma I face here is not dissimilar to the difficulties referred to by Gyles J in C7 Pty Ltd v Foxtel Management Pty Ltd,[12] where he stated as follows:[13]
The evidence which has been led from either side broadly supports the rival contentions, although there is some exaggeration on both sides. Resolution of conflict where both sides, in a sense, are right is always difficult. The problem in the present case is acute. Those best placed to both understand and interpret the material and also make an informed decision as to litigation on the part of the applicants are those persons who have the best overall knowledge of the industry as a whole and of the strategy of Seven Network Ltd in relation to it. They are the persons to whom information about competitors and potential competitors would mean most and be most useful.
[12][2002] FCA 1189.
[13]Ibid [4].
Turning now to the specific categories of documents, I would make the following summary observations:
(a) I accept that references to QIC’s IRR are commercially sensitive and highly confidential to QIC, and that the information is unlikely to be stale. It is also directly relevant to the issues in this proceeding. However, I am not convinced that the risk of misuse is as high as that contended for by Lochard. I am also not convinced that it is necessary for each of the five nominated individuals to see this information in order for EnergyAustralia to be able to properly instruct its lawyers;
(b) I accept that documents concerning Lochard’s contracting strategy and pricing strategy are commercially sensitive and highly confidential to Lochard, and that the information is unlikely to be stale. I consider the risk of inadvertent misuse of this information is not insignificant in the absence of appropriate restrictions;
(c) I accept that the AGL terms documents are highly confidential to both Lochard and AGL. I accept that insofar as the AGL terms documents refer to the price, withdrawal rights, and duration of services, they are relevant to the issues in this proceeding. I am not so convinced that other terms, such as options to renew and the like, are directly relevant to the issues in the proceeding; and
(d) while I accept that documents concerning competing gas storage options are confidential to QIC and Lochard, I do not consider the degree of sensitivity is as high as for the previous three categories. That said, I doubt that this information is of particularly direct relevance to the issues in this proceeding.
I shall elaborate further on my conclusions in relation to each category below.
IRR documents
In his affidavit of 28 August 2018, Mr DeSouza deposed as follows:[14]
[14]Omitting the reference to the actual IRR in (a) and (b).
If:
(a) the IRR initially targeted by QIC (X%);
(b) the IRR that QIC ultimately targeted (Y%);
(c) the segmental IRRs targeted by QIC;
(d) the IRRs targeted by QIC’s client;
(e) the downside IRRs considered by QIC; or
(f) sensitivity testing on the IRR conducted by QIC,
as part of the bid process were disclosed to EA, it would be easy for any representative of EA who was shown those particular IRRs to remember (and difficult to forget). If, in the future, QIC were to bid against EA for a large energy‑related infrastructure asset, or were to bid for a large energy‑related infrastructure asset owned by EA, it would be impossible for a representative of EA who was aware of those IRRs to put those figures out of their mind in assessing the bid price that QIC would likely be willing to pay for that asset. That information would give EA a competitive advantage in any future bid process, because EA would be able to more accurately anticipate what IRR target QIC is likely to adopt in assessing the value of the asset (and accordingly, more accurately anticipate what QIC would bid for the asset) and adjust their own strategy accordingly. If the segmental IRRs used by QIC were disclosed to EA, that would enable them to predict the bid price QIC would likely adopt with greater accuracy, as they would be able to use the specific segmental IRRs (such as, for example, the IRR used by QIC for contracted revenues) rather than just the overall IRR.
Mr Bruers gave the following evidence about the relevance of the IRR documents:
It is also necessary to know the plaintiffs’ IRR assumptions for the purposes of full interrogating and understanding their alternative damages claim. That claim proceeds on the basis of the difference between the price the plaintiffs paid for Iona and what they would have paid (Alternative Purchase Price), had the plaintiffs known what they allege the true position to be about the withdrawal capacity of the Iona Facility.
With the redactions proposed by the plaintiffs to the IRR and cash flows, it will not be possible to check whether the withdrawal capacity assumption is the only change made by the plaintiffs to their purchase price model for the purposes of calculating the Alternative Purchase Price.
EnergyAustralia submitted that, from its perspective, the most important information required to assess Lochard’s reliance and damages claim, apart from the purchase price itself, are the projected cash flows and the assumptions that underlie those cash flows. EnergyAustralia does not accept there is any justification for Lochard to keep confidential the IRR information, given the public statements made by QIC’s CEO regarding QIC’s target rate of return (between 10 per cent and 12 per cent), and there is no particular commercial advantage to EnergyAustralia by it knowing what discount rates were used by QIC in this transaction, given that the Iona facility is a unique asset.
In response, Lochard submitted that EnergyAustralia has not adduced any evidence to challenge the proprietary and highly confidential nature of the IRR information.
I accept Mr DeSouza’s evidence concerning the use made by QIC of IRR (and IRR for different segments and scenarios) and the stability and sensitivity of that information. In particular, if a competing bidder for an infrastructure asset was to know QIC’s target IRR, that information could be used by that competitor in setting its own bid. The range of QIC’s target IRR referred to in the media is quite a wide range, with small differences in IRR generating quite substantial changes in bid prices.
However, it may well be that the risk of potential misuse of the IRR used to develop the bid for the Iona facility is not as high as contended for by Lochard. First, while there was a ‘headline’ IRR used by QIC in setting the bid price for the Iona facility, there are a range of IRR applied to different revenue streams, different IRR targets set for the debt and equity components of the purchase price, and the target IRR for different investors in the asset. Further, it is apparent from the confidential documents that QIC was prepared to vary its target IRR over the course of the bidding process.
I accept that a person inspecting the documents in an unredacted form may well remember the ‘headline’ IRR, and this may provide some competitive advantage in competing with QIC for energy infrastructure assets. Indeed, it is clear from the confidential documents that a bidder such as QIC is interested in the proposed terms and bidding strategy of other bidders. But these concerns would only arise in the future in a scenario where EnergyAustralia knew that QIC was a bidder for that asset, and where the relevant asset was substantially similar to the Iona facility. The sample documents include a number of segmental IRR, with numerous figures referred to on a number of pages, which one would expect would be difficult for even an experienced commercial person to retain in their memory. As these segmental IRR are investor specific or asset specific, it is difficult to see how that information could be used in preparing bids and bid strategies for other like assets unless copies of those documents were deliberately retained and deliberately referred to by those inspecting the documents when preparing bids for other infrastructure assets. For present purposes, one can assume that a senior executive in a major company who has executed a confidentiality undertaking in the context of this proceeding would not deliberately breach such an undertaking. As for EnergyAustralia’s internal lawyers, one would doubt that they would be in a position to retain in their memories and use such information, as it seems inherently unlikely that lawyers would be involved in the financial modelling and valuation part of any future bidding process.
Given the nature of the IRR information, one might expect that the experts engaged by EnergyAustralia ought to be able to use the IRR information without recourse to EnergyAustralia personnel. However, as it appears that Dr Brown may not have fully appreciated how QIC uses IRR to construct its financial models, input may be required from EnergyAustralia’s commercial personnel in order to assist in evaluating Lochard’s loss and damage claim. In any event, it is apparent from all of the evidence that this information is of substantial forensic significance to the issues in the proceeding.
Accordingly, adopting the framework used in IOOF,[15] my conclusions in relation to the IRR documents are as follows:
[15][2016] VSC 594.
(a) the IRR documents are highly relevant to the issues in the proceeding;
(b) the IRR documents are confidential, and have not yet been disclosed to EnergyAustralia personnel in this proceeding;
(c) it is not entirely clear, given the number of different IRR in the sample documents, and the difficulty of memorising such a large number of figures, that the information could be retained in such a way as to be useful to EnergyAustralia in any future bidding process;
(d) in my view, given Mr Bruers’ role within EnergyAustralia, including his knowledge of the Iona facility and the bidding process, it would be unfair for him to be precluded from assisting and giving instructions to EnergyAustralia’s legal representatives and experts on such a significant aspect of Lochard’s claim; and
(e) I agree that the imposition of terms such as those proposed by Lochard would be unworkable, particularly given the secrecy that often surrounds bidding processes for infrastructure assets. However, the concerns of QIC could be ameliorated by limiting inspection of this information to Mr Bruers, the provision of a confidentiality undertaking by Mr Bruers, and the provision to him of documents on certain terms (for example, by providing him with hard copy documents only, to be returned to Lochard at the conclusion of the proceeding).
Contracting and Pricing Strategy documents
In his affidavit affirmed on 29 August 2018, Mr Wong deposed as follows:
If:
(a)information setting out the terms on which QIC and/or Lochard proposed to contract future services offered by the Iona Business;
(b)Lochard’s contracts with customers other than EA, including the pricing of these contracts;
(c)analysis of customer demand for Lochard’s services, including volume and price;
(d)details concerning the price of capacity that Lochard planned to bring on‑line as a result of expansion works; or
(e)details of Lochard’s projected financial performance (including profit, loss and rates of return and the impact of customer pricing on that performance),
were disclosed to EA, EA would be provided with an unfair competitive advantage as against Lochard, and other customers of Lochard, in the future. Knowledge of Lochard’s pricing requirements would give EA increased power in its contractual negotiations with Lochard. In particular, EA would be able to use this information to understand and predict the contractual terms (including pricing and the term of the contract) that Lochard would be willing to accept.
In addition, EA has certain conditional rights under its existing agreements, including options to extend the term of the existing GSSA. … A relevant factor when considering and negotiating the possible extension of the GSSA is the price that Lochard is willing to accept to sell those services to other customers if EA does not exercise its option.
Given the highly commercially sensitive nature of the information disclosed in these documents and the relative simplicity of certain information such as Lochard’s target price, it would be easy for any representative of EA to remember and it would not be possible to completely and effectively put that information out of their mind.
EnergyAustralia submitted that QIC’s assumptions about contracting strategy and price made for the purposes of calculating the bid price for the Iona facility is information necessary to assess the reasonableness of those assumptions and modelled cash flows. There is no certainty that this modelling reflects the way that Lochard is currently operating the Iona business, and it is reasonable to assume that business plans change over time.
In response, Lochard submitted that notwithstanding market changes in the gas supply market, the evidence shows that the gas storage services market is quite stable. EnergyAustralia’s evidence does not undermine Lochard’s position concerning the confidentiality and currency of the contracting and pricing strategy information.
Having reviewed the sample documents in this category, and also Ms Deckart’s evidence regarding the competitive environment in which the parties operate, I agree that the contracting and pricing strategy information is particularly commercially sensitive. Further, unlike the IRR documents, it would be relatively easy for an interested reader of these documents to remember the specific price information in them, such that the risk of inadvertent use of that information is high. That said, given Mr Bruers’ current role in EnergyAustralia, he is unlikely to be involved in negotiating contracts between Lochard and EnergyAustralia. Any concerns on the part of Lochard could be ameliorated by an undertaking on Mr Bruers’ part that he would not be involved in any contractual negotiations between Lochard and any other party in respect of the Iona facility for an appropriate period of time.
Accordingly, again using the IOOF[16] framework:
[16][2016] VSC 594.
(a) the contracting and pricing strategy documents are highly relevant to the issues in the proceeding;
(b) the contracting and pricing strategy documents are confidential, and have yet not been disclosed to EnergyAustralia personnel in this proceeding;
(c) the information is presented in such a way that it would not be difficult to retain, and thus inadvertently use, the information;
(d) while it would be unfair to preclude Mr Bruers from reviewing the information, given that it is likely that forecast prices was a significant input into QIC’s valuation process, his role does not seem to involve negotiating contracts on a regular basis; and
(e) accordingly, it is feasible to craft a form of undertaking which protects the legitimate interests of Lochard and Mr Bruers.
AGL terms documents
Ms Deckart of AGL has provided detailed, focussed, and compelling evidence of how disclosure of the AGL terms documents to EnergyAustralia would cause serious prejudice to AGL. Ms Deckart deposed that the AGL terms documents include information on pricing, capacity rights, and options under the AGL GSSA. She gave evidence that AGL is currently in active negotiations with EnergyAustralia in relation to a commercial transaction. Ms Deckart deposed as follows:
The examples I have given of the highly confidential information also illustrates the fragility of the information contained in the GSSA. Employees of businesses often change roles. If EnergyAustralia employees gained access to the GSSA, they may in the future perform a role which requires them to directly negotiate with or compete against AGL. Much of the sensitive information is set out in tables and readily identifiable. Once an employee of EnergyAustralia has seen the sensitive information, it will be difficult for them to forget and not seek to apply the information to EnergyAustralia’s advantage. This may be done in negotiations directly with AGL, or AGL may be unaware that the information is being used for the benefit of EnergyAustralia to improve its position or to harm AGL’s.
I accept Ms Deckart’s evidence. I am also not satisfied that, insofar as the AGL terms documents include terms other than the price, withdrawal rights and duration of the services provided under the AGL GSSA, this information is particularly relevant to Lochard’s loss and damage claim. I am also not satisfied, as yet, that there is a particular need for EnergyAustralia personnel to see these documents. To the extent that the AGL terms documents are relevant, they will presumably be used to verify the assumptions made by QIC in preparing its bid price. In the absence of any specific evidence to the contrary, I cannot see how that task could not be adequately undertaken by EnergyAustralia’s experts.
In accordance with the IOOF[17] framework, I conclude as follows:
[17][2016] VSC 594.
(a) the AGL terms documents are highly relevant to the issues in this proceeding, at least insofar as they concern the price, duration, and withdrawal capacity of services provided to AGL under the AGL GSSA, to the extent those terms constituted inputs into the financial modelling to generate the bid price for the Iona facility;
(b) the information is highly confidential, not only to Lochard, but also to AGL, which is a competitor of EnergyAustralia, and is not a party to this proceeding. The information has not been previously provided to EnergyAustralia;
(c) the information maintains its currency, given that the AGL GSSA is a long term contract. Further, the information is presented in such a way that it would be relatively capable of retention by an interested reader; and
(d) while in some respects the AGL terms documents are of a similar nature to the information in the contracting and pricing strategy documents, given the potential harm to Lochard and AGL of disclosure, I am not satisfied on the evidence that it would be unfair if Mr Bruers or other EnergyAustralia personnel were not able to review the AGL terms documents.
Accordingly, the EAO regime should continue to apply to the AGL terms documents, subject of course to granting EnergyAustralia liberty to apply.
Competing available storage options
In his affidavit of 28 August 2018, Mr DeSouza gave the following evidence concerning the competing available storage option documents:
It is possible that in the future, QIC will be involved in bidding for any or all of those fields. It is likely that if QIC were to seek to acquire an interest in those fields, they would do so using Lochard as the appropriate investment vehicle. If the Competing Fields considered by QIC at the time of the bid process were known to EA, it is likely that EA could infer, based on QIC’s assessment of these assets; that Lochard and/or QIC would be interested in acquiring these assets, and details of how Lochard and/or QIC would value those assets. EA could then use that information to Lochard and/or QIC’s competitive disadvantage in any sale process for those fields.
If:
(a) the identities of the Competing Fields considered by QIC;
(b)the assessment of the viability and quality of the reservoirs in those fields as storage reservoirs, including the relative assessment of the quality of each of them;
(c)the likely capital expenditure needed to convert those fields to gas storage fields; and
(d)the likely price of services that could be offered by those fields,
was disclosed to EA, it would be easy for any representative of EA who was shown those matters to remember (and difficult to forget). If, in the future, QIC were to bid against EA for one of these Competing Fields, it would be impossible for a representative of EA who was aware of these matters to put those figures out of their mind in assessing the approach that QIC would likely take to bidding for the asset. That information would give EA a competitive advantage vis-a-vis both QIC and other potential bidders in any future bid process, because EA would be able to more accurately anticipate QIC’s approach in bidding for the asset, and adjust their bid strategy accordingly.
Mr Wong also gave evidence to substantially the same effect.
EnergyAustralia submitted that the analysis undertaken by QIC or for QIC regarding alternative gas storage options is directly relevant to the calculation of the bid price for the Iona facility. Given the changes in the gas industry over recent years, including changes in the ownership of competing facilities, and the speculative nature of the analysis undertaken, Lochard has failed to explain why this information remains so confidential that EnergyAustralia should not have access to it.
The information concerning competing available storage options seems to me to be of a somewhat different character than the information in the other categories of confidential documents. Essentially, these documents express QIC’s opinions about the feasibility and pricing structure of current and potential alternatives to the Iona facility, as part of its assessment of the competitive position of the Iona facility. A substantial part of this information is derived from a report prepared by an external consulting firm, which presumably prepared its report based upon publicly available information and its own industry experience. In some respects, QIC’s application to protect this information may well have arisen out of a desire to protect its work product and that of its consultants rather than confidential information of the nature referred to in the authorities.
Such information would no doubt be of interest to EnergyAustralia and other industry participants, but it is difficult to see how EnergyAustralia’s possession of that information could materially prejudice QIC and/or Lochard. On the other hand, the information is probably of lesser relevance than the other categories of confidential information: QIC’s assessment of the competitive position of the Iona facility is probably not as significant as QIC’s financial modelling to assessing Lochard’s claim for damages. Rather than feeding directly into the price QIC was willing to pay for the Iona facility, this information seems to be more relevant to evaluating the competitive environment within which the Iona facility was operating. This information may have influenced QIC’s view that the Iona facility was an attractive asset to bid for, but I cannot see how that information fed into QIC’s valuation of the Iona facility. However, EnergyAustralia personnel may be better placed to evaluate the relevance of this information than EnergyAustralia’s lawyers or experts.
Further, insofar as it was said by Lochard that the competing available storage options documents could be used in competing against Lochard in any future bids for those facilities, this evidence seems somewhat speculative.
Again, using the IOOF[18] framework, I conclude as follows:
[18][2016] VSC 594.
(a) the information in these documents is of less relevance to Lochard’s claims in this proceeding than the other categories of confidential documents;
(b) the information in these documents is relatively easy to remember, and is unlikely to be stale;
(c) the documents are confidential, but their commercial sensitivity is not as great as the other categories of documents, particularly given that information was largely sourced from a third party; and
(d) as noted above, the evidence regarding the potential use to which the information could be put is somewhat speculative. However, any concerns of Lochard in that regard could be alleviated by Mr Bruers providing an undertaking not to be directly involved in any bid by EnergyAustralia (or any other party, should he change employment), for those assets for an appropriate period of time.
Conclusion
In summary, I find as follows:
(a) the confidential information is in fact confidential, and should be subject to a restricted access regime;
(b) access to the AGL terms documents should be restricted, at least at this stage, to the EAO regime;
(c) access to IRR information should be granted to Mr Bruers. There should be no additional restriction imposed upon Mr Bruers apart from the provision of a confidentiality undertaking in the usual terms, including a requirement that the IRR documents be delivered up to Lochard at the conclusion of the proceeding;
(d) access to contracting strategy and price information should be granted to Mr Bruers on the condition that he agrees not to be directly or indirectly involved in any contractual negotiations between Lochard and EnergyAustralia concerning the Iona facility until after the conclusion of any negotiations with respect to any variation or renewal of the GSSA, or three years from the date of giving the undertaking, whichever is the longer;
(e) access to competing storage option information should be granted to Mr Bruers on the condition that he agrees not to be directly involved in any bid by any party for the facilities identified in the competing storage options documents for a period of three years from the date of giving any undertaking;
(f) there is no evidence of any compelling necessity for Mr Edwards and Mr Ryan (EnergyAustralia’s in-house counsel) to see any of the confidential documents. However, there does not seem to be any compelling reason why they should not be granted access to the confidential documents on the same terms as Mr Bruers, given their unchallenged evidence is that they are not involved in any commercial activity with respect to the eastern Australian gas market; and
(g) I will make orders for there to be liberty to apply with respect to individual documents, categories of documents, any further discovered documents, the identity of any other person EnergyAustralia wishes to have view the confidential documents, and the terms of any confidentiality undertaking. I note that EnergyAustralia seeks to reserve its position in the event Lochard alters the manner in which it puts its claim for loss and damage, and I acknowledge its right to do so.
I shall seek further submissions from counsel with respect to the appropriate form of orders to give effect to these reasons, and the question of costs.
SCHEDULE OF PARTIES
27 September 2018
S ECI 2017 00122
| LOCHARD ENERGY (IONA OPERATIONS HOLDING) PTY LTD (ACN 607 441 041) | First Plaintiff |
| LOCHARD ENERGY (IONA ASSET) PTY LTD (ACN 608 441 701) (as trustee of the Lochard Energy (Iona Asset) Trust) | Second Plaintiff |
| LOCHARD ENERGY (IONA OPERATIONS PTY LTD (ACN 608 441 7298) (as trustee of the Lochard Energy (Iona Operations) Trust) | Third Plaintiff |
| - and - | |
| ENERGYAUSTRALIA INVESTMENTS PTY LTD (ACN 113 121 592) | First Defendant |
| ENERGYAUSTRALIA HOLDINGS LIMITED (ACN 101 876 135) | Second Defendant |
| ENERGYAUSTRALIA PTY LTD (ACN 086 014 968) | Third Defendant |
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