Macquarie Bank Ltd v McCann and Associates Pty Ltd

[1998] FCA 1533

FEDERAL COURT OF AUSTRALIA

DISCOVERY –application for special discovery –claim of privilege for witness statements prepared for purpose of previous court proceedings where some read and some not – whether amount claimed for legal costs of previous proceedings can be tested by reference to non-privileged witness statements – whether internal credit assessment guidelines of bank not used in section of bank which approved the loan the subject of proceedings should be discovered if negligence alleged against bank.

Evidence Act 1995 (Cth)

Akins v Abigroup Ltd (1998) 43 NSWLR 539
Lake Cumbeline Pty Ltd v Effem Foods Pty Ltd (1994) 126 ALR 58
Banco de Portugal v Waterlow & Sons [1932] AC 453

MACQUARIE BANK LIMITED v McCANN & ASSOCIATES PTY LIMITED

NG 1104 of 1997

MOORE J
2 DECEMBER 1998
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 1104  of   1997

BETWEEN:	MACQUARIE BANK LIMITED APPLICANT
AND:	McCANN & ASSOCIATES PTY LIMITED RESPONDENT
JUDGE:		MOORE J
DATE OF ORDER:		2 DECEMBER 1998
WHERE MADE:		SYDNEY

THE COURT ORDERS THAT:

1. The notice of motion is stood over to a date to be fixed.

2. Costs reserved.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 1104 of 1997

BETWEEN:	MACQUARIE BANK LIMITED APPLICANT
AND:	McCANN & ASSOCIATES PTY LIMITED RESPONDENT

JUDGE:	MOORE J
DATE:	2 DECEMBER 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

Introduction

An issue has arisen in proceedings brought by Macquarie Bank Limited (“MBL”) against McCann & Associates Pty Limited (“McCann”) concerning discovery.  General discovery was ordered and lists of documents have been prepared and served.  However McCann contends in this interlocutory application that MBL has failed to give discovery of documents that should have been discovered and, to the extent that any claim of privilege might be made in relation to them, the claim is not well founded or privilege has been waived.  In order to understand the issues raised in these interlocutory proceedings it is desirable to set out both the background facts and, in summary, the issues in the principal proceedings between MBL and McCann.

Background facts

The following is the background against which the principal proceedings are brought.  It reflects, in substance, the facts as set out in an outline in written submissions prepared by counsel for MBL.  In September 1994 MBL entered into a project facility agreement with Soredo Pty Limited (“Soredo”) and a number of guarantors (“the guarantors”) under which MBL was to make certain advances to Soredo (“the Soredo facility”).  The Soredo facility was to be used by Soredo to develop and subdivide an area of land known as Bayside Views Estate, Princes Highway, Yallah, New South Wales (“the site”).  The Soredo facility was secured by a registered mortgage over the site.

Before providing the Soredo facility, MBL wished to obtain a valuation report confirming, amongst other things, that the current market value of the site for mortgagee purposes was not less than $5 million.  In November 1994 MBL retained McCann to assess the current market value of the site on a number of bases.  This included assessing the current market value on an “as is” basis assuming development approval for the eastern and western portions on certain specified lot yields and including the value of land fill works as at the date of the valuation.  On about 12 December 1994 McCann forwarded to MBL a valuation certificate and report of the site and on 15 December 1994 provided to MBL a recalculation of separate components of the site (“the valuation”).

During the period 20 December 1994 to 30 June 1995 MBL made advances to Soredo under the Soredo facility totalling approximately $3.5 million.  On about 19 July 1995 MBL terminated the Soredo facility.  MBL demanded payment of $7,953,541 representing principal, interest, fees and other monies owing.  On 23 January 1996 MBL commenced proceedings against Soredo and the guarantors of the Soredo facility in the Commercial Division of the Supreme Court of New South Wales being Plaint No 50010 of 1996 (“the Supreme Court proceedings”).  In conformity with a practice note of the Court, on 31 May 1996 Rolfe J ordered the parties to file and serve witness statements by nominated dates.  Thirteen such statements or affidavits (including expert reports) were filed and served on behalf of MBL (“the MBL statements”) and nine on behalf of the guarantors.  The MBL statements were prepared for the sole purpose for the Supreme Court proceedings.

On 26 May 1997 the Supreme Court proceedings commenced before Bainton J and on 30 May 1997 they were settled.  At the time of settlement none of the statements filed and served by the guarantors had been tendered as evidence and of the MBL statements only those of Simon McDonald, Steven Papadopoulos and Rodney Jeffery had been tendered.

At 19 May 1997 the debt owing to MBL from Soredo and the guarantors was certified by MBL as being $11,874,909.63.  The settlement involved judgment being entered against Soredo and the guarantors in the sum of $11,800,000.  It was a term of the deed of settlement that MBL would not enforce the judgment until 29 August 1997 provided, amongst other things, the amount of $2,500,000 was received by MBL by 29 August 1997.  A further sum of $250,000 was payable on or before 28 November 1997.  MBL also agreed that in the event that these conditions were met it would discharge the mortgage secured over the site and remove the receiver and manager appointed to Soredo.  The deed of settlement was varied by a deed of variation dated 26 August 1997 and the sums of $2,500,000 and $250,000 were to be paid by 29 August 1997 and a further sum of $31,805 by 2 March 1998.

On 19 December 1997 MBL commenced the principal proceedings in this Court.

The issues in the principal proceedings
In order to deal with the question of whether discovery should be given of the documents sought, it is necessary to ascertain whether they are documents “relating to any matter in question”: see O 15 r 2(a), which might, for example, fairly lead to a train of inquiry which might uncover information that would directly or indirectly enable a party to advance its own case or damage that of the opposing party: see Commonwealth v Northern Land Council (1991) 30 FCR 1 at 25. To make this assessment it is necessary to consider the issues raised in the principal proceedings. In its statement of claim MBL alleges that in breach of its retainer and negligently, McCann provided MBL with the valuation which overstated the value of the site. The damages claimed by MBL include legal and other expenses in the Supreme Court proceedings and in providing the Soredo facility. While it is not entirely clear the legal fees claimed appear to total approximately $949,000 as out of pocket expenses. Also claimed as damages is the difference between the sum of $11.8 million and the amount of $2,750,000 received from Soredo. In its defence McCann denies the valuation involved an overstatement of the value of the site. Moreover it alleges that any loss that may have been suffered by MBL was not caused by McCann. In particular the defence alleges that any loss suffered by MBL as a result of the Soredo facility arose from, inter alia, MBL’s decision to terminate the facility in June 1995. It is contended that the termination of the facility precluded Soredo completing the project of developing and subdividing the site. In addition McCann alleges in its defence that MBL failed to mitigate any loss it suffered by, inter alia, acting unreasonably in compromising its claim against Soredo and the guarantors in the Supreme Court proceedings. Contributory negligence is also raised in the defence and an allegation made that MBL acted with full knowledge of the risk of loss and voluntarily accepted such risks.

The documents sought
The documents sought by McCann fall into four groups.  The first three relate to witness statements prepared for the purposes of the Supreme Court proceedings.  Of those, the first group was those prepared on behalf of MBL for those proceedings, served on the defendants but not read in the proceedings.  In relation to those statements it is accepted by counsel for McCann that they attract client legal privilege: see Akins v Abigroup Ltd (1998) 43 NSWLR 539, but it is contended that the privilege has been waived by the disclosure of their contents. There is also an issue about the relevance of these documents, that is to say, whether they are documents that should be discovered. The same issue of relevance arises in relation to the second group of documents which are witness statements prepared by MBL for the Supreme Court proceedings and which were read. As noted earlier there are three such statements. MBL accepted that privilege has been lost by the use of the documents in the Supreme Court proceedings. However the question of the relevance of these documents arises. It was accepted by counsel for McCann that the third group of documents, which are the statements prepared by the defendants in the Supreme Court proceedings which had been served on MBL, were confidential and should not be disclosed: see Akins v Abigroup Ltd (supra) at 549. The fourth group of documents are credit assessment guidelines within MBL which existed at the time the Soredo facility was approved. The guidelines for the division which approved that facility, the Property Finance Section, have been discovered and inspected. McCann asserts that guidelines for other divisions within MBL ought also be discovered. MBL puts in issue their relevance.

Witness statements – waiver of privilege
Accepting for the moment that the witness statements created by MBL are relevant, it is convenient to deal with the question of whether privilege has been waived. I should proceed on the basis that the question of whether privilege has been lost is to be determined by reference to the provisions of s 122 of the Evidence Act 1995 (Cth): see Adelaide Steamship Company Ltd and Australian Securities Commission v Spalvins (1998) 152 ALR 418. That section relevantly provides:

(1)…

(2)Subject to subsection (5), this Division does not prevent the adducing of evidence if a client or party has knowingly and voluntarily disclosed to another person the substance of the evidence and the disclosure was not made:

(a)…

For present purposes the critical part of this provision is the expression “disclose … the substance of the evidence”.  When the witness statements were prepared by MBL for the Supreme Court’s proceedings they would have been confidential documents as that expression is defined in s 117.  That is, they would have been documents prepared by solicitors for MBL for witnesses where there would have been an implied obligation not to disclose their contents.  Having that status s 119 would have precluded the evidence of the contents of the confidential document being adduced because it had been prepared for the purpose of MBL being provided with professional legal service in relation to the Supreme Court proceedings.  That privilege might conveniently be described as litigation rather than advice privilege (see Newcastle Wallsend Coal Company Pty Ltd v The Court of Coal Mines Regulation (1997) 42 NSWLR 351 at 388).

The factual foundation of the contention of counsel for McCann that the substance of the evidence had been disclosed was that the issues in the Supreme Court proceedings were, in many material respects, the same as or similar to the proceedings in this Court.  A number of the individuals for whom statements were prepared in the Supreme Court proceedings by MBL’s solicitors have also prepared statements which have been filed in these proceedings.  It can be inferred, it was submitted by counsel for McCann, that the evidence in the statements in these proceedings is the same as or similar to the evidence contained in the statements prepared for the Supreme Court proceedings.  It can also be inferred, it was submitted that the substance of those earlier statements have been disclosed in the statements filed in these proceedings.  There was specific evidence in this interlocutory application of the solicitor having the conduct of the matter on behalf of MBL having had recourse to one of the statements filed in the Supreme Court proceedings for the purposes of preparing a draft of the statements filed in the proceedings in this Court. 

Assuming, for present purposes, that the coincidence of issues and witnesses who may have given evidence or did give evidence in the Supreme Court proceedings and might give evidence in these proceedings justifies a conclusion that the contents of the statements prepared for the Supreme Court proceedings has been substantially reproduced in the statements filed in this Court.  There is nonetheless a fundamental difficulty in the approach contended by counsel for McCann.  It is that there has not yet been disclosure of the contents of the statements filed in the proceedings in this Court.  If, as submitted by counsel for McCann, it is truly the contents of the earlier statements which is privileged (which depends upon difficult issues of construction of the Evidence Act 1995 (Cth)) then the contents remain privileged having regard to the nature of the disclosure to this point. The disclosure to this point has been as a result of directions of this Court that statements had to be filed and served by a specified time. It cannot be said, in my opinion, that there has been a voluntary disclosure. It is a position that, in principle, is the same as that discussed by the Court of Appeal in Akins v Abigroup Ltd (supra).  Thus there is no foundation for the contention of counsel for McCann that there has been voluntary disclosure.

The witness statements – relevance

As noted earlier there are three witness statements that were read in the Supreme Court proceedings and no claim of privilege is asserted in relation to them.  Counsel for McCann says these statements, as well as the privileged witness statements, are relevant for two purposes.  The first is that McCann wishes to challenge the amount claimed by way of legal costs in the Supreme Court proceedings.  They seek to do so, it appears, by testing whether amounts claimed for the preparation of the statements can be justified.  The second is to test whether the settlement of the Supreme Court action was reasonable.

As to the question of whether costs were reasonably incurred, counsel for MBL submitted that an examination of the witness statements by McCann, either in isolation or in conjunction with non-privileged material, would not enable it to form an opinion about the reasonableness or otherwise of the fees.  The only evidence in this interlocutory application concerning the material available to those advising McCann that could be used to scrutinize the witness statement for the stated purpose of evaluating the reasonableness of the fees, is an affidavit of Ms Monique Scheen.  It is an affidavit filed by MBL in the principal proceedings, but tendered by counsel for McCann in this interlocutory application, in which Ms Scheen deposes to amounts having been paid to MBL’s solicitors, Clayton Utz, in relation to the Soredo facility.  Bare amounts are identified and the purpose of the payments is not.  There is no material pointed to by counsel for McCann that would suggest there could be any rational consideration of the statements as a means of evaluating the appropriateness of the fees charged for their preparation or the conduct of the Supreme Court proceedings more generally.  It was acknowledged by counsel for McCann that while the files of Clayton Utz in relation to the conduct of the Supreme Court proceedings have been discovered, a claim for privilege has been maintained.  That claim has not been challenged.  In my opinion no order for particular discovery should, as a matter of discretion, be made as the prospects of the statements being used for this stated purpose in any rational way are, at best, remote.

I should, on this question of costs, refer to one other matter.  Counsel for MBL also submitted that a party claiming costs as damages who provides a list of the costs and amounts in respect of which the claim is made does not waive privilege in relation to documents for which fees were paid for the professional legal services that led to the creation of the documents.  Reference was made to the judgment of Tamberlin J in Lake Cumbeline Pty Ltd v Effem Foods Pty Ltd (1994) 126 ALR 58 where, at 69, his Honour indicated that in the circumstances just described, privilege is not waived by a party seeking to prove the damages based on legal costs by reference to memoranda of fees without providing, to the other party, the primary documents (such as advices and the like) for which the fees were rendered. His Honour went on to say that a party claiming privilege in relation to the primary documents ran the risk of not being able to prove its claim for costs. It is unnecessary for me to consider at length Tamberlin J’s reasons as, in the present case, it is not suggested that there has been a waiver of privilege having regard to the evidence of MBL (the affidavit of Ms Scheen) concerning the quantification of damages arising from the payment of legal costs.

In response to the submission made by counsel for MBL that an applicant could elect to seek to prove damages by way of legal costs without being required to provide detailed documentation to support the fees charged, counsel for McCann made the following submission.  It was that, in substance, a respondent would be limited to challenging the damages on the basis that they had not been proved rather than challenging them on grounds that they were excessive.  This submission raises a legal point of substance that may have to be addressed at trial.  I need only mention it now.  As a matter of general principle the position of MBL in relation to legal costs incurred as a result of any negligent conduct of McCann or its breach of contract should be as stated by Lord McMillan in Banco de Portugal v Waterlow & Sons [1932] AC 452 at 456:

Where the sufferer from a breach of contract finds himself in consequence of that breach placed in the position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty.  It is often easy after an emergency has passed to criticise the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency.  The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the costs of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.

Thus, it might be thought that even if MBL had retained solicitors whose fees were excessive or in the upper range of what might be charged (I am not, in putting it this way, implying they were) then if MBL acted reasonably in retaining them it might be able to recover the fees actually paid.  More specifically, however, there is authority that suggests that while damages based on the legal costs of earlier litigation with a third party are recoverable, only the party/party component of them can be recovered and not the solicitor/client component of fees actually paid: see McGregor on Damages, 1997, 16^th edition at p 508-511.

I now turn to the question of whether the witness statements are relevant because McCann is entitled to explore the reasonableness of the settlement reached in the Supreme Court proceedings.  I do not accept the submission of counsel for MBL that no issue can arise about the reasonableness of the settlement because judgment was entered for an amount that approximated the amount claimed, namely $11,800,000.  My present view is that the settlement can be considered having regard to all aspects of it.  While judgment was entered for $11,800,000 the claim was effectively compromised, albeit conditionally, for $2,781,805.  However MBL has not yet filed its evidence concerning the basis upon which the claim was compromised.  It may be that it does not rely on the strength of its case in the Supreme Court proceedings but on matters extraneous to it.  If that is the factual foundation advanced in support of the compromise, then the strength or otherwise of the case of MBL in the Supreme Court proceedings may not be, as I presently understand the case as pleaded, an issue arising for consideration in the present proceedings.  In this respect I accept that on the submission of counsel for MBL it is premature to determine whether, on this basis, the witness statements are relevant.  It is also premature to consider the submission of counsel for McCann that MBL has raised an issue about its state of mind as to the strength of its case and thus, perhaps arguably, raised the question of whether privilege can be asserted in relation to documents that led to that state of mind: see Telstra Corporation Ltd v BT Australia Pty Ltd (1998) 156 ALR 634 at 647-648 per Branson and Lehane JJ.

Credit assessment guidelines – relevance

The manner in which MBL assessed the credit worthiness of Soredo and the guarantors appears to be a relevant basis for asserting contributory negligence: see Challenge Bank Ltd v V.L. Cooper & Associates Pty Ltd [1996] 1 VR 220 at 243-248. It is at least arguable that a practice for assessing credit worthiness adopted by one part of a banking institution concerning a particular type of transaction might be relevant in assessing whether the practice of another arm, in relation to the same or a similar type of transaction, met the standards of a notional prudent banker.

However there is no evidence to suggest that other branches or sections of MBL were engaged in transactions of the type, or even remotely of the type, to which these proceedings relate.  Indeed the existence of a Property Finance Section rather implies that transactions of the present type are dealt with in the one area of the bank, namely that section.  I accept, as MBL submitted, that McCann is engaged, in so far as it seeks credit assessment guidelines/manuals from other divisions or sections of MBL, in a task that is substantially a speculative one.  In my opinion, McCann has not established a basis for ordering discovery of those guidelines or manuals.

Conclusion

I presently propose to make no further orders for discovery.  As all issues raised in the notice of motion are not yet resolved I propose to reserve the costs of the motion.  The notice of motion is stood over to a date to be fixed.

I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore

Associate:

Dated:             2 December 1998

Counsel for the Applicant in the notice of motion and Respondent in the proceedings:	J S Wheelhouse
Solicitor for the Applicant in the notice of motion and Respondent in the proceedings:	Minter Ellison
Counsel for the Respondent in the notice of motion and Applicant in the proceedings:	S White
Solicitor for the Respondent in the notice of motion and Applicant in the proceedings:	Clayton Utz
Date of Hearing:	11 November 1998
Date of Judgment:	2 December 1998