McCarthy v Dolpag Pty Ltd - [2000] WASCA 106

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT : THE FULL COURT (WA)

CITATION: McCARTHY & ORS -v- DOLPAG PTY LTD [2000] WASCA 106

CORAM: ANDERSON J
SCOTT J

HEARD: 6 APRIL 2000

DELIVERED : 20 APRIL 2000

FILE NO/S: FUL 33 of 2000

BETWEEN: PAUL CHARLES McCARTHY
First Appellant (First Defendant)
CARL ROBERT MAYOR
Second Appellant (Second Defendant)
MONEY TALKS (WA) PTY LTD (ACN 087 190 618)
Third Appellant (Third Defendant)
AND
DOLPAG PTY LTD (ACN 054 277 744)
Respondent (Plaintiff)

Catchwords:

Practice and procedure - Discovery - Discovery before action - Principles - Rules of the Supreme Court O 26A

Legislation:

Rules of the Supreme Court, O26A

Result:

Appeal allowed
Costs to be in the cause

Representation:

Counsel:

First Appellant (First Defendant) :             Mr D H Solomon
Second Appellant (Second Defendant)     :        Mr D H Solomon
Third Appellant (Third Defendant)           :        Mr D H Solomon
Respondent (Plaintiff)  :        Mr A Metaxas

Solicitors:

First Appellant (First Defendant)              :        Solomon Brothers
Second Appellant (Second Defendant)     :        Solomon Brothers
Third Appellant (Third Defendant)           :        Solomon Brothers
Respondent (Plaintiff)  :        Arthur Metaxas & Co

Case(s) referred to in judgment(s):

Buckley v Tutty (1971) 125 CLR 353
Harman v Secretary of State for the Home Department [1983] 1 AC 280
Heron v The Port Huon Fruitgrowers' Co‑operative Ltd (1922) 30 CLR 315
Lindner v Murdock's Garage (1950) 83 CLR 628
O'Sullivan v Herdmans Ltd [1987] 3 All ER 129
Tipperary Developments Pty Ltd v Western Australia [1999] WASC 62; (1999) 21 WAR 250

Case(s) also cited:

Airservices Australia v Transfield Pty Ltd [1999] FCA 886; (1999) 164 ALR 330
Cardile v LED Builders Pty Ltd (1999) 162 ALR 294
Home Counties Dairies Ltd v Skilton [1970] 1 All ER 1227
Hooper v Kirella Pty Ltd [1999] FCA 1584; (1999) 167 ALR 358
Jenkins v Smith (1997) 18 SR (WA) 304
Kent Coal Concessions Limited v Duguid [1910] 1 KB 904
Mann v Carnell [1999] HCA 66; (2000) 168 ALR 86
McLean v Burns Philip Trustee Co Pty Ltd [1985] 2 NSWLR 623
Mobil Oil Australia Ltd v Guina Developments Pty Ltd [1996] 2 VR 34
Norwich Pharmacal Co v Customs and Excise Commissioners [1974] AC 133
Stephens v Kuhnelle (1926) 26 SR (NSW) 327

JUDGMENT OF THE COURT: This is an appeal from a decision of Master Sanderson granting an application by the respondent for discovery before action.
The authority to make such an order is contained in O 26A which, so far as is relevant, provides:
"4(1)This rule applies if a person who may have a cause of action against a person … ('the potential party') wants ‑
(a)to commence proceedings against the potential party
…
but the person, after reasonable enquiries, has not been able to obtain sufficient information to enable a decision to be made as to whether to commence or take the proceedings
(2)If there are reasonable grounds for believing that the potential party had, has, or is likely to have had or to have, possession of documents that may assist in making the decision, the person may apply for an order under this rule."
The respondent carried on business as a finance broker and the first and second appellants were its employees. They were initially engaged under employment agreements dated 13 May 1998 and 28 November 1998 respectively. The involvement of the third appellant, Money Talks (WA) Pty Ltd, comes about in the following way. At some time prior to March 1999, the respondent wanted to change the status of its employees. They were all offered engagement as contractors. The first appellant, Mr McCarthy, did not accept that offer. The second appellant, Mr Mayor, agreed to do so, subject to some further negotiation. While these negotiations were in train, there was an oral arrangement that the second appellant's remuneration would be paid to the third appellant. We gather this was in anticipation that a contractual arrangement would be concluded whereby the third appellant would contract with the respondent to provide the services of the second appellant to the respondent as a finance manager for a contract fee payable to the third appellant. So far as appears, that contract was never signed and by June 1999, both Mr McCarthy and Mr Mayor had left the respondent's employment.
In the affidavit in support of the application for discovery before action, Mr Crouch, of the respondent, deposed that the respondent had an arrangement with a real estate group known as "The Professionals" and with a real estate and building organisation known as "The Summit Group". The arrangement was that persons dealing with these groups who required finance to build or buy homes might be referred to the respondent as a "preferred finance broker". The respondent did a lot of business with people referred under these arrangements. One or other or both of the appellants handled some or most of this business in the course of their employment with the respondent. According to Mr Crouch, from shortly after the appellants left the employment of the respondent, business from these two sources substantially reduced. He said that in the case of The Summit Group it "totally dried up".
There is evidence that the appellants now carry on business together under the name M & N Mortgage Finance as finance brokers in competition with the respondent and that this organisation now receives business from the Summit Group.
In the service agreements between the appellants and the respondent, there is a restraint of trade clause, whereby each employee agreed, during his employment and for a period of three months following the termination of his employment, not to "act as contractor, consultant or adviser to or canvass or solicit orders, custom or business from any past or present customer/client of [the respondent]".
In correspondence between the parties, the respondent has accused the appellants of breach of contract by breaching that clause. This, the appellants have denied. The respondent has not been able to obtain from other sources sufficient evidence in proof of the alleged breach and there is evidence on which the court can conclude that, if there had been a breach by either of the appellants, the appellants will have had in their possession, custody or control or do now have in their possession, custody or control documents evidencing the breach. In argument before us, these documents were identified as being documents such as correspondence or other written communications between the appellants and customers or clients of the respondent, finance applications submitted by the appellants on behalf of persons referred by past or present customers of the respondent, and so on.
By originating summons dated 7 December 1999, the respondent sought an order that each of the defendants give discovery of "all documents that are or have been in their respective possession, custody or power relating to all transactions undertaken by each of the defendants in arranging loans or financial accommodation in the period from the 1st day of July 1999 to 31 December 1999". The relevance of the date 1 July 1999 is that it is approximately the date upon which the appellants left the employment of the respondent.
The matter came before Master Sanderson and he was persuaded that an order ought to be made. The terms of his order were that:
"Within 28 days from the date of this order each of the defendants give discovery of all the documents that are or have been in their respective possession, custody or power relating to all transactions undertaken by each of the defendants in arranging loans or financial accommodation in the period from the 1st day of July 1999 to 31 December 1999."
The main ground of appeal is that the respondent had failed to establish that it may have a cause of action against either of the appellants because the restraint of trade clause on which the causes of action would be founded is void and unenforceable.
Restraint of trade clauses are prima facie contrary to public policy and unenforceable: Buckley v Tutty (1971) 125 CLR 353 at 356. A restraint of trade clause will only be enforced if it is reasonable in all the circumstances, the question being whether the restriction exceeds what is reasonably necessary for the protection of the covenantee: Heron v The Port Huon Fruitgrowers' Co‑operative Ltd (1922) 30 CLR 315 at 324. Unless the clause affords no more than adequate protection to the party in whose favour it is imposed, the courts will not generally enforce it: Lindner v Murdock's Garage (1950) 83 CLR 628 at 642. On behalf of the appellants, Mr Solomon submitted that Master Sanderson should have held that the restraint of trade clauses in these contracts were unenforceable and that in consequence the respondent did not have a cause of action based upon them. He invited us so to hold.
We are of the opinion that, in every case, the question whether a restraint of trade clause is or is not reasonable depends upon the facts of the particular case and to come to a conclusion about it in this case, the court would have to try the facts and would need to hear full argument based upon the evidence. That is not the function of the court in considering an application under O 26A. This ground of appeal is not made out.
Mr Solomon also submitted that the test as to whether an applicant for an order under O 26A "may have a cause of action" is or should be a stringent test. There is no doubt that caution must be exercised before making an order and that such orders should not be made as a matter of course. They should only be made when reasonably necessary to achieve the proper administration of justice: Tipperary Developments Pty Ltd v Western Australia [1999] WASC 62; (1999) 21 WAR 250, per Parker J at 24; O'Sullivan v Herdmans Ltd [1987] 3 All ER 129 at 135 ‑ 6. It must be remembered that discovery "constitutes a very serious invasion of privacy and confidentiality [and] the process should not be allowed to place upon a litigant any harsher or more oppressive burden than is strictly required": Harman v Secretary of State for the Home Department [1983] 1 AC 280 at 308 per Lord Keith of Kinkel; and this is a fortiori the position where the discovery is sought before action and is for the purpose of determining whether or not there is an issue to litigate. Mr Solomon submitted that Master Sanderson has proceeded on the basis that mere suspicion that there may be a cause of action is sufficient. He referred us to other decisions of the learned Master which, he submitted, show that the Master has consistently adopted a test with a threshold which is too low and much lower than the test adopted in the District Court of this State and in other jurisdictions.
We are not concerned with other decisions of the learned Master. Looking only at his decision in this case, we are not able to identify in his reasons any error as to the test which he applied. Whilst he did say that in his opinion "the threshold test in relation to order 26A rule 4 is a low one", the word "low" must take its meaning from its context. It is a relative term and in this case it is plain that Master Sanderson acted upon the evidence outlined above and other evidence in coming to the conclusion that the respondent "may" have a cause of action against the appellants. In our opinion, that evidence does sustain a conclusion that the appellants may have breached the covenant contained in their contracts of service, on any view of the meaning of the word "may".
We have come to the conclusion, however, that the order is a little too wide. It is not necessary that the respondent have discovery of all the appellants' broking records relating to all of their customers in the period in question. It must be borne in mind that the parties are business competitors. Orders for discovery of business records especially of competitors, should be no wider than necessary. We think that discovery before action in this case should be limited to documents relating to or arising from dealings with clients of The Professionals or The Summit Group; and with the groups themselves.
This is not intended to be a definitive statement of the categories of documents that ought, at this stage, to be covered by the order. The point is, however, that only those documents actually relevant to a cause of action which the respondent may have for breach of the restraint covenants ought to be the subject of the discovery order. On this narrow ground, we would set aside the present order and remit the matter to Master Sanderson for reconsideration by him of the appropriate form of order in the light of this judgment.
As to the costs of this application, we are of the opinion that they should be in the cause. Whilst the appellants have had some success in having the extent of discovery before action confined, they failed in their main contention that no order should be made at all.