New Cap Reinsurance Corporation Ltd (In Liq) v Renaissance Reinsurance Ltd

[2007] NSWSC 258

CITATION:	New Cap Reinsurance Corporation Ltd (In Liq) & 1 Or v Renaissance Reinsurance Ltd [2007] NSWSC 258
HEARING DATE(S):	09/11/06
JUDGMENT DATE :	26 March 2007
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	White J
DECISION:	1. Order that paragraphs 2-4 of the interlocutory process filed on 9 June 2006 be dismissed; 2. order that the defendant pay the plaintiffs’ costs of paragraphs 2-4 of the interlocutory process.; If either party contends that a different order should be made, they should notify my associate and the opposite party in writing within 21 days enclosing written submissions on that question, and I will list the matter at a convenient time. ; 3. Order that if no such application is made within 21 days, the costs of the defendant’s application in paragraph 1 of the interlocutory process filed on 9 June 2006 be costs in the proceedings.
CATCHWORDS:	PROCEDURE – Discovery and inspection of documents – Grounds for resisting production – Client legal privilege – Whether draft expert report, letters of instruction from clients’ solicitors to expert witness, and notes prepared for preparation of final report are privileged – Waiver of privilege – Whether privilege waived by service of final expert report – Whether draft reports, letters of instruction and notes influenced content of final report so that use or service of final report inconsistent with maintaining privilege in those materials – Waiver of privilege by voluntary disclosure – Held: draft expert report and preliminary letters of instruction from clients’ solicitors to expert witness, privileged because created for dominant purpose of plaintiff being provided with legal services – Privilege not waived. - PROCEDURE – Discovery and inspection of documents – Grounds for resisting production – Exclusion of evidence of settlement negotiations – Communication of extract of document made in the course of settlement negotiations – Held that defendant not entitled to inspect balance of document. - Considered: Evidence Act 1995 (Cth), ss 117, 119, 122, 126, 131(1) - PROCEDURE – Discovery and inspection of documents – Grounds for resisting production – Relevance – Documents created during later period reflecting historical financial position of company – Oppression – Where process of giving discovery of certain class of documents would be onerous – Discovery not necessary – Utility of discovery outweighed by burden – Discovery not ordered.
LEGISLATION CITED:	Corporations Act 2001 (Cth) Evidence Act 1995 (NSW) Uniform Civil Procedure Rules 2005 (NSW)
CASES CITED:	Esso Australia Resources Ltd v Commissioner of Taxation of the Commonwealth of Australia (1999) 201 CLR 49 Mann v Carnell (1999) 201 CLR 1 Interchase Corporations Ltd (in liq) v Grosvenor Hill (Queensland) Pty Ltd (No. 1) [1999] 1 Qd R 141 Australian Securities and Investments Commission v Southcorp Limited (2003) 46 ACSR 438 Re Southland Coal Pty Ltd (recs and mgrs apptd) (in liq) (2006) 59 ACSR 87 Natuna Pty Ltd v Cook [2006] NSWSC 1367 Brookfield v Yevad Products Pty Ltd [2006] FCA 1180 Grant v Downs (1976) 135 CLR 674 Attorney-General (NT) v Maurice (1986) 161 CLR 475 Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (1998) 81 FCR 526 Odgers, Uniform Evidence Law, 7th ed, (2006) Sydney, Lawbook Co Ryder v Frohlich [2005] NSWSC 1342 Australian Securities and Investments Commission v Southcorp Ltd (2003) 46 ACSR 438 Akins v Abigroup Ltd (1998) 43 NSWLR 539 Sevic v Roarty (1998) 44 NSWLR 287 Dubbo City Council v Barrett [2003] NSWCA 267 Chen & Ors v City Convenience Leasing Pty Ltd & Anor [2005] NSWCA 297 Bourns Inc v Raychem Corporation [1999] 3 All ER 154 Dingwall v Commonwealth of Australia (1992) 39 FCR 521 Tirango Nominees Pty Ltd v Dairy Vale Foods Ltd (No. 2) (1998) 83 FCR 397; 156 ALR 364 Australian Competition and Consumer Commission v Lux Pty Ltd [2003] FCA 89 Thomas v State of New South Wales [2006] NSWSC 380 AWB Ltd v Cole [2006] FCA 1234 Integral Energy Australia v EDS (Australia) Pty Ltd [2006] NSWSC 971 Linter Group Ltd v Price Waterhouse [1999] VSC 245 Ampolex Ltd v Perpetual Trustee Company (Canberra) Ltd (1996) 40 NSWLR 12 Adelaide Steamship Company Ltd v Spalvins (1998) 81 FCR 360
PARTIES:	New Cap Reinsurance Corporation Ltd (In Liq) & 1 Or v Renaissance Reinsurance Ltd
FILE NUMBER(S):	SC 2305/02
COUNSEL:	Plaintiff: R G Forster SC & P Dowdy Defendant: D Price
SOLICITORS:	Plaintiff: Henry Davis York Defendant: Malleson Stephen Jaques

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

WHITE J

Monday, 26 March 2007

2305/02 New Cap Reinsurance Corporation Ltd (In Liq) & 1 Or v Renaissance Reinsurance Ltd

JUDGMENT

1 HIS HONOUR: This is an application by the defendant that the plaintiffs make available for inspection certain documents over which the plaintiffs have claimed privilege. There is another claim for the production of documents where the opposition to production is not on the ground of privilege, but on the grounds of relevance and oppression.

2 The first plaintiff, New Cap Reinsurance Corporation (“New Cap”) is in liquidation. It carried on business as a reinsurer. The second plaintiff, Mr Gibbons, is its liquidator. Mr Gibbons was appointed administrator of New Cap on 21 April 1999. The plaintiffs allege that on or about 15 January 1999, New Cap paid the defendant US$8,703,757 and discharged the defendant from liability to New Cap to pay amounts by way of penalty premium and unearned profit commission in the sum of US$1,296,705. The plaintiffs allege that at the time of these transactions, New Cap was insolvent. They seek a declaration that the transactions were voidable transactions within the meaning of Part 5.7B of the Corporations Act 2001 (Cth) and that the defendant pay the plaintiffs US$10,000,000 pursuant to s 588FF(1) of the Corporations Act, together with interest.

3 The allegation that New Cap was insolvent at the time of the transaction is not admitted. The plaintiffs proposed to rely upon an expert’s report as to the solvency of New Cap at the relevant date. The Court made orders for the plaintiffs to file and serve their expert’s report on insolvency. Pursuant to those orders, the plaintiffs filed and served an expert’s report of Mr Murray Smith.

The Privilege Claims

4 The plaintiffs have served a list of discovered documents. They claim privilege in respect of thirty-eight documents and also in respect of correspondence between New Cap and its legal advisors. The first thirteen documents in respect of which privilege was claimed were described as draft reports prepared by Mr Smith. The defendant seeks an order that the plaintiffs make the draft reports available for inspection.

5 The defendant also seeks an order that the plaintiffs make available for inspection by the defendant all documents in the section of the list of documents headed “Privileged Documents” that:

“ a. Record request from KPMG to Henry Davis York as solicitors for the plaintiffs for instructions in relation to the preparation of the report;

b. Record instructions from or on behalf of Henry Davis York as solicitors for the plaintiffs, to KPMG in relation to the preparation of the report; and
c. Constitute notes and/or working papers of KPMG relating to the preparation of the report. ”

6 The plaintiffs do not have in their possession, custody or power any documents falling in the class of documents being “notes and/or working papers of KPMG relating to the preparation of the report.” A subpoena has been issued to Mr Smith for such documents. I understand that the plaintiffs claim privilege in respect of the documents referred to in the subpoena to Mr Smith. However, that claim is not before me.

7 At the relevant times, Mr Smith was a partner of KPMG, Chartered Accountants. Henry Davis York are the solicitors for the plaintiffs. Accordingly, the defendant is seeking communications between the expert and the plaintiffs’ solicitors recording instructions given to the expert in relation to the preparation of the report or requests for such instructions from the expert. The defendant also seeks the notes and working papers of KPMG relating to the preparation of the expert’s report.

8 The expert’s report contains a statement that it was made in compliance with the Expert Witness Code of Conduct. This code requires the expert witness to specify, amongst other things, “the facts, matters and assumptions on which the opinions in the report are based (a letter of instructions may be annexed)” and, to specify “any literature or other materials utilised in support of the opinions”. (Paragraph 5(b) and (e) of the Code). Mr Smith included in the report his “engagement letter”, being a letter of instructions dated 30 May 2005 from Henry Davis York to him. The letter specified that Mr Smith should make certain assumptions set out in an attachment to the letter. The letter also noted that for the purposes of preparing Mr Smith’s report, he required expert actuarial assistance. Henry Davis York acknowledged that Mr Smith had retained a Mr Richard Wilkinson of KPMG Actuaries Pty Ltd to provided that assistance. The letter of instructions advised that Mr Wilkinson should make specified assumptions in carrying out an actuarial assessment of the value of the insurance liabilities of New Cap as at 31 December 1998.

9 This was not the first such engagement letter. It appears from a letter from Mr Smith of 23 February 2005 (also enclosed in the report) that he was engaged in 2002 to provide a professional opinion regarding the insolvency of New Cap during the period from 31 December 1998 to 21 April 1999, that draft reports were provided by him on 12 March 2003 and 17 December 2003 and that there had been earlier engagement letters.

10 The first of the documents in question was described in the list of documents as a “Draft Report prepared by M Smith” dated 12 March 2003. The plaintiffs read an affidavit that this item consisted of an email dated 12 March 2003 from a Mr Daniel Okun of KPMG to Ms Kathy Merrick of Henry Davis York attaching a pdf version of a letter from Mr Smith to Ms Merrick of that date, and a draft insolvency report of that date. The affidavit disclosed that the letter included a statement that:

“ At your request the report is now prepared in draft form for review by Henry Davis York, counsel and Mr Gibbons as liquidator of New Cap …

The report is being provided in its current draft form to be reviewed by the abovementioned parties for the purpose of commenting on its present content, structure and factual accuracy, and to identify any known information that I have not included in the report or may not have taken into consideration in assessing New Cap’s solvency during the review period … ”

11 The deponent stated that the draft report had identified some issues that required legal advice. He did not identify what those issues were, or what advice was sought.

12 The plaintiffs emphasised that the documents in question were not uncommunicated drafts of the report, but were communications passing between the expert and the plaintiffs’ solicitors for the purpose of the plaintiffs being provided with professional legal services in connection with the proceedings.

13 The remaining twelve items also consisted of communications between Mr Smith, or other members of his firm, and Henry Davis York, attaching further drafts of the report, and in most cases, inviting a review on the basis quoted above. One of the items in question consisted of a draft report containing notes from a Mr David Burdiss, a consultant retained to advise the liquidator on various reinsurance issues. The plaintiffs’ evidence was that Mr Burdiss’ comments on the draft (the content of which was not disclosed) were given in response to a request by Ms Merrick of Henry Davis York for his comments “both in terms of general reaction to the report and its overall thrust, as well as comments as to the factual accuracy of the statements and figures in it. For example, the report includes cashflow analyses for various fortnightly periods and it is quite possible that due to the volume of material that the expert had to look at, and the difficulty experienced in trying to pull all that material together in a short space of time, the expert may not have identified all major payments or receipts in each of the periods. I imagine that with your general ‘feel’ for NCRA, any major gaps in the report will be apparent to you.”

14 The defendant contended that the draft reports were not privileged. If they were privileged, the defendant submitted that privilege had been waived. The waiver arose, it was said, from the disclosure of the final report for the express purpose of its being used by the plaintiffs as evidence for them in the litigation. It was also submitted that the description given by the plaintiffs, in evidence on this application, of the correspondence referring to the draft reports constituted a waiver of privilege in relation to the correspondence and the attached draft reports.

The Application of the Evidence Act

15 The defendant submitted that the provisions of the Evidence Act 1995 (NSW) do not apply to the determination of this application. I do not agree. The questions of whether the documents are privileged, and if so, whether privilege has been waived, are to be resolved by the provisions of the Evidence Act, not by the common law. That is not because the Act has modified the common law, or applies by its own force to pre-trial procedures (Esso Australia Resources Ltd v Commissioner of Taxation of the Commonwealth of Australia (1999) 201 CLR 49; Mann v Carnell (1999) 201 CLR 1). Rather, it is a consequence of the rules. Rule 21.3 of the Uniform Civil Procedure Rules 2005 (NSW) requires that a list of documents must identify any document that is claimed to be a “privileged document” and must specify the circumstances under which the privilege is claimed to arise. Rule 21.5 provides in substance that a party is not required to make available “privileged documents” for inspection. Rule 1.2 provides that words and expressions defined in the Dictionary have the meaning set out in the Dictionary. In the Dictionary, the expression “privileged document” is defined as meaning a document that contains privileged information. “Privileged information” is defined as meaning, relevantly, any information of which evidence could not by virtue of the operation of Div 1 of Pt 3.10 of the Evidence Act be adduced in the proceedings over the objection of any person. Hence, the provisions of the Evidence Act are made applicable by the definitions contained in the Uniform Civil Procedure Rules.

16 The relevant section in Div 1 of Pt 3.10 of the Evidence Act is s 119. It provides:

“ 119 Litigation

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

17 The expressions “confidential communication” and “confidential document” are defined in s 117 as follows:

“ confidential communication means a communication made in such circumstances that, when it was made:
(a) the person who made it, or
(b) the person to whom it was made,
was under an express or implied obligation not to disclose its contents, whether or not the obligation arises under law.
confidential document means a document prepared in such circumstances that, when it was prepared:
(a) the person who prepared it, or
(b) the person for whom it was prepared,
was under an express or implied obligation not to disclose its contents, whether or not the obligation arises under law. ”

18 Paragraph 119(b) is important. It has been held that common law legal professional privilege does not attach to an expert’s own documents, prepared by him for the purpose of expressing an expert opinion in litigation but which were not communicated to the client or the lawyer of the client, and do not reveal communications between the expert and the client, or between the expert and the lawyer for the client (Interchase Corporations Ltd (in liq) v Grosvenor Hill (Queensland) Pty Ltd (No. 1) [1999] 1 Qd R 141 at 150-151, 153, 162; Australian Securities and Investments Commission v Southcorp Limited (2003) 46 ACSR 438 at [21]).

19 This view is based upon the fact that:

“ Legal professional privilege is concerned with communications, either oral, written or recorded, and not with documents per se. ” ( Commissioner of Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501 at 529, 543, 552, 568, 580-581, 585).

20 Section 119 of the Evidence Act expressly applies both to confidential communications between the client and a third party, or between a lawyer acting for the client and a third party, for the dominant purpose of the client being provided with professional legal services relating to legal proceedings, and to the contents of a confidential document prepared with that dominant purpose, whether the document is delivered or not (Re Southland Coal Pty Ltd (recs and mgrs apptd) (in liq) (2006) 59 ACSR 87 at [16]-[19]; Natuna Pty Ltd v Cook [2006] NSWSC 1367 at [8], [15]).

The Dominant Purpose for Creation of the Documents

21 It was submitted for the defendant that although the draft expert reports in question had been communicated to the plaintiffs’ solicitors, it could not be inferred that at the time they were prepared for the purpose of its being so communicated. It was submitted that the fact of the draft reports being communicated did not change the fact that the purpose of their creation was not that they be communications between the expert and the client, or between the expert and the lawyers for the client.

22 I doubt that this would be a proper ground for rejecting a claim for privilege at common law in respect of the communication of a draft report to the lawyers for the client. I would infer that the draft reports were produced for the purpose of being communicated in that way. A document brought into existence by the expert for the purpose of being communicated to the client’s lawyer for the purposes of the litigation would be privileged on any view of the authorities at common law, provided they have the necessary quality of confidentiality (Interchase Corporation Ltd (in liq) v Grosvenor Hill (Queensland) Pty Ltd (No. 1) at 153, 162; Australian Securities and Investments Commission v Southcorp Ltd at 441-442, [21] (1) and (3); Brookfield v Yevad Products Pty Ltd [2006] FCA 1180 at [12]-[16]).

23 I understood counsel for the defendant to accept that the documents consisting of drafts of the expert’s report, which were forwarded to the plaintiffs’ solicitors, were prepared for the dominant purpose of the provision of legal services to the plaintiffs in connection with the proceedings.

24 The questions of whether any drafts of the report kept by Mr Smith were privileged under s 119, and whether notes or working papers of KPMG relating to the preparation of the report were privileged under s 119, were not directly raised by the notice of motion.

25 In Grant v Downs (1976) 135 CLR 674, Barwick CJ described legal professional privilege in the following terms (at 677):

“Having considered the decisions, the writings and the various aspects of the public interest which claim attention, I have come to the conclusion that the Court should state the relevant principle as follows: a document which was produced or brought into existence either with the dominant purpose of its author, or of the person or authority under whose direction, whether particular or general, it was produced or brought into existence, of using it or its contents in order to obtain legal advice or to conduct or aid in the conduct of litigation, at the time of its production in reasonable prospect, should be privileged and excluded from inspection.” (Reference omitted.)

26 Likewise, in Attorney-General (NT) v Maurice (1986) 161 CLR 475, Deane J said (at 490) that:

“It is a substantive general principle of the common law and not a mere rule of evidence that, subject to defined qualifications and exceptions, a person is entitled to preserve the confidentiality of confidential statements and other materials which have been made or brought into existence for the sole purpose of his or her seeking or being furnished with legal advice by a practising lawyer or for the sole purpose of preparing for existing or contemplated judicial or quasi-judicial proceedings.”

27 The two limbs of legal professional privilege, that is, “legal advice” and “litigation” privilege were broadly reflected in ss 118 and 119 of the Evidence Act. However, s 119 of the Evidence Act does not make privileged confidential documents brought into existence for the dominant purpose of use in an anticipated or pending proceeding. Rather, the section applies where the document was prepared for the dominant purpose of the client being provided with professional legal services relating to an actual or pending proceeding. In Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (1998) 81 FCR 526, Goldberg J observed (at 554-555):

“Sections 118 and 119 of the Evidence Act do not appear to refer to documents which come into existence for the purpose of use in legal proceedings such as are covered by the second limb in Grant v Downs and are referred to by Lockhart J in Trade Practices Commission v Sterling (1979) 36 FLR 244 at 246 (par (b)) unless it be accepted that the reference to the client " being provided with professional legal services " relating to anticipated or pending proceedings is a reference to the use of the documents by the client's lawyer in those proceedings. In Attorney-General (NT) v Maurice Deane J identified what I have called the second limb of Grant v Downs as covering confidential statements and other materials:
‘which have been made or brought into existence for the sole purpose of preparing for existing or contemplated judicial or quasi-judicial proceedings ... ‘

and his Honour referred generally to Baker v Campbell.
None of the parties submitted that the Evidence Act provisions did not cover the second limb of Grant v Downs and I proceed on the basis that it does. ”

28 A lawyer will provide professional legal services in relation to a witness’ statement of evidence where the lawyer is asked to advise on what the statement should contain and settle the form of the statement. The deployment of the final report by the plaintiff’s lawyers through its service on the opposite party and its tender into evidence will also constitute the provision of professional legal services relating to the proceeding.

29 Section 119 directs attention to the dominant purpose for which each confidential communication or confidential document comes into existence. The dominant purpose for which a final expert’s report or final witness statement is brought into existence would presumably be for the purpose of being laid before the Court as the witness’ evidence. Prima facie, it would not be privileged (Attorney-General (NT) v Maurice at 480). However, draft reports, and notes used in preparing a report, may stand at a different position, particularly where the expert has been retained by the party’s solicitors and it is expected that the party’s lawyers will advise on the contents of, and settle the form of, the report. There is nothing improper in such a course. It is not inconsistent with the expert’s paramount duty being the duty to the Court and not to the client retaining him or her.

30 It will be a question of fact, to which the expert may be required to put his or her oath, as to whether any draft reports prepared and kept by him, and working notes prepared by him or his staff, were brought into existence for the dominant purpose of the plaintiffs being provided with professional legal services. If they were prepared for the dominant purpose of a draft report being submitted for advice or comment by the plaintiffs’ lawyers, then they would be privileged under s 119. However, if they were brought into existence for the dominant purpose of the expert forming his or her opinions to be expressed in the final report, then it could be arguable that they were not made for the dominant purpose of the plaintiffs being provided with professional legal services relating to the proceedings.

31 The expression “professional legal services” is not defined. In Odgers, Uniform Evidence Law, 7th ed, (2006) Sydney, Lawbook Co at para 1.3.10720, the learned author says that: “Since providing a client with professional legal services includes representing the client in legal proceedings, it is likely that a document prepared for use in such legal proceedings by the client’s lawyer will be privileged.” That, of course, does not answer the question whether a document prepared by an expert witness for use by him or her in giving his or her evidence in the proceedings is privileged. It is not, unless it was prepared for the dominant purpose of the client being provided with professional legal services.

32 In Ryder v Frohlich [2005] NSWSC 1342, Barrett J said (at [11] and [12]) quoting in part Thomas J in Interchase:

“ [11] …
‘I would hold that in general, when an expert is engaged by a solicitor for the purpose of giving evidence in a case, documents generated by the expert and information recorded in one form or another by the expert in the course of forming an opinion are not a proper subject for a claim of legal professional privilege. Privilege may however be claimed in relation to communications between the expert and the solicitor (both ways) when such communication is made for the purpose of confidential use in the litigation. Beyond this there is no sufficient reason why any material relevant to the formation of the expert's opinion should be subject to a claim of legal professional privilege. It is as well to add that an expert or solicitor may not artificially manufacture privilege by, for example, the expert sending in his or her file to the solicitor. Documents of this kind simply are not confidential.’
[12] The point made here is that privilege can only attach to documents which embody communication between the expert and the litigant by whom the expert is retained (or the litigant’s lawyer). A draft report prepared by the expert is not, of its nature, such a communication. It may be that the draft report is, in fact, given or sent by the expert to the litigant or the litigant’s lawyer, but that does not change its character as something prepared by the expert which is not intended to be a means of communication with the litigant or lawyer. ”

33 His Honour’s reasoning was heavily influenced by Lindgren J’s judgment in Australian Securities and Investments Commission v Southcorp Ltd (2003) 46 ACSR 438 (at [21]), and by Interchase Corporation Ltd v Grosvenor Hill (Queensland) Pty Ltd (No. 1) [1999] 1 Qd R 141. As Biscoe AJ pointed out in Natuna Pty Ltd v Cook [2006] NSWSC 1367 at [8], those cases turned upon principles of common law, and not s 119(b), with the emphasis, at least in more recent cases, on privilege applying to communications, rather than documents per se.

34 Section 119(b) of the Evidence Act extends the privilege to confidential documents, whether communicated or not, provided they were brought into existence with the requisite dominant purpose. The question however is what that purpose is. If an expert prepares a draft report, or notes for the report, with the dominant purpose of a draft report (whether the precise draft then prepared by the expert or an intended later draft) being furnished for comment or advice by the lawyer, then it is privileged. If not, it is not.

35 The issue may not be an easy one to determine. In all probability, an expert witness retained by a lawyer for a party will prepare a draft report with the intention (and purpose) that it will set out the evidence which he or she expects to give, but also with the intention and purpose of its being considered and commented on by the party’s lawyers. If the latter purpose is dominant, the document so produced is privileged. If not, it is not privileged.

36 In this way, in the case of claims for privilege over working notes and expert’s draft reports not communicated to a client’s lawyer, the same practical outcome may be reached in many cases whether the privilege is claimed at common law or under s 119 of the Evidence Act. However, the analysis of the claims must proceed on different paths.

37 It suffices to say that the draft reports which are the subject of the notice of motion are privileged because they were copies of the draft report sent to the plaintiffs’ lawyers for the purposes of comment. Whether the same documents in the hands of the expert were produced for the same dominant purpose will be a different question, the resolution of which may depend upon the expert’s oath. Instructions in relation to draft reports, or requests for such instructions, are also privileged under s 119(b) as they were brought into existence for the dominant purpose of the client being provided with profesional legal services in connection with the proceedings.

Waiver of Privilege by Service of the Final Report

38 The question of whether privilege in drafts of the reports, earlier letters of instruction, and notes prepared for preparation of the report has been waived by service of the final report depends on whether s 122 of the Evidence Act would allow such evidence to be adduced notwithstanding s 119. Section 122 relevantly provides:

“ 122 Loss of client legal privilege: consent and related matters
(1) This Division does not prevent the adducing of evidence given with the consent of the client or party concerned.
(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) in the course of making a confidential communication or preparing a confidential document, or
(b) as a result of duress or deception, or
(c) under compulsion of law, or
(d) if the client or party is a body established by, or a person holding an office under, an Australian law—to the Minister, or the Minister of the Commonwealth, the State or Territory, administering the law, or the part of the law, under which the body is established or the office is held.
(3) Subsection (2) does not apply to a disclosure by a person who was, at the time, an employee or agent of a client or party or of a lawyer unless the employee or agent was authorised to make the disclosure.
(4) Subject to subsection (5), this Division does not prevent the adducing of evidence if the substance of the evidence has been disclosed with the express or implied consent of the client or party to another person other than:
(a) a lawyer acting for the client or party, or
(b) if the client or party is a body established by, or a person holding an office under, an Australian law—the Minister, or the Minister of the Commonwealth, the State or Territory, administering the law, or the part of the law, under which the body is established or the office is held.
(5) Subsections (2) and (4) do not apply to:
(a) a disclosure by a client to another person if the disclosure concerns a matter in relation to which the same lawyer is providing, or is to provide, professional legal services to both the client and the other person, or
(b) a disclosure to a person with whom the client or party had, at the time of the disclosure, a common interest relating to a proceeding or an anticipated or pending proceeding in an Australian court or a foreign court. ”

39 Also relevant is s 126 of the Evidence Act. It provides:

“126 Loss of client legal privilege: related communications and documents
If, because of the application of section 121, 122, 123, 124 or 125, this Division does not prevent the adducing of evidence of a communication or the contents of a document, those sections do not prevent the adducing of evidence of another communication or document if it is reasonably necessary to enable a proper understanding of the communication or document.
Note. Example:
A lawyer advises his client to understate her income for the previous year to evade taxation because of her potential tax liability “as set out in my previous letter to you dated 11 August 1994”. In proceedings against the taxpayer for tax evasion, evidence of the contents of the letter dated 11 August 1994 may be admissible (even if that letter would otherwise be privileged) to enable a proper understanding of the second letter.”

40 The defendants submitted that by serving the expert’s report, the plaintiffs impliedly waived privilege in all of the communications between the plaintiffs’ solicitors and the expert, including earlier letters of instruction, drafts of the report submitted to the plaintiffs’ solicitors, and communications between the plaintiffs’ solicitors or counsel and the expert. The defendants relied upon Australian Securities and Investments Commission v Southcorp Ltd (at [21]). Lindgren J said:

“ [21] I will apply the following principles which I did not understand to be in dispute:
(1) Ordinarily the confidential briefing or instructing by a prospective litigant's lawyers of an expert to provide a report of his or her opinion to be used in the anticipated litigation attracts client legal privilege: cf Wheeler v Le Marchant (1881) 17 Ch D 675; Trade Practices Commission v Sterling (1979) 36 FLR 244 at 246; Interchase Corp Ltd (in liq) v Grosvenor Hill (Qld) Pty Ltd (No 1) [1999] 1 Qd R 141 ( Interchase ) at 151 per Pincus JA, at 160 per Thomas J.
(2) Copies of documents, whether the originals are privileged or not, where the copies were made for the purpose of forming part of confidential communications between the client's lawyers and the expert witness, ordinarily attract the privilege: Commissioner of Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501 ; 141 ALR 545 ; 91 A Crim R 451 ( Propend ); Interchase , per Pincus JA; Spassked Pty Ltd v Cmr of Taxation (No 4) (2002) 50 ATR 70 at [17].
(3) Documents generated unilaterally by the expert witness, such as working notes, field notes, and the witness's own drafts of his or her report, do not attract privilege because they are not in the nature of, and would not expose, communications: cf Interchase at 161–2 per Thomas J.
(4) Ordinarily disclosure of the expert's report for the purpose of reliance on it in the litigation will result in an implied waiver of the privilege in respect of the brief or instructions or documents referred to in (1) and (2) above, at least if the appropriate inference to be drawn is that they were used in a way that could be said to influence the content of the report, because, in these circumstances, it would be unfair for the client to rely on the report without disclosure of the brief, instructions or documents; cf Attorney-General (NT) v Maurice (1986) 161 CLR 475 at 481 ; 69 ALR 31 at 34 per Gibbs CJ, CLR 487–8; ALR 38–9 per Mason and Brennan JJ, CLR 492–3; ALR 42–3 per Deane J, CLR 497–8; ALR 46–7 per Dawson J; Goldberg v Ng (1995) 185 CLR 83 at 98 ; 132 ALR 57 at 66 per Deane, Dawson and Gaudron JJ, CLR 109; ALR 75 per Toohey J; Instant Colour Pty Ltd v Canon Australia Pty Ltd [1995] FCA 870; BC9506842 Australian Competition and Consumer Commission v Lux Pty Ltd [2003] FCA 89; BC200300344 ( ACCC v Lux ) at [46].
(5) Similarly, privilege cannot be maintained in respect of documents used by an expert to form an opinion or write a report, regardless of how the expert came by the documents; Interchase at 148–50 per Pincus JA, at 161 per Thomas J.
(6) It may be difficult to establish at an early stage whether documents which were before an expert witness influenced the content of his or her report, in the absence of any reference to them in the report: cf Dingwall v Commonwealth of Australia (1992) 39 FCR 521; Tirango Nominees Pty Ltd v Dairy Vale Foods Ltd (No 2) (1998) 83 FCR 397 at 400 ; 156 ALR 364 at 366; ACCC v Lux at [46].”

41 Notwithstanding the reference to client legal privilege, Lindgren J was speaking of common law principles of legal professional privilege.

42 It was submitted for the plaintiffs that there could be no waiver of privilege by service of the expert’s report because the report was served pursuant to an order requiring its service. The disclosure of the report was therefore not voluntary (Akins v Abigroup Ltd (1998) 43 NSWLR 539; Sevic v Roarty (1998) 44 NSWLR 287; Dubbo City Council v Barrett [2003] NSWCA 267).

43 The consequence of the expert’s report having been served under compulsion of law is that s 122(2) does not apply so as to permit the adducing of the report as evidence over the plaintiffs’ objection, on the ground that the plaintiffs have knowingly and voluntarily disclosed to another person the substance of that evidence. That is not the present question. The question is not whether privilege in the contents of Mr Smith’s final report is being waived because its disclosure was under compulsion of law. Rather, the question is whether privilege in draft reports and prior communications between the plaintiffs’ solicitors and the expert, and related documents, has been waived. The service of the final report did not disclose the substance of the prior communications. There is no question of privilege having been waived pursuant to s 122(2).

44 The question is whether privilege has been waived by s 122(1). It is now firmly established that consent under s 122(1) includes a consent which will be imputed to a party on the same principle where, at common law, a party will be taken to have waived privilege, even though he or she did not subjectively intend to do so (Chen & Ors v City Convenience Leasing Pty Ltd & Anor [2005] NSWCA 297 at [29]-[33]). That principle is that:

“ It is inconsistency between the conduct of the client and maintenance of the confidentiality which effects a waiver of the privilege … waiver may be express or implied. Disputes as to implied waiver usually arise from the need to decide whether particular conduct is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect. When an affirmative answer is given to such a question, it is sometimes said that waiver is ‘imputed by law’. … What brings about the waiver is the inconsistency, which the courts, where necessary informed by considerations of fairness, perceive, between the conduct of the client and maintenance of the confidentiality; not some overriding principle of fairness operating at large .” ( Mann v Carnell (1999) 201 CLR 1 at [28] and [29].

45 The qualification in paragraph 4 of Lindgren J’s statement of principles set out in Australian Securities and Investments Commission v Southcorp Ltd is significant. There are many cases in which it has been held that privilege in material provided to an expert is not lost merely because the expert is called, or the expert’s report is served. In Bourns Inc v Raychem Corporation [1999] 3 All ER 154, Aldous LJ said (at 166-167):

“ Service of a witness statement, whether it be a statement of an expert or a witness to fact, waives privilege in that statement. As stated in the Marubeni Corp case mere reference to a document does not waive privilege in that document: there must at least be reference to the contents and reliance. In the present case there was no reference and no reliance therefore no waiver. ”

46 In Dingwall v Commonwealth of Australia (1992) 39 FCR 521, Foster J, referring to Attorney-General (NT) v Maurice, said (at 524):

“ I have come to the view, upon a close consideration of the judgments in Maurice’s case that it cannot be regarded as authority for a wide principle that, whenever documents are sent to a potential witness as part of material being placed before him in order that he may provide a report of an expert kind to be used as evidence in a case, that those documents, ipso facto, although they had the protection of legal professional privilege, necessarily would lose it because of the doctrine of waiver. Maurice’s case does not go as far as that. It requires, certainly, that there be an indication that the documents were used in the preparation of the evidentiary document in a way that could be said to influence the content of that document. ”

47 The same principle was applied by Mansfield J in Tirango Nominees Pty Ltd v Dairy Vale Foods Ltd (No. 2) (1998) 83 FCR 397 at 400; 156 ALR 364 at 367, and by Nicholson J in Australian Competition and Consumer Commission v Lux Pty Ltd [2003] FCA 89 at [46].

48 It may be said that the question of whether such privileged documents influenced the content of the expert’s report is a matter which the opposite party should be entitled to test. However, questions of privilege inevitably involve the striking of a balance.

49 In Thomas v State of New South Wales [2006] NSWSC 380, McClellan CJ at CL held that service of an affidavit attaching an advice of counsel which in turn referred to certain medical reports, waived privilege in the medical reports because they influenced the content of the advice (at [17]). The principle is the same. The same principle was applied by Young J in AWB Ltd v Cole [2006] FCA 1234 at [168]-[178] in holding that disclosure of the substance of legal advice impliedly waived privilege over associated material as the publication of the legal advice was inconsistent with the maintenance of confidentiality over such material which underpinned the advice.

50 As set out earlier in these reasons, Mr Smith, as he is required to do under the Expert Witness Code of Conduct, specified the materials used in support of his opinions. These did not include draft reports, or earlier letters of instruction, or communications with the plaintiffs’ solicitors.

51 Following the course taken by Einstein J in Integral Energy Australia v EDS (Australia) Pty Ltd [2006] NSWSC 971, I thought it appropriate to inspect the documents for which privilege is claimed in order to consider whether such documents may have influenced the content of the report. There are limits to whether this is a useful exercise. It would be impossible, as a matter of practice, and inappropriate, as a matter of principle, for a judge to approach that question in the same way as a party might wish to do so if preparing a cross-examination of the expert.

52 I have also taken into account the observations of Harper J in Linter Group Ltd v Price Waterhouse [1999] VSC 245 at [16] that:

“I accept for these purposes the sworn statement by Mr Sawer that that opinion is a mere draft. As such it would only be of relevance to the first defendant if it could be shown that it differed from Mr Spencer's witness statement, not because Mr Spencer had had a genuine change of opinion but because he was motivated by a desire simply to improve the plaintiffs' case. Such would of course be entirely improper; but an expert is surely permitted, indeed to be encouraged, to change his or her mind, if a change of mind is warranted. … experts should not be inhibited by fear of exposure of a draft from changing their minds when such change is warranted by the material then before the expert.”

53 The question is not merely whether it could be said that the privileged materials were used in such a way that they could be said to influence the content of the report, but whether it could be said that they influenced the content of the report in such a way that the use or service of the report would be inconsistent with maintaining the privilege in those materials, such as, where it would be unfair for the party to rely on the report without disclosure of those materials. Where an expert’s report is submitted to a party’s legal advisers so as to be put into a form which will ensure that it is admissible, it can be said that the privileged communications between the expert and the lawyers have influenced the content of the report, in the sense of its form, although not in the sense of the formulation of the substantive opinions expressed by the expert. Likewise, privileged communications between an expert and the party’s lawyers whereby material information is provided to the expert in the form of assumptions or documents may well influence the content of the report. However, an expert’s report is required to state what material and assumptions are relied on. Use of a final report, which refers to such materials and assumptions, is not inconsistent with maintaining confidentiality in the communications which produced the final product.

54 Having considered the documents in respect of which privilege is claimed, I do not consider that it could be said that they have influenced the content of the final report in such a way that the service or use of the report would be inconsistent with maintaining confidentiality in the privileged materials.

Waiver by Voluntary Disclosure

55 I do not consider that the disclosure of the contents of correspondence as set out in paras [10] and [13] above, or the disclosure of the fact that the draft report enclosed with a letter of 12 March 2003, identified some issues that required legal advice, without identifying what those issues were or what advice was sought, was a disclosure of the substance of the documents so as to waive privilege in the whole of the documents. The test is a quantitative one (Ampolex Ltd v Perpetual Trustee Company (Canberra) Ltd (1996) 40 NSWLR 12 at 15, 17-18; Adelaide Steamship Company Ltd v Spalvins (1998) 81 FCR 360 at 371). Plainly, the substance of the documents was not disclosed by disclosure of passages referred to.

56 Nor do I consider that disclosure of those particular passages amounted to an imputed waiver of the balance of the documents on the ground that it would be unfair for the plaintiffs to make use of part of the document on the application without disclosing the balance, so that it would be inconsistent for them to insist on the confidentiality of the balance of the document. That question must be considered having regard to the issues on the application. I take it that parts of the document were quoted to provide evidence as to the nature of the assistance which the expert was seeking in the completion of the report. If there were other parts of the correspondence which went to that issue, then there would be an imputed waiver of those parts. But there would not be an imputed waiver of the whole of the correspondence. I have read the privileged documents from which extracts were reproduced in the affidavit relied on by the plaintiffs. The deponent extracted all of the material relevant to the issue. Accordingly, there is no imputed waiver as to any other parts of those documents.

57 For these reasons, the application to inspect the first class of documents fails.

“Without Prejudice” Privilege

58 The defendant seeks an order that the plaintiffs make available for inspection a document in the plaintiffs’ list of documents described as “Extract from position paper prepared by M Dunstone for without prejudice discussions with Houston Casualty Company”.

59 The extract referred to is a page extracted from a position paper prepared for other proceedings between the plaintiffs and another insurance company. Those proceedings were settled. The extract, being a single page of the position paper, was provided to Mr Smith. It sets out details of various transactions which are challenged by the liquidator as unfair preferences, and provides details of one of those transactions being a payment of $1,447,052 on 9 February 1999 to Houston Casualty Company. A copy of the extract in question has been provided to the defendant. It was the only part of the position paper provided to Mr Smith. It was provided to him because his report on New Cap’s solvency dealt with the payment in question. Accordingly, the defendant has been given the document in question. The defendant is not entitled to inspection of the balance of the position paper. It was prepared in connection with an attempt to negotiate a settlement of the dispute between the plaintiffs and Houston Casualty Company. It is privileged pursuant to s 131(1) of the Evidence Act. The defendants submitted that such a privilege applied only to the adducing of evidence in proceedings and did not apply to the application for the inspection of documents required to be discovered. For the reasons previously given, that submission is incorrect.

Relevance and Oppression: Drafts of Reports to Creditors

60 In paragraph 4.1 of Mr Smith’s report, he said “It is clear that by 21 April 1999 a significant deficiency in net assets existed. This is evidence by the administrator’s initial report to creditors dated 22 July 1999 where he estimated that NCRA had a net asset deficiency of approximately US$200m.”

61 In paragraph 6 of his report, Mr Smith said “Since his appointment as Administrator of NCRA on 21 April 1999 and subsequently as Liquidator on 16 September 1999, Mr Gibbons has produced several reports to creditors in which he details, amongst other things, his estimate of the financial position of NCRA as it stood at 30 April 1999 (being the closest month end to the date of Administration). His estimate of the balance sheet position is set out below:”

62 There then follows a summary of statements made by Mr Gibbons as Administrator and Liquidator including, amongst other things, his estimates of assets and liabilities of New Cap as at 30 April 1999 as set out in his report to creditors of 22 July 1999. Also set out are Mr Gibbons’ estimate of the company’s assets and liabilities as at 31 March 2001 and 31 March 2004, as set out in his report to creditors of August 2001 and 30 September 2004.

63 The defendant seeks discovery of all of the drafts of those reports together with all work papers in respect of them.

64 A statement of the liabilities of an insurance company, or a reinsurance company, at a particular time, depends upon estimates to be made as to its liabilities under policies of insurance or reinsurance it has written. Later financial statements, insofar as they relate to an earlier financial period, may be relevant to determining its financial position at the earlier period, because the passage of time allows for a greater measure of certainty in estimating its liabilities or at the earlier date. It was not disputed that documents relevant to the company’s financial position in 2001 and 2004, so far as they reflected its financial position in January or April 1999, would not be relevant to New Cap’s solvency in the relevant period.

65 It was not suggested that the plaintiffs had not given adequate discovery of New Cap’s accounting records at the relevant dates.

66 The preparation of Mr Gibbons’ reports to creditors was a complex process. For a period of about two months before completion of each report to creditors, at least ten people on the staff of Mr Gibbons, together with lawyers in London, New York and Sydney, and external consultants, including a company retained as a run-off manager with a staff of about four people, each of whom worked on various aspects of the parts of the balance sheet concerning New Cap’s business. Each segment was analysed, revised and amended on numerous occasions before being compiled into the report to creditors. The amendments and revisions involved extensive electronic communication between the different people involved. Mr Girvan, of Ernst & Young, of which firm Mr Gibbons is a partner, gave evidence on information and belief that there are at least 1,230 files at Ernst & Young’s offices which may have documents in them which could be regarded as working papers in respect of the preparation of reports to creditors. There are approximately fifty boxes of documents in a warehouse facility which may have documents of that kind, and there are approximately 2,195 files held by the run-off agents retained by Mr Gibbons which could be regarded as working papers in respect of the preparation of reports to creditors. Mr Girvan deposed that it would be necessary to review backup tapes held by Ernst & Young to ascertain if computer servers and other electronic storage facilities used by Ernst & Young still had available the drafts, or parts or segments of drafts, of reports to creditors, along with data used in preparing those drafts. There are currently approximately 12,600 documents on Ernst & Young’s internal servers which relate to the liquidation of New Cap. Mr Girvan gave detailed evidence as to the process by which the reports are compiled, and as to the documents used or had regard to in the preparation of the reports to creditors, and which could be regarded as work papers in respect of each of the reports.

67 In my view, it would be oppressive to require the liquidator to give discovery of all drafts of the reports to creditors and of all work papers prepared or used in respect of such reports. I do not accept Mr Girvan’s submission that such documents would not contain any materials relevant to the issue of solvency of New Cap as at 15 January 1999. However, notwithstanding that the documents may be relevant, the defendant has not demonstrated that their discovery is necessary. As I have said, the defendant has not contended that it has been unable to obtain discovery of financial records of New Cap or the liquidator relevant to establishing the company’s solvency or insolvency at the relevant date. The investigation of how reports to creditors were compiled in July 1999, August 2001, and September 2004 is unlikely to be a useful exercise. Such utility as there may be in it, is heavily outweighed by the burden which an order for the provision of such discovery would impose on the plaintiffs.

68 It follows that paragraphs 2, 3 and 4 of the defendants’ notice of motion should be dismissed with costs. The parties reached agreement on the giving of discovery sought in paragraph 1 of the defendants’ notice of motion.

69 I order that paragraphs 2-4 of the interlocutory process filed on 9 June 2006 be dismissed. I order that the defendant pay the plaintiffs’ costs of paragraphs 2-4 of the interlocutory process.

70 Prima facie, the costs of the defendant’s application in paragraph 1 of the interlocutory process should be costs in the proceedings. If either party contends that a different order should be made, they should notify my associate and the opposite party in writing within 21 days enclosing written submissions on that question, and I will list the matter at a convenient time. I order that if no such application is made within 21 days, the costs of the defendant’s application in paragraph 1 of the interlocutory process filed on 9 June 2006 be costs in the proceedings.

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