Southern Equities v Arthur Andersen (No.3) No. Scgrg-94-1474 Judgment No. S6657
[1998] SASC 6657
•1 May 1998
SOUTHERN EQUITIES CORPORATION LTD (IN LIQ) v
ARTHUR ANDERSEN & CO (No. 3)
Civil
Debelle J
On 23 October 1997 the Full Court delivered judgment on an appeal concerning claims that certain documents discovered in this action were subject to legal professional privilege: Judgment No.S6373.1, (23 October 1997). The Court was not unanimous in its approach.
The Chief Justice decided that, in this action, the plaintiff Southern Equities Corporation Ltd (in liq) (“SECL”) had put in issue its state of mind as to the propriety of recording, first, a profit in relation to transactions identified in the Statement of Claim and, secondly, an overall profit in its accounts and in the accounts of the SECL Group. Thus, the Chief Justice held, a waiver of privilege should be imputed as a matter of fairness in relation to legal advice tendered to SECL and its subsidiaries about whether it was proper for SECL and the relevant subsidiary to recognise a profit or not to make a provision in respect of the relevant transactions. However, His Honour distinguished between documents containing legal advice of that kind and documents containing legal advice generally about the structure and terms of the arrangements. The latter, he said, were not subject to an imputed waiver of privilege.
As the Chief Justice recognised, there are difficulties with that decision. He said at p25:
“I must say that I fear that some of the issues and matters that I have dealt with may yet return to plague the judge who hears the action.”
One of the difficulties is that legal advice as to the structure and terms of a transaction may be very relevant to the question whether the transaction was feasible and, thus, bear upon the potential for profit. The Chief Justice has recognised that the allegations in the Statement of Claim go beyond the legal effect or structure of arrangements. In relation to the Rome Land transaction, he said at p20:
“But I do consider that the SC makes allegations which go beyond the bare legal effect or structure of the arrangements. I regard the allegations, in particular from para 155 to para 170, as raising as an issue the overall effectiveness of, or ability of, the relevant arrangements, to give rise to a profit recognisable in accordance with appropriate standards as a profit of the year in question. I do not consider that the SC puts directly in issue SECL’s belief about the validity or effectiveness of each step in the Rome Land transaction, nor its legal advice (if any) on those matters. But, when it is later alleged that AA’s conduct in certifying SECL’s accounts caused or contributed to a mistaken belief on SECL’s part, the SC must be alleging that, as a result of AA’s audit, SECL came to the belief, or was confirmed in a belief, that the Rome Land transaction had given rise to a properly recognisable profit.”
Thus, in the case of documents the subject of legal professional privilege which go to the issues in paragraphs 155 to 170, there is an imputed waiver. Allegations of a similar kind are made with respect to other transactions pleaded in the Statement of Claim.
Another question is whether legal advice concerning the structure and terms of a transaction should have been disclosed to the defendants when they conducted the audit. If they should have been, there would appear to be sound reasons why they should not be the subject of legal professional privilege for the purposes of this action.
Having held that the Master had erred in rejecting the argument that waiver of privilege should be imputed, the Chief Justice ordered that the matter be remitted to the Master to enable the defendants to make such further application as they may be advised.
However, Bleby J (with whom Matheson J agreed) held that the appeal should be dismissed. In his view, although it was clear that the state of mind of SECL concerning the adequacy of the accounts was a relevant issue, there was not sufficient information before the Court to justify the order for production of the documents.
It is against that background that the defendants have applied for production of three classes of documents and for what is called a “Kadlunga List”. In the alternative, the defendants applied for orders that the Court review the claims for privilege. When the application came on for hearing, the parties agreed that the application should be stood over so far as it related to two classes of documents called “John Bond Working Party Documents and Related Documents” and “Sulan Investigation Documents” respectively.
Of the two applications which remain, the first is that the plaintiff discover and make available for inspection all documents recording communications between any officer of Bond Corporation Holdings Limited, now called “SECL”, and any legal advisers, including, without limitation, Parker & Parker or Blake Dawson Waldron, concerning the matters raised in a letter from Arthur Andersen to the directors of SECL dated 29 September 1989. In that letter, the defendants, who were then conducting the audit of SECL, sought certain information in relation to a number of issues which were causing the auditors concern. Those issues related to eleven transactions or sets of transactions. For the reasons which follow, the defendants are entitled to some, but not all, of the documents.
In these reasons, I will use the expression “the documents should be produced for inspection” or a similar expression. That is intended to be a convenient shorthand meaning that I am satisfied that the pleadings in the Statement of Claim concerning the issue whether SECL and its directors were misled as to the financial position of the Group in the period August 1988 to November 1989 are an imputed waiver of privilege of the documents which the defendants seek to have produced.
The first enquiry relates to the painting “La Promenade” by Edouard Manet. The enquiries made by the defendants do not relate to any of the transactions the subject of these proceedings. Nor does it affect the overall financial position of SECL and its profitability in the period August 1988 to November 1989. It does not, therefore, entitle the defendants to discovery of any privileged documents.
The second set of enquiries relates to Austmark International Ltd (“Austmark”). Dealings in relation to Austmark are one of the 19 transactions in respect of which the plaintiff says that the defendants conducted an inadequate audit. The plaintiff has pleaded that, as the accounts of SECL and its subsidiaries did not give a true and fair view of the financial position of SECL and the Group, the directors of SECL were misled and entered into the three sets of transactions pleaded in paras 706 to 773. The plaintiff has pleaded that, had the defendants conducted a proper audit, they would have required SECL to write-down its investment in Austmark by $10.157 million and required the SECL Group to write-down its investment in Austmark by $11.321 million. The transactions pleaded in paras 706 to 773 were entered into between 22 August 1988 and 13 November 1989. One of these transactions was the takeover of Austmark. The investment in Austmark was, therefore, material to the question whether the directors of SECL and the SECL Group were misled as to its profitability. The questions asked by the auditors are relevant to the question whether the directors of those companies knew the true position or were misled. By pleading that SECL and its directors were misled, there is an imputed waiver of legal professional privilege. The documents should be produced for inspection.
The third enquiry related to what were called “Loan Defaults”. These enquiries concerned certain transactions which might have constituted events of default or potential events of default under various financial arrangements to which Bond Brewing Holdings Limited, a wholly owned subsidiary of SECL, was a party. The defendants asked why Bond Brewing Holdings Ltd deposited up to $132 million with a company called Winnington Securities Pty Ltd in the period up to 30 June 1989. The defendants noted that in the same period BCF (Bond Corporation Finance) Limited had obtained unsecured loans from Markland Investments Pty Ltd which had formerly been called Winnington Pty Ltd. These transactions are relevant to the knowledge of SECL and its directors as to the financial position of SECL and the SECL Group in the period August 1988 to November 1989. The relevant documents should, therefore, be produced.
The fourth enquiry related to a loan made by BCF (Bond Corporation Finance) Ltd, a subsidiary of SECL, to Bond Petrochemicals No2 Pty Ltd, another subsidiary of SECL. The question was whether the loan had been made in breach of s230 of the Companies Code. The enquiry does not go to the true profitability of Bond Corporation Holdings as at 30 June 1988 or its perceived profitability in the period August 1988 to November 1989. This enquiry does not justify the defendants’ application.
The fifth enquiry concerned the sale of the Emu Brewery site by Spring Street Development Pty Ltd, a subsidiary of Bond Brewing Holdings Limited, to Inkberry Pty Ltd. The transaction is another of the 19 transactions in respect of which the plaintiff alleges that the defendants did not conduct a proper audit. Although the questions were directed to establishing whether there had been a breach of s229 of the Companies Code, the questions sought all relevant information in respect of a series of transactions going back to December 1986 when the Emu Brewery site was sold to Inkberry Pty Ltd. The questions also expressed a concern that the SECL Group may ultimately have to record a loss on the purchase of the site. The requests for information, therefore, relate to the nature and quality of the information provided to the defendants when conducting the 1988 audit and to the knowledge of SECL and its directors as to the financial position of SECL and the SECL Group in August 1988 to November 1989. The relevant documents should, therefore, be produced.
The sixth set of questions related to what was called “Representations on Options”. The issues concern the exercise of options which materially affected the profitability of SECL and the Group in the period ending 30 June 1989. The letter alleges that two of the directors of SECL, in stating that there were no significant option agreements or put/call agreements in existence at September 1988 except for three named option agreements, had misled the defendants. The defendants state that they had since discovered three additional option agreements and that those option agreements had materially affected the profitability of SECL and the SECL Group. Although the letter sought the information for the purpose of determining whether there had been a breach of s564 of the Companies Code by directors and officers of SECL, the letter is also very relevant to the question as to the extent of knowledge of SECL and its directors of the financial position of SECL and the SECL Group in the period August 1988 to November 1989. The relevant document should, therefore, be produced.
The seventh and eighth enquiries related to the Rome Land transaction, which is another impugned transaction. The defendants first assert that they were given improper information by two directors of SECL when preparing the audit for the year ending 30 June 1988 and seek to clarify the position. The other enquiry in relation to this transaction concerned the profitability of the Rome Land transaction in the financial year ending 30 June 1989. The relevant documents should be produced for the same reasons as were given in relation to the sixth enquiry for information.
The ninth enquiry related to a loan made by Bond Corporation Pty Ltd to a Mr D Aspinall. The enquiry concerned the possibility of a failure to comply with s230 of the Companies Code. It is not related to an issue in these proceedings.
The tenth enquiry related to a loan by Bond Corporation Pty Ltd to Dallhold Investments Pty Ltd, a company related to SECL. The enquiry concerned a loan of $US5 million. Although interest was payable at the rate of 9.5 per centum per annum on the advance, no interest had been paid by Dallhold Investments Pty Ltd. I do not think that the questions asked are sufficiently related to the issues in this action to require discovery of the relevant documents.
The final enquiry related to deposits by SECL with Western Finance Corporation Pty Ltd totalling $11.9 million. I am not satisfied that this transaction is sufficiently related to the issues in this action to require discovery of the documents relating to it.
For these reasons, the plaintiff should discover and make available for inspection by the defendants all documents recording communications between any officer of SECL and any legal advisers including, without limitation, Parker & Parker or Blake Dawson Waldron, concerning the matters raised in paragraphs 2, 3, 5, 6, 7 and 8 of the letter from the defendants to the directors of SECL dated 29 September 1988.
A Kadlunga List
The defendants applied for an order that the plaintiff file what is commonly called “a Kadlunga List” of the documents to which legal professional privilege is claimed. As already mentioned, Bleby J (with whom Matheson J agreed) held that there was insufficient information before the Full Court to justify the order for production of the privileged documents which had been sought by the defendants. He raised the question whether the present lists of documents were adequate, referring to Rules 58.01, 58.07 and the observations of White J in Kadlunga Proprietors v Electricity Trust of SA (1985) 39 SASR 410 at 414-415. He remitted the question whether such a list should be provided for further consideration. Those comments have obviously been one of the causes of this application by the defendants.
The plaintiff resists this application on four grounds. The first is that the number of documents for which privilege is claimed is so large that the task would be burdensome. Privilege has been claimed for some 1500-1600 documents. That is obviously a very large number of documents. But it is apparent from the list that many of the documents are short. In addition, the existence of 1600 documents for which privilege is claimed must be weighed against the fact that thousands of documents have been discovered in this action. This is a very substantial action. When all of the discovered documents are viewed as a whole, I do not think that a requirement to provide a better description is burdensome.
The second ground upon which the plaintiff opposes the application is that the documents are already adequately described. The third ground of opposition is a corollary of that ground, namely, that a more adequate description might defeat the claim for privilege. I will consider these grounds together.
There is some force in the submission that documents are already described. With relatively few exceptions, the documents have been described in a way which identifies the nature of the document, its date and those associated with it. So, in the case of correspondence, the documents are described variously by such terms as letter, facsimile, telex, memorandum or note. In addition, a date is given and the sender and recipient are named. In the case of minutes of meetings, the name of the group or organisation which is meeting and the date of the meeting are provided. In the case of correspondence, it is apparent in most cases that either the recipient or the sender is a solicitor or firm of solicitors. Even if that fact is not apparent to an outsider, it is fair to infer that that fact would be known to the parties.
Not all communications between solicitor and client are privileged. They must be either for the sole purpose of obtaining legal advice or for use in existing or anticipated litigation. While the list of documents asserts that the documents listed in the schedule are privileged from production, being documents which came into existence for the sole purpose of either the plaintiff obtaining legal advice or in anticipation of the plaintiff being a party to legal proceedings, the description of each document says nothing as to the purpose of the creation of any of the individual documents in the list. Given the issues in this action and the very substantial number of documents which exist, the list should specify the transaction or litigation to which the advice relates. This requirement is consistent with the observations of the Full Court in Kadlunga Proprietors v Electricity Trust of South Australia (supra) and, in particular, with the observations of White J (with whom the other members of the Court agreed) at 414 that:
“...the description of a particular document for which protection is claimed should be sufficient to disclose quite readily (without disclosing contents) whether or not it is in fact a document to which the head of privilege relied upon can extend.”
The reason for that view was that reliance on the judgment of a legal practitioner is not a substitute for an adequate description.
The approach of the Court in Kadlunga has been criticised as going too far. In Lazenby v Zammit [1987] Tas R 54 at 56 the Full Court of the Supreme Court of Tasmania relied on the observations of Cotton LJ in Taylor v Batten (1878) 4 QBD 85 at 88 and held that the Rules of Court in Tasmania required a sufficient description of the documents to enable it to be identified. Thus, the Court ordered that there should be some identifying mark, date or number so that it is possible to determine objectively whether any individual document falls within the group or bundle for which privilege is claimed. The decision in Lazenby v Zammit was followed in Braegrove Pty Ltd v Bendeich [1993] 2 Qd.R. 239. In Derby & Co Ltd v Weldon (No.7) [1990] 3 All ER 161 Vinelott J applied the reasoning in Taylor v Batten and did not require the defendant to give any better description of the documents for which privilege had been claimed. But I am bound by the decision of the Full Court in Kadlunga which addressed the decision in Taylor v Batten. Further, I respectfully agree with the policy considerations which underpin the decision in that case. As White J observed (at 414-415):
“The limits of the privilege must be strictly observed. The High Court examined the scope of legal professional privilege in Grant v Downs (1976) 135 CLR 674 and confined the privilege to those documents which are brought into existence for “the sole purpose of submission to legal advisers for advice or for use in legal proceedings... The judgments demonstrate the importance attached to careful scrutiny of any claim to privilege made during discovery. Legal professional privilege, although entrenched to serve an important public interest in confidentiality between solicitor and client, also cuts across the more general public interest in open and fair litigation and the principle that all relevant documentary evidence should be available to both sides at the earliest possible time before the trial.”
In addition to those reasons, it must be noted that the reasons of Cotton LJ in Taylor v Batten were given at a time when it was the practice of the Court of Equity when exercising its statutory jurisdiction to assist parties in litigation in common law courts by making orders for discovery to require documents to be identified so that the Court could order production of any which the other party wished to see. That was done by tying them up in bundles and numbering the bundles: see Derby & Co v Weldon (No.7) (supra) at 181. Moreover, at that time the grounds on which privilege could be claimed were more extensive than now. Since then the ambit of legal professional privilege has been narrowed, a conspicuous example in this country being the decision in Grant v Downs. Finally, rules developed in former times in relation to actions in which the subject matter was in a narrow compass are not appropriate to large and complex commercial causes.
As already mentioned, in this action it is alleged that the audit was defective in relation to 19 substantial transactions, some of which are quite complex. It is also alleged that the failure to conduct a proper audit resulted in four kinds of substantial loss, two of which involved a series of complex transactions. These are all pleaded in a lengthy Statement of Claim of 402 pages containing 800 paragraphs. As Doyle CJ observed in Southern Equities Corporation Ltd (in liq) v Arthur Andersen & Co (at page 13):
“It will come as no surprise to learn that the relevant transactions are most complex, involving dealings between many bodies corporate, often related, incorporated in many different countries, the use of sophisticated and complex financing arrangements, and complex agreements at every turn.”
In short, the issues in this action are so diverse and so complex that a description which does not identify the document for which privilege is claimed by anything more than its author, recipient and date fails to satisfy the requirements in Kadlunga. The description of the document should be sufficient to relate the document to a particular transaction or matter and state the ground on which it is alleged that the document is privileged, that is to say, whether it was for the sole purpose of the plaintiff obtaining legal advice or was for the sole purpose of anticipated or actual legal proceedings. To require the plaintiffs to do more would, I think, run the risk of disclosing the content of each document. The requirement to state the transaction or matter to which the document relates will not mean that the content of the document is disclosed. For example, a description which states “memorandum from A to B dated 30 June 1988 re Rome Land Transaction” discloses nothing about the transaction. The proposition may be tested another way. In litigation concerning a single transaction, the fact that privilege is claimed often means that, although an opponent will realise that the documents relate to the transaction, he will not be aware of their contents and there is no impairment of the claimed privilege.
For these reasons, I allow the application. There will be an order that the plaintiff file and deliver a list of the documents for which legal professional privilege is claimed which shall accord with the following requirements:
In relation to each class of document listed hereunder, the list shall state whether the document came into existence for the sole purpose of the plaintiff obtaining legal advice or for the sole purpose of pending or contemplated legal proceedings.
In the case of correspondence, the list shall also include the name of the sender, the name of the recipient, the date of the document and the transaction or matter to which the document relates.
In the case of minutes, the list shall also note the date of the meeting, the name of the persons present at the meeting and the transaction or matter to which the meeting relates.
In the case of any other document or portion of a document, the list shall include a description of the document, the name of the author of the document, the date of the document, and the transaction or matter to which the document relates.
In the vast majority of cases, the lists which have been filed satisfy most of the requirements in paragraphs 2, 3 and 4. Thus, what is being asked of the plaintiff is to edit its existing lists to add the additional information. In these days of word processing, that is not an unduly burdensome task.