The Berry Rural Co Operative Society Ltd v Sepak Industries Pty Ltd (No 3) - [2018] NSWSC 1751

Supreme Court

New South Wales

Medium Neutral Citation: The Berry Rural Co Operative Society Ltd v Sepak Industries Pty Ltd (No 3) [2018] NSWSC 1751
Hearing dates: 9 November 2018
Decision date: 15 November 2018
Jurisdiction: Equity - Commercial List
Before: Stevenson J
Decision:
Plaintiff granted leave to rely on further evidence on terms including as to costs

Catchwords:
CIVIL PROCEDURE – pleadings and evidence – amendment – plaintiff seeks leave to amend its pleadings and rely upon further evidence – where plaintiff previously granted leave to rely on evidence served in the face of a guillotine order – where earlier order that if plaintiff in default of any direction or order the proceedings be dismissed – where plaintiff’s legal advisors aware that defendants preparing evidence in response – where plaintiff’s legal advisors concluded that existing evidence insufficient and required augmentation – where plaintiff’s legal advisors did not inform the defendants or the Court that further evidence be marshalled – where significant body of further evidence served without notice on the day after defendants served its evidence – where likely that defendants will have to revisit all evidence adduced so far to ascertain whether it answers evidence freshly served by plaintiff – whether plaintiff should have leave to rely upon the further evidence – whether plaintiff should have leave to amend its pleadings
PROFESSIONS AND TRADES – Lawyers – whether solicitor for plaintiff should pay the costs that the plaintiff must pay the defendants by reason of leave being granted
Legislation Cited: Civil Procedure Act 2005 (NSW)
Cases Cited: Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27
National Mutual Life Association of Australasia Ltd v Tolfield Pty Ltd [2011] FCA 1309
The Berry Rural Co Operative Society Ltd v Sepak Industries Pty Ltd [2018] NSWSC 298 (No 2)
Texts Cited: Practice Note SC Gen 5
Category: Procedural and other rulings
Parties: The Berry Rural Co Operative Society Ltd (Plaintiff/Applicant)
Sepak Industries Pty Ltd (First Defendant/Respondent)
Henry Kong (Second Defendant/Respondent)
Representation:
Counsel:
J P Knackstredt (Plaintiff/Applicant)
J C Giles SC (Defendants/Respondents)
Solicitors:
Resolve Litigation Lawyers (Plaintiff/Applicant)
Somerville Legal (Defendants/Respondents)

File Number(s): SC 2016/281883

Judgment

The Berry Rural Co Operative Society Ltd trades as “South Coast Dairy”. Its members are representatives of six dairy farming families in the Berry region.
In February 2014 the Co Operative entered into a contract with Sepak Industries Pty Ltd for the design and supply of a milk processing system (“the Equipment”).
The Co Operative alleges that the Equipment did not meet statutory health and safety standards. It brings these proceedings to recover the damages it alleges it has suffered by reason of alleged shortcomings in the Equipment. The Co Operative claims some $900,000.
In August 2016 Sepak commenced proceedings against the Co Operative in the Local Court seeking to recover the unpaid balance of the purchase price of the Equipment (some $45,000).
On 20 September 2016 the Co Operative commenced these proceedings. The Local Court proceedings have since been transferred to this Court.
In my judgment of 9 March 2018 (The Berry Rural Co Operative Society Ltd v Sepak Industries Pty Ltd (No 2) [2018] NSWSC 298) I described the manner in which the Co Operative’s then legal advisors had prosecuted the proceedings to that point as being disgraceful (at [6]). I set out the lamentable details of that conduct in the schedule to that judgment.
Nonetheless, and with reluctance, I acceded to the Co Operative’s application for leave to rely upon evidence which it has served in the face of a guillotine order.
I granted that leave on terms that the Co Operative pay a portion of Sepak’s costs of the proceedings to that date, that the solicitor then on the record for the Co Operative pay those costs, and that such costs be specified as a gross sum under s 98(4) of the Civil Procedure Act 2005 (NSW) be paid forthwith.
I also ordered that:

“…unless the Court otherwise orders, if the [Co Operative] makes default in the compliance with any future order or direction, the proceedings be dismissed.”

Since then, the following directions have been made:

on 16 March 2018, that Sepak serve all lay and expert evidence by 1 June 2018 and that the Co Operative serve all evidence in reply by 29 June 2018;

on 26 June 2018, that the time for Sepak to serve its evidence be extended to 27 July 2018 and that the time for the Co Operative to serve its evidence in reply be extended to 17 August 2018;

on 24 July 2018, that the time for Sepak to serve its evidence be extended to 17 August 2018 and that the time for the Co Operative to serve its evidence in reply be extended to 7 September 2018; and

on 9 August 2018, the time for Sepak to serve its evidence be extended to 7 September 2018 and that the time for the Co Operative to serve its evidence in reply be extended to 28 September 2018.

Each of those orders was made in chambers and by consent. An explanation has been given for Sepak’s need to extend the time to serve its evidence. It is not necessary to set out those reasons. Mr Knackstredt who appeared for the Co Operative accepts that the extensions of time were justified and that no criticism can be made of Sepak or its legal advisors in relation to them.
Ultimately Sepak served its evidence (statements of two lay witness and three experts) on 3 October 2018.
Following my judgment of 9 March 2018 the Co Operative retained Mr Michael Daniel, from Resolve Litigation Lawyers, to act for it in these proceedings.
Mr Daniel filed a Notice of Change of Solicitor on 17 April 2018.
Mr Daniel’s employee, Mr Christian Allen, assumed day to day carriage of the proceedings.
Mr Daniel retained Mr Knackstredt on 9 May 2018.
Mr Daniel, Mr Allen and Mr Knackstredt concluded that:

the Co Operative’s pleadings required amendment;

the evidence of some witnesses already identified by the Co Operative required augmentation; and

it was necessary to adduce evidence from further witnesses, particularly as to the loss and damage that the Co Operative alleges it has suffered because of the alleged shortcomings in the Equipment.

Between May and October 2018 Mr Daniel and Mr Allen, with some assistance from Mr Knackstredt, marshalled the evidence in chief said to be necessary to make out the Co Operative’s case.
On 4 October 2018, without notice except for a telephone call earlier that day, Mr Allen served on Sepak’s solicitors by email witness statements of Mr Robert Woods, Mr Peter Little, Mr Adam Knight and Mr Paul Timbs (whose earlier affidavits were the subject of the leave I granted on 9 March 2018) together with affidavits of Mr John Louth and Mr Peter Bailey (who had not previously made affidavits in the proceedings). For the most part these witnesses give lay evidence.
Since then, the Co Operative has served an affidavit from a dairy plant system expert, Mr Ian Froude (augmenting an earlier affidavit) and from Ms Karalyn Duncan. Ms Duncan’s evidence is directed to the loss said to have been suffered by the Co Operative.
The further evidence is extensive. With annexures and exhibits, it comprises over 2,500 pages.
Despite consenting, on three occasions, to an extension of the time for Sepak to serve its evidence, neither Mr Daniel nor Mr Allen notified Sepak’s legal advisors that further evidence was being prepared. Instead Sepak’s legal advisers prepared its evidence on the basis of the evidence in chief for which I had granted leave on 9 March 2018. They were not aware that further evidence was being prepared.
Nor did Mr Daniel cause the matter to be relisted in order that the Court be apprised of what was going on.
The matters were before me for directions on 5 October 2018. I gave directions for the Co Operative to file a Notice of Motion seeking leave to rely upon the further evidence.
That Notice of Motion was filed on 12 October 2018.
In addition to seeking leave to reply upon the evidence to which I have referred, the Co Operative sought leave to file a Further Amended Summons and a Further Amended Commercial List Statement (as well as a corresponding Amended Defence in the proceedings commenced by Sepak in the Local Court, now transferred here).
In an affidavit sworn on 8 November 2018 Mr Daniel gave this explanation for what has happened:

“7.   Once various deficiencies in the commercial list documents and affidavits previously served on behalf of the [Co Operative] were identified in mid-late May 2018, it was necessary for Mr Allen (and also Mr Knackstredt) to meet with various witnesses and potential witnesses in order to ascertain what further material could be obtained to correct those deficiencies.
8.   At around the same time it was then determined the most efficient way to progress the matter was to prepare the further material as expeditiously as was reasonably possible and, once complete, to serve any further affidavits on the legal representatives for the defendants in one go as the [Co Operative] would then be in a position to seek the Court’s leave to rely on that material. For the reasons set out in Mr Allen’s affidavit sworn 12 October 2018 this process took longer than I anticipated.
9.   The reasons were as follows. First, there were difficulties obtaining the complete file from Carter Ferguson (the previous solicitors for the [Co Operative]). Second, the [Co Operative’s] principal lay witness Mr Paul Timbs was unwilling to assist the [Co Operative] for a period of time. I understand Mr Allen has explained the first two reasons in his affidavits. Third, Mr Ian Froude (one of the [Co Operative’s] expert witnesses who had previously prepared an affidavit served in the proceedings) could not be instructed by Resolve Litigation Lawyers until all the further lay affidavits were complete.”

Mr Giles SC, who appeared for Sepak, sought leave to cross-examine Mr Daniel. The discretion to permit cross-examination in an interlocutory application is exercised sparingly and with caution (for example see the authorities referred to by Collier J in National Mutual Life Association of Australasia Ltd v Tolfield Pty Ltd [2011] FCA 1309 at [8] to [11]). I found this to be an appropriate occasion upon which to permit cross-examination. Mr Giles identified a particular matter that he submitted warranted cross-examination; the failure of Mr Daniel and Mr Allen to foreshadow their preparation of further evidence to Sepak’s solicitors and to the Court. I concluded that I would be assisted by such cross-examination.
In cross-examination Mr Daniel accepted that he was responsible for the decision to investigate what further evidence could be adduced on behalf of the Co Operative.
Mr Daniel also accepted that he had determined not to tell Sepak’s solicitors or the Court about that decision.
He said:

“I did think that it would be premature to identify the fact that we had problems without working out if we could solve those problems, and I thought it would be premature to seek consent to making changes to both pleadings and further affidavit evidence until it had been prepared.”

Mr Daniel said that he did not, in terms, seek instructions from the Co Operative to adopt this course. He said:

“…what I told the client we were doing was putting – preparing – getting the case in order and that we would then first seek the consent of the other side and if the other side did not consent then we would need leave of the Court.”

And:

“Q. Did you get instructions not to tell my instructing solicitors about what you were doing until you had finished preparing the evidence?
A. Again, I didn't seek instructions in those terms nor receive them in those terms.”

Mr Daniel gave this further evidence first in response to questions from Mr Giles and then from me:

“Q. In doing so, why didn't you just tell the Court and my instructing solicitors what you were doing?
A. Because if I was to tell the Court and the instructing solicitors from the outset that we had a problem and we were not sure – we were not sure if we were able to fix it which – we were not sure about whether we would have access to witnesses, we had some difficulty with access to witnesses and that is why I thought it was best to see if we could fix the problem rather than flagging there is a problem without knowing that it could be fixed.
HIS HONOUR
Q. Are you conscious that I ordered on or shortly after 9 March that if the [Co Operative] made any further default in compliance with any future order or direction then the proceedings would be dismissed?
A. I was aware of that -- that order your Honour.
Q. Was a reason that you did not speak up that you were concerned that the Court would fix a time by which your client was to put any further evidence on and then run the risk of having the proceedings dismissed if that order was not complied with?
A. I was certainly aware of the fact that we were – that there was – that there it would be – there would be – that it would be difficult to get leave and that if – I am aware – I was aware of that order, your Honour. It is hard now for me to work out what sort of weighting that order had at the time -–
Q – it would be dangerous to speak up for fear that I or some other Judge made a direction that all further evidence be put on by a certain date but that if that direction would not be complied with that the proceedings would then be dismissed?
A. That's correct, your Honour.”

Mr Allen gave detailed evidence in his 12 October 2018 affidavit of the steps taken to obtain the file from the Co Operative’s former solicitors and the difficulty encountered in obtaining the complete file. He also gave evidence of the steps taken to interview witnesses to investigate the availability of further evidence and whether that evidence should be adduced to advance the Co Operative’s case.
I see no basis to criticise Mr Daniel and Mr Allen in relation to the time it took to martial the material.
Nor do I see the proposal to amend the pleadings as, itself, raising any insurmountable difficulty. Mr Giles offered some criticisms of the proposed amendments but did not suggest that they were demurrable or unable to be dealt with. I propose to grant the Co Operative leave to amend its pleadings in the manner proposed.
The difficulty I see arises from Mr Daniel’s failure to notify Sepak’s solicitors, and the Court of his conclusion that the Co Operative’s evidence in chief was deficient and required extensive supplementation.
Mr Daniel must have known that Sepak’s legal team was causing Sepak to incur costs by preparing its evidence in response to that already adduced on behalf of the Co Operative. He must have known that costs would be thrown away if Sepak were later confronted with further evidence, including from existing deponents, that also required a response.
As soon as Mr Daniel identified that further evidence was needed, he should have taken steps to restore the matter to the List, inform the Court of the position and sought directions.
The Court would then have made a direction limiting the time for service of further evidence.
Mr Daniel knew that the Co Operative’s previous legal advisors had conducted the proceedings in an egregious fashion. He knew that the Co Operative had sought and obtained, over the vigorous objection of Sepak, the Court’s indulgence to rely upon evidence served in defiance of the guillotine order made by Hammerschlag J on 23 June 2017.
I am particularly troubled about the evidence Mr Daniel that I have set out at [33] above.
Mr Daniel was conscious of my order that the Co Operative’s proceedings be dismissed if it was in default of any further direction or order.
Mr Daniel accepted that a factor which was relevant to his decision not to inform the Court of what was going on was an apprehension that, had that occurred, a direction would have been made with which the Co Operative may not have been able to comply. The consequence would have been that the proceedings stood dismissed. Certainly, he accepted that my order was something of which he was “very conscious”.
Mr Knackstredt informed me there is no real prospect of the Co Operative’s case succeeding on the existing evidence. Mr Knackstredt informed me that, in particular, without Ms Duncan’s evidence the Co Operative cannot prove that it has suffered loss as a result of the alleged shortcomings in the Equipment.
There was debate as to the extent to which the further evidence is “new”. It appears that much of it is directed to subject matters that are already in the evidence served, albeit in form which might not survive objection.
However that might be, it is obvious that Sepak’s legal team will now have to give careful consideration to the further evidence it will adduce to meet the new evidence.
Had Mr Daniel foreshadowed that the Co Operative was proposing to adduce further evidence, Sepak’s legal team would have no doubt deferred further expenditure on legal costs until the Co Operative had corralled its proposed evidence in chief and sought leave to rely upon it.
According to an affidavit sworn by Sepak’s solicitor, Mr Benjamin Hemsworth, Sepak has incurred legal expenses in the order of $90,000 preparing the evidence that it served on 3 October 2018. Much of those costs will be thrown away if the Co Operative obtains the leave it now seeks.
It is true, as Mr Knackstredt pointed out that, in one sense, it is the Co Operative, rather than Sepak that is being “held out of its money” by reason of the delay in the progress of these proceedings.
Sepak is seeking a relatively modest amount (the unpaid portion of the purchase price of the Equipment) whereas the Co Operative is seeking a significant damages sum.
Conduct of this kind is customarily dealt with by expulsion from the Commercial List. However that is not an appropriate course here, as it will cause obvious prejudice to Sepak and the Co Operative.
Mr Knackstredt submitted that, in substance, there was no prejudice to Sepak beyond that which can be cured by a robust costs order. That is to be contrasted, Mr Knackstredt submitted, with the prejudice that would be suffered by the Co Operative if the leave sought is not granted; namely that, the Co Operative’s case fails.
What, then, is to be done?
It should by now be well understood in the profession that a costs order is not a cure for all procedural evils: Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27 at [99].
Sepak has now been vexed by these proceedings for over two years. Its sole director, Mr Kong, is also a defendant. The ongoing stress of this litigation no doubt weighs heavily on him.
Had the Co Operative prosecuted these proceedings in the manner customarily expected in this List, it is likely that the proceedings would have been heard and determined by now.
However it is only now that the Co Operative’s evidence in chief is in a state fit to proceed to trial.
I was reluctant to afford the Co Operative the indulgence it sought earlier this year.
I am even more reluctant to afford the indulgence it seeks now.
However my conclusion is that the justice of case does require that the Co Operative obtain the leave it seeks.
That is primarily because, once again, the circumstance before the Court is not the Co Operative’s fault. Once again, it has been let down by the poor judgment of its legal advisers. Were I to refuse leave, it seems likely the Co Operative’s claim will fail, and it will be left either itself to bear the loss it contends to be Sepak’s responsibility or to seek to recover that loss in professional negligence proceedings.
Again, the granting of that leave must be on very strict terms.

The first is that I order that the Co Operative pay all of the costs that Sepak has incurred in preparing the evidence it served on 3 October 2018 and that those costs be paid on an indemnity basis.
The second is that I specify those costs as a gross sum under s 98(4) of the Civil Procedure Act and direct that those costs be paid forthwith. I will hear submissions about what that gross sum should be.
Further, pursuant to s 99 of the Civil Procedure Act, and Practice Note SC Gen 5, I direct that by 5pm on 19 November 2018 Mr Daniel show cause in writing to my Associate why he should not pay to the Co Operative the whole of the costs that the Co Operative must pay Sepak.
I direct that Mr Daniel forthwith cause a copy of these reasons to be given to all members of the board of the Co Operative and that Mr Daniel file, and provide by email to my Associate, an affidavit confirming this has been done.
I grant the Co Operative leave to file a Further Amended Summons and Further Amended Commercial List Statement in proceedings 2016/281883 and an Amended Defence in proceedings 2016/252339 in the form annexed to Exhibit CEA-1.
I list the matter for directions before the Commercial List Judge tomorrow, 15 November 2018, for the immediate allocation of a hearing date. This will ensure that no further delay occurs.

**********

Decision last updated: 15 November 2018

Medium Neutral Citation:	The Berry Rural Co Operative Society Ltd v Sepak Industries Pty Ltd (No 3) [2018] NSWSC 1751
Hearing dates:	9 November 2018
Decision date:	15 November 2018
Jurisdiction:	Equity - Commercial List
Before:	Stevenson J
Decision:	Plaintiff granted leave to rely on further evidence on terms including as to costs
Catchwords:	CIVIL PROCEDURE – pleadings and evidence – amendment – plaintiff seeks leave to amend its pleadings and rely upon further evidence – where plaintiff previously granted leave to rely on evidence served in the face of a guillotine order – where earlier order that if plaintiff in default of any direction or order the proceedings be dismissed – where plaintiff’s legal advisors aware that defendants preparing evidence in response – where plaintiff’s legal advisors concluded that existing evidence insufficient and required augmentation – where plaintiff’s legal advisors did not inform the defendants or the Court that further evidence be marshalled – where significant body of further evidence served without notice on the day after defendants served its evidence – where likely that defendants will have to revisit all evidence adduced so far to ascertain whether it answers evidence freshly served by plaintiff – whether plaintiff should have leave to rely upon the further evidence – whether plaintiff should have leave to amend its pleadings PROFESSIONS AND TRADES – Lawyers – whether solicitor for plaintiff should pay the costs that the plaintiff must pay the defendants by reason of leave being granted
Legislation Cited:	Civil Procedure Act 2005 (NSW)
Cases Cited:	Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27 National Mutual Life Association of Australasia Ltd v Tolfield Pty Ltd [2011] FCA 1309 The Berry Rural Co Operative Society Ltd v Sepak Industries Pty Ltd [2018] NSWSC 298 (No 2)
Texts Cited:	Practice Note SC Gen 5
Category:	Procedural and other rulings
Parties:	The Berry Rural Co Operative Society Ltd (Plaintiff/Applicant) Sepak Industries Pty Ltd (First Defendant/Respondent) Henry Kong (Second Defendant/Respondent)
Representation:	Counsel: J P Knackstredt (Plaintiff/Applicant) J C Giles SC (Defendants/Respondents) Solicitors: Resolve Litigation Lawyers (Plaintiff/Applicant) Somerville Legal (Defendants/Respondents)
File Number(s):	SC 2016/281883