The Duke Group Ltd (in Liq) v Alamain Investments Ltd & Ors No. Scciv-02-1675

THE DUKE GROUP LTD (IN LIQ) v ALAMAIN
INVESTMENTS LTD & ORS
[2003] SASC 272
Civil

DEBELLE J The plaintiff has applied for an order that I disqualify myself from hearing the trial of this action or any applications by way of final relief including certain applications which have been listed for hearing on 27, 28 and 29 August. I set out the facts leading to the application and, in doing so, will examine the applications to be heard at the end of this month. I will call this action “the 2003 action”. In a moment I will set out the issues in that action.
The 1992 Action
The 2003 action is a successor to the action number 1874 of 1992, Duke Group Ltd (in liq) v Pilmer (1998) 144 FLR 1 and, on appeal, (1999) 73 SASR 64. For convenience, I will refer to it as “the 1992 action”.
In 1987 Duke Group Ltd was called Kia Ora Gold Corporation NL (“Kia Ora”). On 11 July 1989 this Court ordered that Kia Ora be wound up. Mr John Sheahan is its liquidator. In 1992, Duke Group Ltd (in liq) (“the plaintiff”), by its liquidator, instituted an action in the Court making a claim in negligence and in contract against Nelson Wheeler, a firm of accountants. The plaintiff alleged that Nelson Wheeler had negligently prepared for the plaintiff a report required by Rule 3J(3) of the Listing Rules of the Australian Stock Exchange Ltd in relation to the takeover by the plaintiff of a company called Western United Ltd. The takeover was proposed in 1987. In 1987, a number of the directors of the plaintiff were also directors of Western United Ltd. The partners of Nelson Wheeler were individually sued. Mr Pilmer was the first partner named as defendant.
Nelson Wheeler defendants joined the directors of the plaintiff as third parties. On 3 November 1993, the plaintiff obtained leave to add the directors of the plaintiffs as defendants: see Duke Group Ltd (in liq) v Pilmer (1993) 173 LSJS 248. The plaintiff alleged that the directors had been guilty of breaches of their fiduciary and statutory duties to the plaintiff in recommending the takeover to the shareholders of the plaintiff.
After a very long trial, the plaintiff succeeded against both the Nelson Wheeler defendants and the defendant directors. The decision was upheld on appeal to the Full Court and to the High Court of Australia, although the High Court reduced the assessment of damages.
This Court encourages mediation as a process of dispute resolution and, if requested, some judges act as mediators. Before the trial of the action I was asked if I was willing to act as a mediator of the issues in the first action. I agreed. A preliminary conference was held. According to an affidavit filed on behalf of the plaintiff, the mediation was conducted on 5 and 6 April 1994. I do not agree with those dates. According to my diary, the mediation was conducted over two days in the week commencing 28 March 1994. The mediation was held more than nine years ago. I have no memory of those dates. I rely on my diary for the dates. The difference in the dates is of no consequence. It is sufficient to note that the mediation occurred in late March or early April 1994, more than nine years ago.
The only persons present at the mediation were the parties and their representatives. The parties were the plaintiff, some of the Nelson Wheeler defendants, and some of the defendant directors. I remember that only one or two directors were present. I recall only the name of one of the directors, Sir Ernest Lee-Steere. I do not believe that all of the directors were present. However, I may be mistaken as to that fact.
The mediation was conducted in what I understand to be the usual manner. The mediation began with all parties present. Thereafter, I held a number of meetings with each of the three groups of parties separately as well as meeting again on a number of occasions with all parties present. The meetings separately with each of the parties were conducted as a so-called “caucus”.
The mediation was conducted in accordance with Rule 56A, the rule of court then in force for the regulation of mediations, and in accordance with the guidelines for mediations set out in Practice Direction 12. Rule 56A.01 provided that a mediation may be presided over by a judicial or other properly qualified officer of the Court. In accordance with Rule 56A.04, the mediation was conducted on a confidential basis. I have destroyed my notes of the mediation. There was no transcript of the mediation. Clearly, even if a transcript had been kept, no part of that document could have been disclosed without the consent of the parties to the mediation. The confidentiality of the mediation is reinforced by cl 3 of the guidelines in Practice Direction 12.
It is no breach of the confidentiality attaching to the mediation to state that the only issues at the mediation were those joined on the pleadings, that is to say, the liability of the Nelson Wheeler defendants and the defendant directors. At that time, there was no issue concerning the present defendants.
I do not have any detailed recollection of the course of the mediation. However, it is apparent from the pleadings that nothing would have been said concerning the issues in the 2003 action. That conclusion is confirmed by later events at the trial of Duke Group Ltd v Pilmer and, in particular, by the evidence of Mr Sheahan in an affidavit sworn by him in the 2003 action. The trial of the 1992 action began on 15 June 1994. In July 1995, some 15 months after the mediation, the plaintiffs first learned of what was called the “Autocure transaction”. On 24 July 1995, about a year after the trial had commenced, the seventh defendant, Mr Ewart-James, was called as a witness by counsel for the Nelson Wheeler defendants. Later, a bundle of Hambros documents concerning the Autocure transaction was produced. It is the Autocure transaction which is the subject of the 2003 action. In his affidavit, Mr Sheahan has sworn that it was in July 1995 that he first became aware of the circumstances in which the Autocure transaction appeared to have taken place. He adds that, before 24 July 1995, he did not believe that the Autocure transaction had assumed any significance. It is apparent from his affidavit that he was confirmed in that belief by the fact that neither the defence of the Nelson Wheeler defendants nor any other pleading referred to the Autocure transaction. He said he had first heard of the Autocure transaction in June 1995 when counsel for the Nelson Wheeler defendants said in the course of his opening that Mr Ewart-James would be called to give evidence concerning that transaction.
After a long trial, Mullighan J found that the Nelson Wheeler defendants had acted negligently and that the defendant directors had acted in breach of their duties as directors. He awarded damages in the sum of almost $94 million: (1998) 114 FLR 1. All of the defendants appealed to the Full Court which dismissed the appeal: (1999) 73 SASR 64. There was a further appeal to the High Court which dismissed the appeal against the findings as to liability but upheld the appeal against the award of damages: Pilmer v Duke Group Limited (in liquidation) (2001) 207 CLR 165.
The 2003 Action
In this action, instituted by its liquidator, the plaintiff makes a claim against the company which in 1987 was called Autocure Ltd and is now called Alamain Investments Ltd. For convenience, I will call the company “Autocure”. The other defendants to the action are three individuals who were directors of Autocure in 1987, the merchant banker Hambros Australia Ltd (“Hambros”), a subsidiary of Hambros, and Mr Ewart-James and Mr Corcoran, two directors of Hambros.
Shortly stated, the plaintiff’s claim is based on the following facts. The plaintiff pleads the finding of liability against the directors in the 1993 action. It then alleges that Autocure held some 2.9 million shares in Kia Ora; that Hambros advised Autocure that Western United was over-valued, that the takeover of Western United by Kia Ora was not in the best interests of Kia Ora, and that Kia Ora should vote against the takeover; that Mr Ewart-James and Mr Corcoran, together with Mr Abbott, a director of the plaintiff, arranged for the sale of all of Autocure’s shares in Kia Ora to a company which owned shares in Western United for a price substantially in excess of the then market value of the shares. Relying on those allegations, the plaintiff asserts that Autocure and its directors are liable in that they knowingly and dishonestly acted in a transaction which they knew involved a misapplication of the assets of Kia Ora by its directors. The claim is in effect made in reliance on Barnes v Addy (1874) 9 Ch App 244 for equitable compensation on the ground that the defendants knowingly participated in a breach by the directors of Kia Ora of their fiduciary duties. The plaintiff asserts that the Hambros defendants and its two directors are liable on the ground that the Hambros companies, by their directors, formulated the strategy by which the directors of Kia Ora caused the purchase of the shares which Autocure held in Kia Ora at a price which was favourable to Autocure and knowing that it would assist the interests of the directors of Kia Ora to acquire all of the shares in Western United. The plaintiff claims the sum of $75.5 million.
Applications by Defendants to Strike Out Claim
There are three sets of defendants. The first set is the first defendant, Alamain Investments Ltd which used to be called Autocure Ltd. The second set comprises the three directors of Alamain Investments Ltd. The third set comprises the two Hambros companies and Messrs Ewart-James and Corcoran. All defendants have made applications for a permanent stay of proceedings on the ground of abuse of process. In addition, all defendants have applied either to dismiss the action or to strike out the statement of claim. The second set of defendants, the directors of Alamain Investments Ltd, has applied for security for costs.
This Court has a panel of three judges who manage long and complex actions in the Court. I am one of those judges. This action is one which the Court regards as a long and complex action. It became my task to manage it. There have been two management conferences. The first was on 30 April 2003 and the second on 13 June 2003.
At the management conference on 30 April 2003, I ordered that the application for security for costs should stand over until the other applications had been heard and determined. I made orders and directions to clarify the issues raised by the defendants in their respective applications. I set the applications down for hearing in the week commencing 25 August next. I informed the parties that I would be the judge who would hear the defendants’ applications. In the course of that management conference, I referred to the fact that I had conducted the mediation in the 1992 action. I said that, as this was an entirely separate action, I did not believe I was disqualified from acting as a judge in this action. No party suggested that I was disqualified.
There was a subsequent management conference on 13 June 2003. I gave further directions in respect of the hearing of the defendants’ applications. The plaintiff did not then object to my hearing the application nor did it indicate that it objected to my hearing the defendants’ applications listed for hearing later in August.
An Application for Disqualification
On 10 July 2003, I received a letter from DMAW Lawyers, the solicitors acting for the plaintiff, asking me to disqualify myself. I think it is necessary to set out the whole of the terms of this letter:
“On 30 April 2003, the Honourable Justice Debelle said in Court that he had conducted the mediation in previous litigation involving Duke (known as the ‘Duke v Pilmer proceedings’) and its directors and the firm of Nelson Wheeler, but did not consider that this was an impediment to his conduct of Duke’s action against Autocure. At that time we, and counsel for Duke in the Autocure litigation, were not aware of the nature or detail of the mediation to which his Honour referred.
Since that time, we have taken detailed instructions and have recently been instructed to write this letter requesting that his Honour not continue as a judicial officer in connection with this matter. The basis of this request is the closeness of the relationship between matters dealt with at the previous mediation and the subject matter of the Autocure litigation.
In making this request, we are constrained by the conditions of absolute confidentiality under which the previous Court ordered mediation took place. Accordingly, in our view, we cannot discuss or reveal what transpired at the mediation or what was said to or by his Honour or the participants. What can be said is that the Duke v Pilmer proceedings, and therefore the mediation, concerned, amongst other things, the conduct of the directors of Duke in connection with the Western United takeover. This conduct was alleged to be in breach of the fiduciary obligations which the directors owed to Duke. In the Autocure litigation, Duke makes the same allegations of breach of fiduciary duty by the directors and further alleges a knowing participation on the part of the defendants in the breach by the directors of those fiduciary obligations. As such, a critical aspect of the Autocure litigation concerns the very matter which was central to the plaintiff’s claim against the directors which was the subject of mediation by his Honour.
In making this request we are conscious that mediations take place in an environment in which the parties are urged to discuss the merits of their case with the mediator with absolute candour. The mediator is thus appraised of substantial information relevant to the claim and its background. The possibility that such information may also include matters relevant to the defence of laches is realistic and the consequences of this are significant.
Without revealing the actual communications with his Honour, as mediator, on that occasion, the very nature of the process makes it a realistic likelihood that parties will have conducted extensive ex parte communications with his Honour under circumstances in which both his Honour and the parties are prohibited from disclosing the content of those communications, or the impressions with which they were left, to the other parties in the subsequent litigation.
It is for the above reasons that the plaintiff requests that the Honourable Justice Debelle should not have any further involvement in the Autocure litigation. We are forwarding a copy of this correspondence to the solicitors for the defendants and would be pleased to address his Honour on this application in open Court if that is considered appropriate.”
A copy of the letter was sent to the other parties. It will have been noticed that the letter refers to the management conference on 30 April when I had mentioned my participation in the mediation.
Given that I have already embarked on the management of this long and complex action, and given that the plaintiff has already acquiesced in my managing the action and hearing the applications listed for August, I considered it inappropriate to accede to this request without a proper application in open court. My Associate so informed the parties. The plaintiff has formally applied for an order that I disqualify myself. Apart from what is stated in the letter of 10 July, the plaintiff’s liquidator, Mr John Sheahan, gives no explanation for this application. None of the defendants join the plaintiff in that application. The defendants have no objection to my managing this action or deciding issues. They have not objected to me acting as the trial judge. They have stated that they will abide the order of the Court.
The ground on which the application is made is
•that the plaintiff in this action makes the same allegations as to breach of fiduciary duty against the directors of Kia Ora and alleges that the defendants were party to those breaches,
•that the applications of the defendants are in part grounded on the long delay of the plaintiff in prosecuting this action so that the defendants will rely on laches, and
•that my participation in the mediation, and in particular the fact that I met privately with some of the directors, may have resulted in me receiving information which would cause me to have a view upon the merits of the action against the directors.
It is said, therefore, that these views might lead to an apprehension that might colour the exercise of my discretion in determining whether, by reason of the delay of the plaintiff in commencing this action, the action should either be stayed or struck out. There is no allegation of actual bias. I will examine these issues in a moment. Before doing so, it is necessary to note the relevant principles.
The Relevant Principles
A central element in the system of justice administered by our courts is that it should be fair and this means that it must be open, impartial and even-handed. With that sentence which expresses a fundamental principle well understood by any judge, Mason J opens his reasons in Re JRL; Ex parte CJL (1986) 161 CLR 342 at 350. His Honour went on to develop that principle. He said:
“It is for this reason that one of the cardinal principles of the law is that a judge tries the case before him on the evidence and arguments presented to him in open court by the parties or their legal representatives and by reference to those matters alone, unless Parliament otherwise provides. It would be inconsistent with basic notions of fairness that a judge should take into account, or even receive, secret or private representations on behalf of a party or from a stranger with reference to a case which he has to decide. This principle immediately distinguishes the judicial branch from other branches of government, except in so far as they may be relevantly affected by the rules of natural justice.”
It is therefore a fundamental principle that a judge must not hear evidence or receive representations from one party to litigation in the absence of the other: Kanda v Government of the Federation of Malaya [1962] AC 322 at 337, affirmed in Re JRL; Ex parte CJL (supra) at 346, at 350, at 365 and at 371. In that same decision at 346 and at 350 – 351, Gibbs CJ and Mason J cited with approval the following remarks of McInerney J in R v Magistrates’ Court at Lilydale; Ex parte Ciccone [1973] VR 122 at 127:
“The sound instinct of the legal profession — judges and practitioners alike — has always been that, save in the most exceptional cases, there should be no communication or association between the judge and one of the parties (or the legal advisers or witnesses of such a party), otherwise than in the presence of or with the previous knowledge and consent of the other party. Once the case is under way, or about to get under way, the judicial officer keeps aloof from the parties (and from their legal advisers and witnesses) and neither he nor they should so act as to expose the judicial officer to a suspicion of having had communications with one party behind the back of or without the previous knowledge and consent of the other party. For if something is done which affords a reasonable basis for such suspicion, confidence in the impartiality of the judicial officer is undermined.”
When a judge acts as a mediator, the judge sheds, as it were, the judicial mantle for the duration of the mediation and acts in a manner inconsistent with the role of a judge by seeing the parties in private. In doing so, the judge acts in a manner contrary to the fundamental principle of natural justice that a judge must not hear representations from one party in the absence of the other. It is for that reason that the judge will not in any respect adjudicate in that action except with the consent of the parties. It is for that reason that Rule 56A.05 of the Supreme Court Rules provided:
“ 56A.05 A judicial officer who has presided over a mediation in an action shall, ipso facto, be disqualified from thereafter hearing or determining the action or any issue arising in the course thereof which is directed to be tried separately.”
The principle is based upon the need for public confidence in the administration of justice. The judge is disqualified because a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial and unprejudiced mind to the resolution of the question the judge is required to decide: Johnson v Johnson (2000) 201 CLR 488 at [12]; Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 at [33]. The fair-minded observer might apprehend that the judge has been told something by one party in the absence of the other and that information may affect his reasoning.

At the same time, it is equally important that juges should discharge their duty to sit and should not, by acceding too readily to the suggestions of appearance of bias, encourage parties to believe that by seeking the disqualification of a judge, they will have their case tried by someone thought to be more likely to decide the case in their favour: Re JRL; Ex parte CJL (supra) per Mason J at 352. And, as Gaudron and McHugh JJ observed in Laws v Australian Broadcasting Tribunal (1990) 170 CLR 70 at 100, it is necessary for the reasonable apprehension of bias to be firmly established. They said:
“When suspected prejudgment of an issue is relied upon to ground the disqualification of a decision-maker, what must be firmly established is a reasonable fear that the decision-maker’s mind is so prejudiced in favour of a conclusion already formed that he or she will not alter that conclusion irrespective of the evidence or arguments presented to him or her.”
The Competing Considerations
I repeat, the mediation occurred more than nine years ago. I have no memory of the details. I have no notes. I believe that it is most unlikely that any submission in the course of these applications or anything appearing in any document would trigger any relevant recollection. The likelihood is even more remote given that the claim against the present defendants was not in contemplation of the parties in early 1994.
This claim concerning the Autocure transaction was not heard as part of the 1992 action. It is a separate action instituted some nine years after the mediation. The allegations by the plaintiff raise different issues from those in the 1992 action. The defendants in this action are different from the defendants in the 1992 action. The Autocure transaction was not in the contemplation of the parties when the mediation was conducted in 1994 and, as already mentioned, it was not an issue in the mediation. The directors of the plaintiff are not defendants in this action. These are all factors which point to the conclusion there is no reason why I should disqualify myself. If informed of these factors, the reasonable bystander might not apprehend any perception that my consideration of the issues would, in any respect, be coloured by what had transpired at the mediation.
It is apparent that at least some of the defendants in this action are not willing to accept some of the findings made by Mullighan J. The third set of defendants has filed a notice of contention in respect of its application stating that they intend to impeach the findings made in Duke Group Ltd v Pilmer. They assert that they seek to question the findings as to the wrongs committed by the directors, to which wrongs the defendants are alleged to be accessories. They also seek to contest the assessment of damages made against the directors.
The fact that the directors intend to re-litigate issues as to whether the directors of Kia Ora acted in breach of their fiduciary duties is a ground which I believe disqualifies me from hearing the defendants’ applications at the end of August. A reasonable bystander might apprehend that, in the course of meeting the directors separately, I might have received information which would cause me to have a view about the merits of the claim against the directors which might affect the exercise of my discretion whether to dismiss the plaintiff’s claim on the ground of laches.
In the result, I believe that what is at stake is the integrity of the Court engaging in two forms of dispute resolution and the public interest in upholding the integrity of the Court and public confidence in the Court. It is necessary to uphold public confidence in the integrity of the mediation process. It is equally important to uphold the public confidence in the integrity of the process of adjudication by the Court. It is important that nothing should occur which would suggest any breach of the obligation of confidence attaching to a mediation. Those who engage in mediation should be entirely confident that in no respect will anything said in confidence be revealed. Secondly, the public should have confidence in its judges knowing that, when they adjudicate issues, they are not influenced by anything which might have occurred in a mediation. It is for these reasons that I believe that I should disqualify myself from being in any respect involved in this litigation.
The application by the plaintiff has been made in sufficient time to enable another judge to be rostered to hear the defendants’ application. The applications will be heard on the appointed date.
For these reasons, I disqualify myself from this action. There will be no order as to costs.

[2003] SASC 272

15 August 2003