Morgan & Banks Ltd v Gemini Personnel Ltd
[2000] NZCA 390
•14 December 2000
| IN THE COURT OF APPEAL OF NEW ZEALAND | CA108/00 |
| BETWEEN | MORGAN & BANKS LIMITED |
| First Appellant |
| AND | PETER A SULLIVAN |
| Second Appellant |
| AND | IAN E FARRANT |
| Third Appellant |
| AND | GEOFFREY K MORGAN |
| Fourth Appellant |
| AND | ANDREW R BANKS |
| Fifth Appellant |
| AND | GEMINI PERSONNEL LIMITED |
| First Respondent |
| AND | SIMPSON GRIERSON LAW |
| Second Respondent |
| Hearing: | 7 September 2000 |
| Coram: | Gault J Keith J McGrath J |
| Appearances: | A R Galbraith QC and J R Wadham for the Appellants G J Judd QC and J McCartney for the First Respondent |
| Judgment: | 14 December 2000 |
| JUDGMENT OF THE COURT DELIVERED BY KEITH J |
This appeal concerns a claim to legal professional privilege against an application for discovery. The plaintiff (Gemini), the first respondent in this appeal, and the first to fifth defendants (collectively Morgan & Banks), the appellants, negotiated to establish a new company. That company, Alectus Recruitment Consultants Ltd (Alectus), was to buy the Gemini business. Gemini interests would hold forty percent of the shareholding and Morgan & Banks sixty percent. Simpson Grierson, a firm of solicitors, the sixth defendant and second respondent in this appeal, were Alectus’ solicitors and Gemini claim that they breached relevant fiduciary duties in actions they took for Morgan & Banks.
Morgan & Banks, Gemini and the three shareholders of Gemini signed the heads of agreement to establish Alectus on 5 September 1993. That document contemplated the preparation of further documents to be drawn up by Simpson Grierson who were named as the solicitors for the new company.
On 30 November 1993, the parties completed a shareholders agreement with the shares being distributed between Morgan & Banks and the Gemini group in the agreed proportions. The agreement set out the primary objects of the company as follows: (1) to acquire the business of Gemini and to establish and to expand the business under the name of Alectus throughout New Zealand, (2) to expand the Auckland business and to establish an office in Wellington, and (3) to conduct the business with the view to maximising profit and returns to the shareholders. The parties also signed restrictive covenants preventing Morgan & Banks and those involved in the Gemini Group from competing with Alectus. On 29 March 1995, after the parties had fallen out, Gemini agreed to sell its shares in Alectus to Morgan & Banks. There appear to have been no other written agreements between the parties.
In its pleadings, Gemini claims that Morgan & Banks acted dishonestly and fraudulently in their dealings with it, both at the time of the formation of the company and later. Morgan & Banks were helped in that because Simpson Grierson, who had previously acted for Morgan & Banks, failed to observe their fiduciary duty owed to Gemini.
“That failure”, to quote Laurenson J, “consisted of separately advising [Morgan & Banks] and then, at the instigation of [Morgan & Banks], preparing the document relevant to the new venture in such a way that it did not conform to arrangements previously agreed between the parties. The consequence of this was [Morgan & Banks] were able to deal unconscionably with the plaintiff in the manner claimed by it.” This Court last year rejected an attempt to strike out causes of action alleging breach of fiduciary duty; Morgan & Banks Ltd v Gemini Personnel Ltd CA311/98, 30 June 1999.
Gemini sought discovery against all the defendants and Alectus of documents exchanged between Morgan & Banks and Simpson Grierson, and between Morgan & Banks and Alectus. Laurenson J ordered discovery, rejecting Morgan & Banks’ claim of legal professional privilege on two independent grounds:
• A joint retainer subsisted between Gemini and Morgan & Banks on the one side and Simpson Grierson on the other and there could be no privilege between the parties to the joint retainer in respect of the documents.
• The conduct in issue was attended by dishonesty.
Morgan & Banks appeal. Simpson Grierson took no substantive part in the hearing before Laurenson J in the High Court or in this Court. All the documents in issue on this appeal are dated or are claimed to have been created between June 1994 and March 1995. By contrast, the High Court was concerned with all documents made between the parties from August 1993 when the joint retainer was created to March 1995.
While there is broad agreement on the legal principles governing legal professional privilege, Morgan & Banks argue that the Judge:
1.was wrong in law and fact in his view that the joint retainer meant that Morgan & Banks was not entitled to privilege for legal advice it had obtained for itself some seven months after Alectus had taken over the business and the shareholders agreement had been entered into; and
2.failed to apply the correct test for the fraud exception which requires strong prima facie evidence of fraud or dishonesty and then misapplied the test in purporting to identify a sufficient foundation in the matters set out in his judgment.
Mr Galbraith QC for Morgan & Banks emphasises the fundamental character of legal professional privilege, quoting in particular this statement of principle by Lord Taylor in R v Derby Magistrates’ Court Ex p. B [1996] AC 487, 507:
The principle which runs through all these cases, and the many other cases which were cited, is that a man must be able to consult his lawyer in confidence, since otherwise he might hold back half the truth. The client must be sure that what he tells his lawyer in confidence will never be revealed without his consent. Legal professional privilege is thus much more than an ordinary rule of evidence, limited in its application to the facts of a particular case. It is a fundamental condition on which the administration of justice as a whole rests.
Against that Mr Judd QC for Gemini refers to a passage in a very recent judgment of this Court delivered by Richardson P in Crisford v Haszard [2000] 2 NZLR 729, 733:
As it was put in the Guardian Royal Exchange Assurance case [[1985] 1 NZLR 596, 604], there is no readily discernible reason for attaching any lesser significance to the social policies underlying the disclosure of documents relating to any question in the proceedings when balancing those public interest considerations against the public interest considerations served by legal professional privilege. The judgment went on to cite the observation of the majority in Grant v Downs (1976) 135 CLR 674, 686 that "the privilege ... detracts from the fairness of the trial by denying a party access to relevant documents or at least subjecting him to surprise"; and concluded, along with Lord Edmund‑Davies in Waugh v British Railways Board [1980] AC 521, 543, that we should start from the basis that the public interest is best served by rigidly confining within narrow limits the cases where material relevant to litigation may lawfully be withheld. To the same effect Nemetz JA in Flack [v Pacific Press Ltd (1970) 14 DLR (3d) 334 (BCCA)] considered that legal professional privilege ought not to be extended beyond the limits of the rationale on which it is founded.
Some support for the latter view may also be seen in the proposals of the New Zealand Law Commission relating to the matter precisely in issue in ex parte B (Evidence NZLC R55, Vol 1, paras 323-326 and Vol 2, draft s71(2) of the Evidence Code and the Commentary). In the circumstances of this case, we need not consider that difference of approach. The disagreement in respect of the joint retainer is essentially on the application of the established tests to the facts and, while the parties to some extent divide on the law in respect of the fraud exception, that matter falls to be decided on a rather precise factual basis.
Joint retainer
The question on the facts is whether, as Gemini contend, in terms of the principle stated in Phipson on Evidence (15th ed, 2000):
The documents in issue fall within the scope of the joint retainer : [if they do] persons who grant a joint retainer to solicitors retain no confidence against one another; if they subsequently fall out and sue one another neither can claim privilege against the other in respect of documents generated in respect of the joint retainer. (para 21-01).
Morgan & Banks argue, to the contrary, that privilege attaches to the legal advice which it sought from Simpson Grierson separately and independently of the joint retainer. Such advice was sought under Morgan & Banks’ existing general retainer, beginning in June 1994, seven months after the shareholders agreement had been concluded, and continuing until the Gemini interests sold out of Alectus in March 1995. According to the same paragraph of Phipson:
Where one of the parties who jointly instruct the solicitor consults the solicitor confidentially on matters in dispute between the persons who have created the joint retainer, he may claim privilege against the other for those communications.
A footnote to that passage comments that “the solicitor may well be embarrassed by a conflict of interest in such circumstances”. No question of that kind arises for the decision in this appeal which is solely concerned with whether the privilege exists.
The essential question is whether the documents sought fall within the scope of any joint venture between Gemini and Morgan & Banks.
Gemini knew, according to Morgan & Banks, that they (Morgan & Banks) had had a long term and continuing professional arrangement with Simpson Grierson. Morgan & Banks argue that there was nothing in the agreement relating to Alectus to stop them or, for that matter, Gemini getting their own separate advice as shareholders in Alectus. The only relevant obligations recorded in writing were those included in the heads of agreement signed in September 1993:
8. SHAREHOLDERS AGREEMENT
8.1Parties Bound by the Principal Terms: This agreement is a Heads of Agreement which binds the parties to proceed in accordance with its terms. The terms of this agreement represent all of the principal issues concerning the establishment of NewCo [which became Alectus], establishment of a new business in Wellington and acquisition of the Business of the parties.
8.2Desire of Parties: to reach agreement and complete all transactions and documentation as soon as practical.
8.3Documentation: The following draft documents are to be completed by the parties and, upon agreement in principle, be prepared by the solicitors for NewCo:
Shareholders Agreement Articles of Assoc (std)
Consultancy Agreement Asset Purchase Agreement
The parties will use fair and reasonable efforts to reach agreement about the form and content of these agreements, and in doing so will preserve the principle above.
8.4Professional Fees: the parties agree to keep professional fees to a minimum. No professional fees are to be entered into without the express knowledge of the other parties.
It is agreed that Simpson Grierson Butler White will act for NewCo.
Mr Galbraith argued that clause 8.4 amounts to no more than an agreement that Simpson Grierson would act for Alectus. It says nothing about Simpson Grierson acting also for the shareholders. Further, the professional fees referred to are only those fees which would be met by the joint venture. It is certainly not possible, he contends, given the differing views of the meaning of para 8.4, to make final findings at this stage of the litigation. He refers, however, to evidence indicating that Gemini itself sought separate legal advice both as the shareholders agreement was being prepared later in 1993 and subsequently, in February 1995.
The argument continues that where two parties agree to use a solicitor for the purpose of preparing a joint venture agreement and for ongoing advice in respect of the joint venture business a number of different interests arise. The following interests can be distinguished:
(1)The joint interest which the parties have in the agreement and the joint venture business.
(2)The separate interests which each principal has in the agreement and the joint venture business.
(3)The separate interest which the vehicle for the joint venture (in this case a company) has in the agreement and the joint venture business.
In this case the key point is that each of Morgan & Banks and Gemini had distinct interests (in terms of (2)).
The argument for Morgan & Banks is that the separate, second interests listed in para [16] can be the subject of privileged advice from solicitors acting for each of those separate interests whether or not such solicitors were also acting for the new business. While it is acknowledged (as Phipson indicates) that there may be a conflict of interest for the solicitor acting for two parties in the latter situation that cannot affect the privilege arising from the separate obligation of confidentiality.
By contrast Mr Judd, for Gemini, contends that clause 8.4 of the Heads of Agreement contemplates that the parties, all of them, would use Simpson Grierson for all purposes, presumably relating to the joint venture. Simpson Grierson, as anticipated by the parties and by clause 8.4, did in fact give advice to both parties on matters where the parties had separate interests. An example of that advice is a letter from Simpson Grierson of 30 September 1994 to Alectus which advised on a question of interpretation and understanding of the shareholders agreement where a difference had arisen between the two partners about funding beyond the initial twelve month period. Simpson Grierson were asked to define both in “legal and intention terms what the agreement as written means and what was intended”. The response identifies the disagreement, identifies the issues and then provides a legal opinion on the issues. Alectus sought further clarification. That was not provided and Gemini wrote to Alectus recording the particular disagreement between the co-venturers and asking that that be put to Simpson Grierson. There was a followup to that request for clarification but apparently further advice was not given to Alectus, Gemini or both. Simpson Grierson did, however, write to Morgan & Banks on the particular matter in a letter to it dated 16 February 1995. According to a witness for Morgan & Banks,
however, this [letter] was provided as part of advice as to M&B’s separate legal position in view of the impending split with Gemini. By this stage, of course, the parties were in tension, and were engaged in discussions leading to the March 1995 share agreement, pursuant to which each obtained their own separate legal advice.
Morgan & Banks would also point out that this advice was given four and a half months after the September advice and should not be seen as in any sense as a continuation of it.
The joint retainer, Gemini’s argument continues, lasted until 25 or 27 February 1995. (Some of the documents sought are dated March 1995 and would not on any basis come within the joint venture or any joint retainer period.) One party to it could not bring it to an end before then without communicating that purpose, and there was no such communication. Not only was there no such communication, but on 30 September 1994 Simpson Grierson had given advice to Alectus, as mentioned, about disputes between the shareholders. That advice was also to be seen as given to the parties to the original joint venture.
We return to the Heads of Agreement and the facts. In the background is Gemini’s knowledge, in general terms at least, that Simpson Grierson continued to be Morgan & Banks’ solicitors through the period from June 1994 to February 1995. One critical point is that clause 8.4 appears to be completely consistent with the freedom of Morgan & Banks (and Gemini for that matter) to continue to have their own solicitors in respect of their own interests. That clause, like clause 8.3, appears to be concerned with the representation of the new company, Alectus. So the fees referred to in clause 8.4 are the fees of Alectus and of nobody else. The joint venture would not incur any fees in respect of the parties’ individual interests as principals. The provisions do not in any way appear to limit the freedom of the other two parties to seek advice on their separate interests – the second sets of interests listed in para [16] above. Further, during the period from June 1994 (seven months after the shareholders agreement was signed) to the breakdown of the relationship, Morgan & Banks and Gemini plainly had disparate interests – as they indeed had before they entered into the joint venture. Those interests were, as well, distinct from those of Alectus. Thus, when the September 1994 advice about the interpretation of the shareholders agreement was given to Alectus and the joint venturers, each of Gemini and Morgan & Banks could have sought separate advice instead of or in addition to seeking it jointly. But they did also receive it jointly; that may suggest that a joint retainer between them still subsisted.
The lack of limits on the parties’ freedom to seek advice matched the limits on the scope of the joint venture retainer itself. That retainer did not extend beyond implementation of the shareholders agreement and the Heads of Agreement. Once those matters were attended to, that first interest (in terms of the list in para [16]) was largely superseded by the third interest as the operational vehicle of the joint venture. But the separate interests under the second heading were always distinct from and outside both the first interest and the third.
On that view, the key point is that Morgan & Banks were entitled to consult at their own expense any lawyer they chose. As Phipson recognises (para [12] above), the solicitor may have had a conflict of interest, a matter for the substantive case. But the fact (if it is the fact) that the solicitors wrongly accepted instructions to the detriment of Gemini or Alectus is not a circumstance cancelling the solicitors’ obligation of confidentiality to Morgan & Banks when they consult their solicitor on matters concerning their second category of interest.
We should add, however, that the privilege in respect of separate advice may not withstand claims for inspection against the solicitors if that is sought in the context of the claim against them which still stands. Although we have not been called on to decide the point at present, we note the view expressed by Henry J in Equiticorp Finance Group Ltd v Collett (1991) 3 PRNZ 509, 512.
The matter is finely balanced. We think that there is a sufficient indication in the evidence – particularly the giving of the September 1994 advice - that the joint retainer extended beyond the implementation of the Heads of Agreement by way of the preparation of the shareholders agreement. There is no documentary indication, before the end of February 1995, that the joint retainer had come to an end. In particular, without having inspected the letter to Morgan & Banks of 16 February 1995 (para [16] above), we cannot say that it was not directed to the joint venture interests of the two parties and within their joint retainer. If Morgan & Banks established to the satisfaction of the Judge that that letter and other documents prepared in the period from June 1994 to February 1995 were legal advice sought and given to Morgan & Banks in respect of its separate interests then its claim to privilege should be upheld.
We accordingly conclude, largely in accord with Laurenson J, that privilege cannot be maintained in respect of communications and documents prepared following the engagement of the solicitors directed to giving effect to the joint venture agreement where any advice from Simpson Grierson was being provided in relation to the interests of both Gemini and Morgan & Banks. It is for Morgan & Banks as the party claiming to privilege to establish its claim and, if necessary, the Judge may privately inspect the documents including the letter of 16 February 1995 and any other documents directed to Alectus but claimed to be intended for Morgan & Banks.
The fraud exception
The parties agree on the legal test to be applied. In particular Morgan & Banks accept that Laurenson J correctly stated the question to be answered : should the privilege be removed at Gemini’s request because the advice was attended by fraud on the part of Morgan & Banks? They also accepted a passage quoted by the Judge from the judgment of Cooke P for this Court in Matua Finance Ltd v Equiticorp Industries Group Ltd [1993] 3 NZLR 650, 653-654, subject to the qualification, in Mr Galbraith’s argument, that the authorities generally support a requirement of a strong prima facie case or strong evidence of fraud. This passage from Viscount Finlay’s judgment, in O’Rourke v Darbishire [1920] AC 581, 604, widely accepted as authoritative, was repeated in Matua:
This is clear law, and, if such guilty purpose was in the client's mind when he sought the solicitor's advice, professional privilege is out of the question. But it is not enough to allege fraud. If the communications to the solicitor were for the purpose of obtaining professional advice, there must be, in order to get rid of privilege, not merely an allegation that they were made for the purpose of getting advice for the commission of a fraud, but there must be something to give colour to the charge. The statement must be made in clear and definite terms, and there must further be some prima facie evidence that it has some foundation in fact. It is with reference to cases of this kind that it can be correctly said that the Court has a discretion as to ordering inspection of documents. It is obvious that it would be absurd to say that the privilege could be got rid of merely by making a charge of fraud. The Court will exercise its discretion, not merely as to the terms in which the allegation is made, but also as to the surrounding circumstances, for the purpose of seeing whether the charge is made honestly and with sufficient probability of its truth to make it right to disallow the privilege of professional communications. In the present case it seems to me clear that the appellant has not shown such a prima facie case as would make it right to treat the claim of professional privilege as unfounded.
The parties disagree on whether the factors relied on by the Judge or put forward by Gemini as constituting a prima facie case of fraud meet the test. (We would note in this context that an application by Mr Judd to adduce further evidence relevant to this matter was withdrawn.) The Judge listed the following:
[a]It is clear from the pleadings that M & B were referring independently to the solicitors in relation to matters which were the subject of the joint retainer. Quite apart from any issue of conflict of interest, the plaintiff submits that for M & B to do so was contrary to the Heads of Agreement which provided, in effect, that only the solicitors would be engaged for this purpose.
[b]A letter dated 1 September 1994 from the solicitors to M & B advising in relation to clause 13.1 of the Shareholders Agreement. This is one of the clauses which the plaintiff alleges was included without the prior agreement of both parties. The plaintiff alleged that this letter indicates that at this time M & B were already seeking to squeeze the plaintiff out of the new company.
[c]Certain advice given to M & B in relation to the second disputed clause in the Shareholders Agreement, appears, on the face of it, to incorrectly represent certain factual matters and to the advantage of M & B.
[d]There is a latter dated 11 November 1994 from M & B to the solicitors from which the plaintiff submits an inference can be taken that at that point M & B were aware of the possibility of a restructuring. Had the plaintiff known of this it is likely that it would not have exited the joint venture company when it did.
He continued:
78.Whether all or any of these matters will, in the final analysis, be proved to be evidence of dishonesty, will, of course, have to remain to be seen.
79.If, however, they are viewed in the total context of the plaintiff’s claim at this point, then I consider that on this basis it can be said that they do, together, provide prima facie evidence giving colour to the charge of dishonesty. To my mind the most important factor to be abstracted from the total context is the undisputed claim by the plaintiff that the transfer of its business occurred, notwithstanding that no Shareholders Agreement or Consultancy Agreement was available for execution, and without payment of the [$100,000] purchase price.
80.Whatever may finally be resolved in relation to this proceeding, it seems to me that prima facie and for whatever reason, the plaintiff had placed itself in a vulnerable position and had seemingly done so in reliance of continuing good faith by M & B.
81.Subsequent events, as pleaded, plus the particular matters relied on by the plaintiff, indicate to me that the nature of the possible breaches of fiduciary duty could scarcely have occurred if M & B had, at all time, honestly represented to the plaintiff the true position as to what was happening in the context of the joint venture company.
82.This being the case, I conclude that the plaintiff has satisfied me that the tests to be satisfied before privilege has been displaced, have been met. …
We consider in turn the four matters listed by the Judge and quoted above and the additional matters mentioned by Mr Judd. So far as (a) and (b) are concerned we can see nothing dishonest in Morgan & Banks seeking legal advice; in the particular circumstances of this case, as discussed earlier, they appear to be free to do that in their own interest. Subparagaph (c) appears to refer to the advice of 30 September 1994, discussed earlier (para [18]) and available from the outset to Gemini who indeed responded. Again, we can see nothing prima facie dishonest in obtaining, in agreement with Gemini, an interpretation from Simpson Grierson. So far as subparagraph (d) is concerned, there is uncontradicted evidence that the subject of the possibility of restructuring was specifically discussed with a Gemini representative on 1 December, long before Gemini exited the joint venture company. There is no prima facie evidence of dishonesty in that circumstance.
So far as para 79 is concerned, while Morgan & Banks accept that the signing of the shareholder agreement was delayed, it was signed and in the meantime all parties had the protection of the Heads of Agreement. We cannot see prima facie evidence of dishonesty or fraud in that. The other matters mentioned in para 80 and the first part of para 81 appear to relate to the claimed breaches of fiduciary duty and not something more. The general reference to (dis)honest representation in para 81 is not given any concrete content.
Mr Judd referred us to five other matters. The first relates to the period when the shareholders agreement was being negotiated : consultation Morgan & Banks had with Alectus’ solicitors had them “include clauses in the joint venture agreement which were not within the provisions and principles of the Heads of Agreement and which were later used by Morgan & Banks to get rid of Gemini”. All the relevant documents from that time have now been disclosed. That advice and related actions at that time do not appear to have a prima face fraudulent character affecting the existence of privilege several months later.
The second matter concerns a letter of 1 September 1994 in which Simpson Grierson respond to a request from Morgan & Banks for an opinion on the meaning of the transfer clause in the shareholders agreement. That letter was made available in February this year. It does show that Morgan & Banks were seeking advice about how that clause could operate with the one consequence being that Morgan & Banks would take over Gemini. Given the problems that were arising and Morgan & Banks’ separate interest, discussed in the earlier part of this judgment, we cannot see any prima facie evidence of fraud in that course.
The third matter returns to the funding issue which was the subject of the advice of 30 September 1994 and further unanswered requests for advice (para [18] above). That that advice (given to all parties) is allegedly wrong and that follow up requests were not answered are not in themselves prima facie evidence of fraud. Nor is the fact that in February 1995 Morgan & Banks apparently obtained its own advice on the funding issue. The fourth point is related. Simpson Grierson did not amend its advice on the funding matter on receiving a copy of a National Bank letter to Morgan & Banks about refinancing of their advance to Alectus. We cannot see how that claimed omission – for what duty did Simpson Grierson have – can be prima facie evidence of fraud by Morgan & Banks.
The final matter, the restructuring proposals from Morgan & Banks Ltd Australia, has already been mentioned (para [28]). There is uncontradicted evidence that that was disclosed.
We conclude that there is no prima facie evidence of fraud with sufficient foundation in fact that could justify denying legal professional privilege. We accordingly disagree with the Judge’s conclusion on that matter.
Conclusion
It follows that the appeal succeeds in part. The matter is referred back to the High Court (Laurenson J, if practicable) so that any documents on which the parties cannot agree may be inspected. In the circumstances there is no order for costs.
Solicitors:
Russell McVeagh, Auckland for the Appellants
Beca & Co, Auckland for the First Respondent
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