Rollex Group (2010) Ltd v Chaffers Group Ltd
[2012] NZHC 1332
•13 June 2012
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV 2011-485-166 [2012] NZHC 1332
BETWEEN ROLLEX GROUP (2010) LIMITED AND ROBERT JOHN LAURIE
Plaintiffs
ANDCHAFFERS GROUP LIMITED First Defendant
ANDJARED WILLIAM THOMPSON Second Defendant
ANDGAVIN RONALD SNOWSILL Third Defendant
ANDGLENN CHARLES TULLOCH Fourth Defendant
ANDCHAFFERS FINANCE LIMITED Fifth Defendant
Hearing: 23 April 2012
Counsel: I R Millard QC for Plaintiffs
N I Burley for First and Fourth Defendants
Judgment: 13 June 2012
JUDGMENT OF THE HON JUSTICE KÓS
Introduction
[1] Emails between some of the defendants and their solicitor have somehow come into the possession of the plaintiffs. May the plaintiffs produce these emails in evidence at trial?
[2] In the ordinary course such communications would be protected from
production by legal adviser privilege. That was formerly known as “solicitor-client
ROLLEX GROUP (2010) LIMITED & ANOR v CHAFFERS GROUP LIMITED HC WN CIV 2011-485-166 [13 June 2012]
privilege”. The plaintiffs accept that the emails are, on the face of things, privileged. But they say that privilege in three emails has been lost, for two reasons. First, because there is a prima facie case that they were prepared for a dishonest purpose. Secondly, because any privilege has been waived by the defendants.
Background
[3] In October 2009 the New Zealand business of Chaffers Group Ltd, the first defendant, was put up for sale. It was formerly called Rollex Group Ltd, and in this judgment I will call it “Rollex/Chaffers”. It sold supermarket and industrial packaging equipment and materials. It had sole New Zealand distribution rights for certain lines of butchery and delicatessen equipment, including film wrapping machines. It also supplied film. It had also started to sell an electronic shelf price labelling system to supermarkets.
[4] Mr Tulloch, the fourth defendant, was sole director of, and majority shareholder in, Rollex/Chaffers. Mr Thompson, the second defendant, was its managing director. Mr Snowsill, the third defendant, was the technical director. Messrs Thompson and Snowsill were minority shareholders in Rollex/Chaffers.
[5] Prospective purchasers were given an information memorandum. It was prepared by Rollex/Chaffers’ broker in October 2009. The memorandum sets out Rollex/Chaffers’ 2009 EBITDA (earnings before interest, tax, depreciation and abnormal items) as $937,502. The asking price of the business was said to be three times that figure, $2.81 million, plus stock. EBITDA for the first five months of the current financial year was said to be $430,047. Projected EBITDA for the 2010 year was given as $956,967.
[6] The memorandum also said that Rollex/Chaffers had sold five Atmopacks. This was a new poultry packaging method. Foodstuffs Wellington was said to want to phase in packaging of all fresh chicken using Atmopacks. The memorandum said this would hugely increase the amount of film supplied by Rollex/Chaffers’ business. It could add $400,000 to the bottom line annually. If Foodstuffs Auckland and South
Island came aboard too, that could add another $1,000,000 per annum. However, this was “by no means a certainty”.
[7] On 24 November 2009 a conditional agreement for sale and purchase of the business was entered. The vendor was Rollex/Chaffers. The purchaser was the plaintiff, Mr Laurie, “or nominee”. He nominated the other plaintiff, Rollex Group (2010) Ltd, which I will call “Rollex 2010”. The price agreed was $3.63 million (plus GST). Assets sold included all “computer equipment, software and laptop computers” owned by the vendor, and its “business records”. There was a 10-year restraint of trade clause binding the vendor and its directors. Mr Tulloch alone was arguably affected by this, but the agreement expressly exempted Messrs Thompson and Snowsill. This on the basis that “at this stage the intention is for both … to continue working in the business under the new ownership structure”. It was agreed separately that Mr Thompson be general manager, and Mr Snowsill technical manager.
[8] The agreement was conditional on due diligence. That took place. The agreement was then varied in January 2010. The due diligence condition was confirmed, the sum payable for goodwill was reduced by $880,000, and the estimated value of stock was increased by $450,000. Settlement occurred on
29 January 2010.
[9] After settlement Mr Thompson and Mr Snowsill resigned. On 15 March
2010 they incorporated NZ Electronic Shelf Labelling Ltd. That company was then granted exclusive New Zealand sales rights in the supermarket shelf labelling system that Rollex/Chaffers had been selling.1
The claim
[10] The plaintiffs plead eight causes of action. They seek “an order that the sale be cancelled”, repayment of the purchase price and damages. It is not clear from the
pleading whether the plaintiffs have actually cancelled the agreement under the
1 Other than for Foodstuffs Wellington.
Contractual Remedies Act 1979. Cancellation is a unilateral party action, rather than a judicial action. A Court can of course confirm the validity of a prior cancellation.
[11] The principal cause of action against the first and fourth defendants is fraud. It is alleged that Rollex 2010 was induced to enter the agreement, and to confirm it as unconditional, by misrepresentations. It is alleged that EBITDA figures in the information memorandum were wrong when contrasted with internal documents of Rollex/Chaffers: EBITDA for 2009 is said to be $1.29 million less, EBITDA projected for 2010 $629,074 less, and EBITDA for the 5 months to 31 August 2009
$515,251 less than stated. It is also alleged that there had been no sales of Atmopack in the current financial year, only four sales in the previous years and that serious problems Ingham (a purchaser of the Atmopack system) were having with it were not disclosed.
[12] Other claims are advanced for breach of contract against Rollex/Chaffers, for deceit (against Messrs Thompson and Snowsill) and for alleged breach of the Fair Trading Act 1986 (against all defendants).
The defence
[13] The defendants deny misrepresentation and deception of any kind. They say Mr Laurie is an experienced businessman. They say that the information memorandum contains disclaimers on which they may rely. They say that Mr Laurie undertook due diligence in accordance with the condition. And they say that as a result of that due diligence exercise the purchase price was negotiated down by the plaintiffs by over $400,000. That is all I need to say at this juncture about the defence.
The present application
[14] The present application concerns a number of emails listed in part 1 of the plaintiffs’ list of documents. They were sent between Mr Tulloch, Mr Thompson and a solicitor, Mr Barrett. Mr Barrett is a partner in the Wellington firm Johnston Lawrence. He was acting for the vendor and first defendant, Rollex/Chaffers,
documenting the sale agreement. He was also acting for Messrs Tulloch, Thompson and Snowsill – shareholders in Rollex/Chaffers – in drafting a shareholders’ agreement to deal with their affairs after sale of the New Zealand business.
[15] It is accepted by the plaintiffs that they were sent for the purpose of obtaining legal advice. It is accepted, also, that the emails were privileged at the time they were transmitted.2 It was not the plaintiffs’ privilege, so the documents are not listed in the privileged section of their affidavit of discovered documents. (The question of whose privilege it in fact was is discussed later in this judgment).3 The plaintiffs wish to use the documents at trial. They say the emails evidence misrepresentation by Rollex/Chaffers and its director and majority shareholder, Mr Tulloch.
[16] Rollex/Chaffers and Mr Tulloch apply therefore for orders prohibiting disclosure and any use of those emails in the proceeding.
[17] The plaintiffs oppose only in relation to three of the emails listed. Orders may therefore be made in relation to the remaining documents listed in the application.
[18] The plaintiffs oppose on the basis that privilege in the three remaining emails should be disallowed. They say the emails:
... evidence fraud and/or were compiled or prepared for a dishonest purpose or to enable or to aid the first defendant to commit or plan to commit what it ought reasonably have known was an offence, namely a deliberate misrepresentation of the expected profit of the business in the 2009/2010 year in order to induce a purchase at a higher than appropriate goodwill figure such misrepresentation being a breach of the Fair Trading Act and Crimes Act.
The notice of opposition expressly cites s 67 of the Evidence Act 2006.
[19] It does not cite s 65. Nonetheless it advances as a ground of opposition that the emails “are in [the plaintiffs’] possession”. When the matter was first called before me on 23 April 2012 I asked Mr Ian Millard QC, who appeared for the
plaintiffs, whether he also opposed on the basis of waiver (s 65). After some
2 Subject to the s 67 argument: see Issue 2 below.
3 At [57].
consideration he said that he did. Mr Nicholas Burley, who appeared for the defendants, contended that the notice of opposition did not advance that ground. He opposed any expansion of it. I ruled that waiver might also be considered. But I allowed further time for waiver-related submissions and evidence to be filed. In particular I wished to understand exactly how the plaintiffs had come by the emails. The hearing thus proceeded in two parts.
[20] It is not appropriate in this judgment to detail the content of the emails. It is enough to say that they contain reflections by Messrs Tulloch and Thompson as to the expected EBITDA levels for the 2010 financial year. It is perfectly clear that the emails relate to the shareholders’ agreement between Messrs Tulloch and Thompson particularly (but also Mr Snowsill and others),4 rather than the potential sale agreement between Rollex/Chaffers and the plaintiffs. The latter was signed a week after the emails. But in the course of the email dialogue the EBITDA (actual and projected) of Rollex/Chaffers is discussed.
[21] It is less clear how the emails came to be in the possession of the plaintiffs. As we have seen, Rollex/Chaffers sold all its “computer equipment, software and laptop computers” to Rollex 2010. Mr Laurie, one of the plaintiffs, has sworn an affidavit about the topic. Mr Laurie says that forensic reconstruction was not required. He says that the emails were found in the sent or subject folders of Mr Thompson’s former computer, or in the inbox or sent folders of Mr Snowsill’s. None of the emails on their face were sent to, or came from, Mr Snowsill. Two were between Mr Tulloch and Mr Barrett (with Mr Thompson copied in). The third is from Mr Tulloch to Mr Barrett, but annotated electronically with Mr Thompson’s comments. There is also evidence that Mr Thompson’s computer had ceased to function.
[22] In reply Mr Tulloch has sworn an affidavit challenging Mr Laurie’s claim that the emails came from the computer folders. He says that he had had access (with the plaintiffs’ permission) to his email account on the Rollex 2010 server for six months after settlement. He had deleted some 3,000 emails within two weeks of settlement.
He did not think about whether anything more was required to expunge them
4 See [14] above.
completely but, had he thought about it, “would likely have reasoned that it is almost impossible to permanently remove material from a computer or server”. But he thought that what he had done was “enough to keep the emails confidential”.
[23] I conclude that it is likely that the emails were extracted from the computers’ hard drives, the server or a back-up system. These, of course, formed part of the assets sold by Rollex/Chaffers to Rollex 2010.
Issues
[24] There are two issues for consideration:
(a) Issue 1: Were the emails prepared for a dishonest purpose, so that privilege must be disallowed?
(b)Issue 2: If not, then have the defendants waived privilege in the emails?
Issue 1 – dishonest purpose
[25] Section 67 of the Act provides:
67 Powers of Judge to disallow privilege
(1) A Judge must disallow a claim of privilege conferred by any of sections 54 to 59 and 64 in respect of a communication or information if satisfied there is a prima facie case that the communication was made or received, or the information was compiled or prepared, for a dishonest purpose or to enable or aid anyone to commit or plan to commit what the person claiming the privilege knew, or reasonably should have known, to be an offence.
(2) A Judge may disallow a claim of privilege conferred by any of sections 54 to 59 and 64 in respect of a communication or information if the Judge is of the opinion that evidence of the communication or information is necessary to enable the defendant in a criminal proceeding to present an effective defence.
(3) Any communication or information disclosed as the result of the disallowance of a claim of privilege under subsection (2) and any information derived from that disclosure cannot be used against the holder of the privilege in a proceeding in New Zealand.
Submissions
[26] For the plaintiffs, Mr Millard submits that the emails were prepared for a fraudulent purpose: to ensure the rapid sale of the business at an inflated price, with the defendants knowingly misrepresenting the profitability of the business being sold. It is said the emails evidence this. It is also submitted the documents were made to enable the defendants to commit, or plan to commit, what they should have reasonably known was an offence under s 240 of the Crimes Act 1961. That section concerns knowing deception causing loss.
[27] Mr Millard accepts that the role of the solicitor Mr Barrett was merely mechanical in all this. He was simply documenting the transaction. But he was asking questions, and the deal might have come off the rails if Mr Tulloch in particular had not answered them. So the emails were a “step along the way to crystallisation” of the plaintiffs’ loss.
[28] Mr Millard also submits that only a prima facie case is required, rather than a strong prima facie case.5 He submits that the dishonest purpose limb is a lower threshold than the commission of an offence. He urges me to follow my earlier decision in Red Bull GMBH v Manhaas Industries Ltd6 where I adopted the words of Goff J in Crescent Farm (Sidcup) Sports Ltd v Sterling Offices Ltd:7 what is needed is a prima facie case of “fraud, sham or trickery”.8
[29] For the defendants Mr Burley emphasises another aspect of my decision in Red Bull: that s 67 is a very limited exception to legal adviser privilege and a very high threshold applies before the Court will apply the s 67 dishonest purpose exception.9 He submits that as no crime is particularised, the plaintiffs would need to show at minimum an intent to deceive and an actus reus misrepresentation to the very high threshold that triggers the very limited exception for fraud, sham or
trickery.
5 Compare for example, High Court Rule 33.3.
6 Red Bull GMBH v Manhaas Industries Ltd HC Wellington CIV 2010-485-1866, 29 July 2011.
7 Crescent Farm (Sidcup) Sports Ltd v Sterling Offices Ltd [1972] Ch 553 (Ch D) at 565.
8 At [40].
9 Ibid.
[30] Mr Burley submits that there is no such prima facie case and the plaintiffs have failed to meet the very high standard required before the exception is triggered. First he makes the point that the emails are not written at all in the process of evidencing the sale to the plaintiffs, but in the context of the side agreement between the shareholders. The privileged emails relate directly only to the EBITDA representations. Mr Tulloch’s affidavit states every effort was made to check the accuracy of the information and he truly believed the figures were correct and that “the projected outcome for the year 31 March 2010 was honest and accurate as far as I was aware”. The emails did not evidence, or effect, fraud. They did not mislead Mr Barrett. On their face they contained qualifications.
Analysis
[31] New Zealand authority: Section 67 has been discussed in three recent decisions of this Court. Once by me, and twice, subsequently, by Heath J.
[32] My own decision in Red Bull GMBH v Manhaas Industries Ltd10 is obiter as to s 67. The decision concerned an argument that privilege in communications with a patent attorney had been waived. I held that it had not. There was fairly clear evidence of jiggery-pokery by the defendant. I went on to say this about s 67:11
Secondly, the common law (and s 67 of the Evidence Act 2006) permit a very limited exception to legal adviser privilege where a communication is made or received “for a dishonest purpose” or to “aid anyone to commit or plan to commit what the person claiming the privilege knew, or reasonably should have known, to be an offence”. So the protection is not absolute. But a very high threshold applies before one can enter the s 67 exception, including the “dishonest purpose” aspect. Clearly that can be less than an offence. But at common law at least, inducing a breach of contract did not qualify. What is needed is fraud, sham or trickery, although a perhaps less stringent test was suggested by Laurenson J in Gemini Personnel Ltd v Morgan & Banks Ltd of conduct (1) prejudicial to the interests of another, (2) sufficient to attract a civil remedy, and (3) attended by dishonesty, i.e. “conscious deception or sharp practice”.
The “fraud, sham or trickery” expression of course derives from the judgment of
Goff J in Crescent Farm.12
10 Red Bull GMBH v Manhaas Industries Ltd HC Wellington CIV 2010-485-1866, 29 July 2011.
11 At [40].
12 At [39].
[33] My rationale for preferring a higher threshold than Gemini Personnel Ltd v Morgan & Banks Ltd13 arose from public policy considerations: the general societal importance of protecting legal adviser communications – emphasised by the Privy Council in B v Auckland District Law Society.14 That has nothing to do with protecting or preferring the legal profession. Its interests are altogether beside the point. The privilege is not the professions’s. The relevant interests are those of clients who consult legal advisers, and of society generally. As I suggested in Red Bull,15 it is in the interests of an ordered civil society that people are free to obtain legal advice so they may understand their rights, and act accordingly, without fear that what they say to the lawyer, and what the lawyer says to them, may later be produced in court as a result of litigation disclosure. This is a rule of common efficiency as much as it is a rule protecting individual civil rights. Society will be better ordered, and less disrupted by unlawful acts, if legal advice can be taken and given on a candid basis.
[34] The underlying principle was explained in the following terms by Bingham
LJ in Ventouris v Mountain:16
The doctrine of legal professional privilege is rooted in the public interest, which requires that hopeless and exaggerated claims and unsound and spurious defences be so far as possible discouraged, and civil disputes so far as possible settled without resort to judicial decision. To this end it is necessary that actual and potential litigants, be they claimants or respondents, should be free to unburden themselves without reserve to their legal advisers, and their legal advisers be free to give honest and candid advice on a sound factual basis, without fear that these communications may be relied on by an opposing party if the dispute comes before the court for decision. It is the protection of confidential communications between client and legal adviser which lies at the heart of legal professional privilege . . . Without the consent of the client, and in the absence of iniquity or dispute between client and solicitor, no inquiry may be made into or disclosure made of any instructions which the client gave the solicitor or any advice the solicitor gave the client, whether in writing or orally.
[35] Only exceptionally, where the right of access is abused so as to assist in an
act of dishonesty, will the privilege be set aside. A client’s confession to his or her
lawyer of past offending, for instance, would not qualify. Nor, normally, will a
13 Gemini Personnel Ltd v Morgan & Banks Ltd [2001] 1 NZLR 14 (HC).
14 [2004] 1 NZLR 326 (PC).
15 Red Bull GMBH v Manhaas Industries Ltd HC Wellington CIV 2010-485-1866, 29 July 2011 at
[39].
16 Ventouris v Mountain [1991] 1 WLR 607 (CA), 611.
client seeking legal advice as to the boundaries of legitimacy in relation to future conduct be unprotected. As Lord Sumner put it in O’Rourke v Darbishire:17
No one doubts that the claim for professional privilege does not apply to documents which have been brought into existence in the course of or in furtherance of a fraud to which both solicitor and client are parties. To consult a solicitor about an intended course of action, in order to be advised whether it is legitimate or not, or to lay before a solicitor the facts relating to a charge of fraud, actually made or anticipated, and make a clean breast of it with the object of being advised about the best way in which to meet it, is a very different thing from consulting him in order to learn how to plan, execute, or stifle an actual fraud.
It will be a rare case that steps across the line into the realm of non-protection. Some examples are given later in this judgment.18
[36] In the second case, Fullerton-Smith v Fullerton-Smith,19 Mrs Fullerton-Smith was seeking to remove Mr Fullerton-Smith as a trustee of their family trust. She inadvertently received correspondence from Mr Fullerton-Smith’s counsel advising on the trust and relationship property. Heath J considered that on any view of the test, the correspondence was insufficient to pass the s 67 threshold. He accepted parts of the correspondence reflected an intention by the husband to undertake acts to disadvantage her financially. But this was not enough to constitute a dishonest purpose of the type contemplated by s 67. The correspondence was equally consistent with frank advice provided by counsel for Mr Fullerton-Smith’s personal benefit. Heath J did not exclude the possibility that this ruling might be reviewed at trial as a result of cross-examination.
[37] Heath J referred to the decision of the Court of Appeal in Gemini Personnel,20 which predated the Evidence Act 2006. It cited with approval another passage from O’Rourke v Darbishire21 in which Viscount Finlay said:
… [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
17 O’Rourke v Darbishire [1920] AC 581 (HL) at 613.
18 At [44].
19 HC Hamilton CIV-2011-419-615, 26 August 2011.
20 Gemini Personnel Ltd v Morgan & Banks Ltd [2001] 1 NZLR 672 (CA).
21 O’Rourke v Darbishire [1920] AC 581 (HL) at 604.
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.
[38] Without proposing to determine the correct test (because, whatever it was, it was not met in this case) Heath J suggested that the "fraud, sham or trickery'' requirement to defeat privilege “appears more nearly to capture the sentiments expressed by Viscount Finlay that were cited with approval by the Court of Appeal
in Gemini”. 22
[39] Heath J returned to the question in Manifest Capital Management Ltd v Lawrence.23 A member of the Blue Chip ponzi scheme, was put into liquidation. Manifest sought to set aside the liquidators’ decision that they were not a creditor. Applying to remove the liquidators, it filed an affidavit from a Mr Reeves. That gave evidence of the content of discussions with the liquidators. The liquidators objected to admission of the affidavit on the basis that the communications were “without prejudice”, so that settlement negotiation privilege applied.24 The Court also looked at whether this privilege was overridden by s 67. The question the Judge asked himself was:25
Does Mr Reeves’ affidavit go far enough either to demonstrate “conscious deception or sharp practice” (Laurenson J’s approach in Gemini) or “fraud, sham or trickery” (Kós J’s approach [in Red Bull])?
While tending towards the latter approach – a somewhat higher threshhold - Heath J
was satisfied that there was not enough on the evidence to meet either test.
22 At [23].
23 Manifest Capital Management Ltd v Lawrence HC Auckland CIV 2010-404-7741, 20 December
2011, per Heath J.
24 Evidence Act 2006, s 57.
25 At [77].
[40] Overseas common law authority: It is useful to survey, briefly, the approach taken in cognate jurisdictions.
[41] England: Crescent Farm is still the leading authority in England. The
relevant passage of Goff J’s judgment reads:26
“...fraud in this connection is not limited to the tort of deceit and includes all forms of fraud and dishonesty such as fraudulent breach of contract, fraudulent conspiracy, trickery and sham contrivances, but I cannot feel that the tort of inducing a breach of contract or the narrow form of conspiracy in this case comes within that ambit..’
Little difficulty arises where criminal or civil fraud is involved. The cause of action is not decisive; what is important is whether the conduct is dishonest and not merely disreputable or a failure to maintain good ethical standards.27 In a 2010 Chancery Division decision, BBGP Managing General Partner Ltd v Babock & Brown Global Partners,28 Norris J said:
... Although the case law refers to crime or fraud or dishonesty (such as fraudulent breach of trust, fraudulent conspiracy, trickery or sham contrivances) it is plain that the term ‘fraud’ is used in a relatively wide sense ... In each of these cases the wrongdoer has gone beyond conduct which merely amounts to a civil wrong; he has indulged in sharp practice, something of an underhand nature where the circumstances required good faith, something which commercial [people] would say was a fraud or which the law treats as entirely contrary to public policy. (my emphasis added).
[42] Australia: The iniquity exception has been the subject of legislation in the Commonwealth, New South Wales and Tasmania.29 That legislation refers to actions in “furtherance of the commission of a fraud or an offence or the commission of an act that renders a person liable to a civil penalty” or in “furtherance of a deliberate abuse of a power”. Otherwise the common law applies. Crescent Farm is still cited
with general approval in the Australia.30
26 At 565.
27 Phipson on Evidence (17th ed, Sweet & Maxwell Ltd, UK, 2009) at [26-72] citing Gamlen
Chemical Co (UK) v Rochem (No 2) [1980] 124 SJ 276.
28 BBGP Managing General Partner Ltd v Babock & Brown Global Partners [2011] 2 All ER 297 (Ch D) at [62].
29 Evidence Act 1995 (Cth), s 125; Evidence Act 1995 (NSW), s 125; Evidence Act 2001 (Tas), s 125.
30 See for example Attorney-General (N.T.) v. Kearney (1985) 158 CLR 500; AWB Ltd v Cole
[2006] FCA 1324; Ligertwood Australian Evidence (4th ed, LexisNexis, 2004) at [5.29].
[43] Canada: The position in Canada is unsettled. Paciocco & Stuesser state:31
The ‘negation’ of solicitor-client privilege is most often framed in terms of criminal or fraudulent wrongdoing. However, the argument is made that the privilege should apply whenever communications are made in furtherance of
‘any unlawful conduct’, which would include torts, breach of contract, regulatory offences and abuse of process applications. In principle, these communications are not within the scope of professional privilege at all, in that it is not part of a solicitor’s duty, innocently or otherwise, to further any breach of duty or wrongful act.
The Supreme Court of Canada in Blank v Canada32 commented that privilege would not protect from disclosure evidence of abuse of process or
‘similar blameworthy conduct’. In the words of Justice Fish, a privilege ‘is not a black hole from which evidence of one’s own misconduct can never be
exposed to the light of day’. This comment was made with respect to
litigation privilege; however, in principle it would seem applicable to solicitor-client privilege as well. All privileges are created in the public interest and it contrary to the effective administration of justice to use the privilege to shield criminal, fraudulent, or abusive conduct. Applying this principle, in Dublin v Montessori Jewish Day School the exception was recognized for claims involving intentional infliction of emotional harm.33
The expansive view in the Dublin decision34 has very recently been described by the Canadian Federal Court as “highly debatable”.35 That debate is yet to be resolved authoritatively by the Supreme Court of Canada.
[44] Application: One measure of the exception is to identify clearly the cases in which, at the margin, it has been applied. Particularly in England and Australia. Of course as Norris J said in the BBGP decision, “The enumeration of examples is useful only in so far as it enables some underlying theme or connectedness to be identified:”36
(a) In Gamlen Chemical Co (UK) v Rochem (No 2)37 the defendants were former senior employees of the plaintiff. It sold chemicals for cleaning ships. The defendants set up new competing business and
diverted to the new business many of the plaintiff’s customers.
31 Paciocco & Stuesser The Law of Evidence (6th ed, Irwin Law, Toronto, 2011) at 228.
32 2006 SCC 39 at [44].
33 (2007) 85 OR (3d) 511 (SCJ Ont).
34 Dublin v Montessori Jewish Day School (2007) 85 OR (3d) 511 (SCJ Ont).
35 Abi-Mansour v Canada Revenue Agency [2012] FC 376 at [3].
36 At [62]
37 Gamlen Chemical Co (UK) v Rochem (No 2) [1983] RPC 1 (Ch) (a 1979 decision), affirmed by the Court of Appeal [1980] 124 SJ 276. Walsh Automation (Europe) Ltd v Bridgeman [2002] EWHC 1344 (QB) is a similar decision in similar circumstances to Gamlen.
Discovery was ordered of instructions given by the defendants to their solicitors relating to the setting up of the new businesses. On appeal Templeman J said that “it had to be determined whether the defendants consulted their legal advisers before the commission of fraud and for the purpose of being guided and helped, wittingly or unwittingly, in committing the fraud.”
(b)In Barclays Bank Plc v Eustice38 a strong prima facie case was found that the defendant farmers had entered various transactions below value amongst one another to defraud the bank. Communications with their solicitors “in relation to the setting up of these transactions” were held discoverable.
(c) Nationwide Building Society v Various Solicitors39 concerned claims in negligence by a building society against solicitors who had acted for both the society and the borrowers. It was held that where at least a prima facie case was demonstrated that the borrower was making a deliberate misrepresentation to the society to procure an advance, then the advice given by the solicitors – if “employed in the furtherance of the iniquity” was no longer privileged.
(d)In Abbey National plc v Clive Travers & Co40 a law firm acted for the bank, borrower and vendor in relation to a transaction which appeared to constitute mortgage fraud. The bank commenced proceedings against the firm alleging negligence. The Court of Appeal held that in these circumstances there was no privilege in the solicitor’s files – whether for purchaser (as in Nationwide Building Society) or vendor. Simon Brown LJ’s judgment contains however a frank disclaimer: “This judgment should ... be recognised for what it is: an extempore judgment given after a morning’s hearing in a
busy week in a decidedly difficult area of our law”.41
38 Barclays Bank Plc v Eustice [1995] 4 All ER 511 (CA).
39 Nationwide Building Society v Various Solicitors [1999] PNLR 52 (Ch D)
40 Abbey National plc v Clive Travers & Co [1999] 1 Lloyd’s Rep PN 753 (CA).
41 At 755.
(e) In BBPG Managing General Partner v Babcock & Brown Global Partners42 the defendant was a limited partnership established as a co-investment fund. BBGP was the defendant’s general or managing partner. BBPG alleged the defendant breached a duty of fidelity to BBPG by failing to disclose plans to disadvantage and remove BBPG, and more generally that they preferred the interests
of the limited partners over the interests of BBPG. Norris J considered there was a strong prima facie case of conduct of that character was sufficient to engage the iniquity exception. No privilege therefore attached to their communications concerning the scheme by the date it appeared that conduct had been established.
(f) Finally, Clements, Dunne & Bell v Commissioner of Australian Federal Police43 is an extreme case directly implicating the legal advisers in the dishonest conduct. A search warrant had been obtained in a corruption investigation against an Assistant Commissioner of Taxation, a Mr Nick Petroulias (a man not unknown to the Courts in this jurisdiction).44 The communications were between accountants promoting employee benefit schemes (apparently assisted by Mr Petroulias securing binding rulings from subordinate employees, for a fee) and the accountants’ legal advisers. The evidence demonstrated a prima facie case of criminal conduct, and that the correspondent solicitors and accountants knew Mr Petroulias was engaged in that conduct.
[45] At common law therefore it is apparent that the advice has to be part of the instrumentation of the illegal purpose for it to lose its ordinary protection. The solicitors were needed to convey the properties the subject of the mortgage fraud. They established the new ventures to which the plaintiffs’ corporate opportunities
were unlawfully diverted by the defendants. In each case where the privilege was set
42 BBPG Managing General Partner v Babcock & Brown Global Partners [2011] 2 All ER 297 (Ch).
43 [2001] FCA 1858.
44 See e.g. Avowal Administrative Attorneys Ltd v District Court CA73/2009 11 May 2010.
aside the legal advisers’ participation was essential or desirable to effect the dishonesty, or the adviser was a witting participant in that dishonesty.
[46] I turn now to the application of principle to the facts of the present case. [47] I am satisfied that the emails do not trigger the s 67 exception.
[48] First, they do not involve the use of communications with the solicitor Mr Barrett to further a dishonest purpose of deceiving the plaintiffs. The emails have nothing directly to do with the sale of the Rollex/Chaffers business to the plaintiffs. Instead they concerned arrangements between the shareholders of Rollex/Chaffers consequential on sale. These needed to be documented in an agreement. It was necessary to do so to anticipate the eventual sale price: the shareholders’ arrangement being negotiated assumed a minimum price based on a
multiple of EBIT.45 It is clear that is why the emails were discussing EBIT numbers
for the past and current periods. The fact that those emails suggest some uncertainty in the minds of the correspondents as to the exact EBIT numbers does not mean that the communications are being conducted with the purpose of deceiving the plaintiffs. At most it might evidence, in a passive sense, an intent to deceive. But that is not enough. In any case there is real doubt on the face of the emails that they evidence any such intent.
[49] Secondly, another way of assessing the application of the exception might be to ask what possible difference non-transmission of the emails might have made. Mr Millard suggested that the emails were designed in effect to pull the wool over Mr Barrett’s eyes. Had he been left in more doubt about the EBIT numbers, the deal might have gone off the rails, thus saving the plaintiffs from the improvident bargain they say they made. I do not accept that analysis. In context, the exactitude of the EBIT numbers was immaterial to Mr Barrett. He was clearly on notice that 2010
EBIT would likely be less than 2009 EBIT. As the period was incomplete as at November 2009, when the emails were sent, no one knew then what 2010 EBIT would be. Mr Tulloch was guessing, and guessing that it would be less than 2009.
But to document the shareholders’ agreement, it did not matter. Mr Barrett just
45 Not, in this instance, EBITDA.
wanted to know how the numbers might fit into the formula the shareholders were thinking of using in their draft agreement.
[50] Thirdly, a significant consideration in this case was that the plaintiffs negotiated a due diligence clause in the agreement they signed less than a week after the emails were sent. Indeed it was inconceivable that any purchaser would commit unconditionally without due diligence. That process was always going to be the real test of the value of the business. Had the emails perhaps evidenced a deliberate exercise to distort the due diligence process, s 67 might have been engaged. But they do nothing of that sort. One of the emails notes, perfectly frankly, that a buyer “may find” (i.e. in due diligence) differences that bring the 2009 or 2010 EBIT numbers down. There is nothing abnormal or deceptive about that. Indeed the fact that the discussion is happening with the solicitor suggests the very opposite.
Conclusion
[51] I do not find that the plaintiffs have shown a prima facie case that any of the emails were sent for the dishonest purpose of deceiving the plaintiffs.
Issue 2 – waiver
[52] Section 65 of the Act provides:
65 Waiver
(1) A person who has a privilege conferred by any of sections 54 to 60 and 64 may waive that privilege either expressly or impliedly.
(2) A person who has a privilege waives the privilege if that person, or anyone with the authority of that person, voluntarily produces or discloses, or consents to the production or disclosure of, any significant part of the privileged communication, information, opinion, or document in circumstances that are inconsistent with a claim of confidentiality.
(3) A person who has a privilege waives the privilege if the person—
(a) acts so as to put the privileged communication, information, opinion, or document in issue in a proceeding; or
(b) institutes a civil proceeding against a person who is in possession of the privileged communication, information,
opinion, or document the effect of which is to put the privileged matter in issue in the proceeding.
(4) A person who has a privilege in respect of a communication, information, opinion, or document that has been disclosed to another person does not waive the privilege if the disclosure occurred involuntarily or mistakenly or otherwise without the consent of the person who has the privilege.
(5) A privilege conferred by section 57 (which relates to settlement negotiations or mediation) may be waived only by all the persons who have that privilege.
[53] The key question here, given that the plaintiffs have accessed the computer system sold to them, and thereby the emails, is whether there has been a waiver of privilege by voluntary production in circumstances inconsistent with a continuing claim of confidentiality. A double hurdle for the plaintiffs. If, on the other hand, disclosure was involuntary or mistaken, s 65(4) would mean privilege was not lost. It is of course a curiosity of the way in which the application came to be advanced
that the plaintiffs do not argue that privilege in any of the other emails disclosed46
has been waived.
Submissions
[54] Mr Millard makes two arguments in support of waiver. The first is that the emails form part of the “business records” expressly transferred by Rollex/Chaffers to Rollex 2010. Secondly, he submits that the computer records (including the relevant emails) were “deliberately handed over without any requirement for confidentiality in relation to what was contained”. No effective attempt to delete the emails was made, other than “preliminary deletions” from certain folders. As Mr Millard put it, s 65 does not protect against negligent disclosure, as opposed to
mistaken disclosure, citing Body Corporate 191561 v Argent House Ltd.47
[55] For the defendants, Mr Burley submits that the “business records” transfer does not apply. The definition specifically excludes the vendor’s personal records. The clause therefore reflects the possibility that personal records might be retained
on work computers and servers. Those are not part of the records transferred. As to
46 That is, other than the three subject to the suggested s 67 exception.
47 Body Corporate 191561 v Argent House Ltd (2008) 19 PRNZ 501 (HC) at [40].
the plaintiffs’ second submission, the evidence shows that Mr Tulloch (and it would appear also Mr Thompson) attempted to delete their emails. Their actions in doing so show a “continued concern about confidentiality”. There is, therefore, no voluntary disclosure inconsistent with a continued claim to confidentiality. If anything remained after these deletions, it was there by “mistake”.
Analysis
[56] Business records: I do not accept that the emails form part of the “business records” transferred to Rollex 2010. The definition of “business records” excludes “the vendor’s personal records”. These emails probably are not included in the exception. But that still does not make them part of the vendor’s business records. The fact that company computers have been used to transmit non-company emails no more makes them company business records than if their contents had been written on company-purchased notepaper, or left in the bottom drawer of a company- owned desk. What is important is the character of the communication, rather than its method or location. Nor does it matter that Mr Thompson’s emails included his job title in its standard format electronic signature. Again, it is the character of the communication that matters. An officious bystander looking at the emails would appreciate that they were sent for the purpose of finalising the shareholders’ agreement. They are personal to Messrs Tulloch and Thompson, rather than forming part of Rollex/Chaffers’ business records. To put it another way, had the plaintiffs not already held them, they could not have insisted on being given them.
[57] Whose privilege? The present application is made by Rollex/Chaffers and Mr Tulloch. I have some doubt that Rollex/Chaffers has any claim to privilege here at all. The communications appear to concern arrangements between Messrs Tulloch, Thompson and Snowsill (and possibly others) about their shareholders’ agreement, but not Rollex/Chaffers. No point was taken along these lines, however. In any event, there seems little doubt that Mr Tulloch is entitled to advance a claim to privilege.
[58] Voluntary disclosure, inconsistent with confidentiality? The next question is whether the actions of Mr Tulloch (and Messrs Thompson and Snowsill) in leaving
the emails somewhere within the Rollex/Chaffers IT system (on computer hard drives, server or a back-up system) amounts to a “voluntary disclosure ... inconsistent with the claim of confidentiality”.48 The obverse of that is an “involuntary disclosure” to which s 65(4)’s continued protection applies. There is also a protected middle ground – mistaken disclosure. This presumably lies in a no- man’s land of voluntariness, but protection is still given in such a case in s 65(4).
[59] In Body Corporate 191561 v Argent House Ltd49 Asher J provided useful guidance as to the meaning of “involuntary disclosure” and “mistaken disclosure” in s 65. As to involuntary disclosure, Asher J said this:50
The word “involuntarily” is not defined in the Act. The concept of something being involuntary arises when the act is other than a conscious act of will. Thus if a document is disclosed by it accidentally falling out of a suitcase and being found by the other party, or if it is inadvertently left attached to a non-privileged document there will be no waiver. The disclosure will be involuntary. That is not the situation here. There was no doubt that there was a deliberate act of will involved in sending the privileged material, knowing what was sent. The disclosure was voluntary. This point was ultimately conceded ...
[60] And as to mistaken disclosure:51
I conclude that the mistake must be a mistake as to the act of disclosure itself rather than the implications of it. Thus, a mistake in the handing over of a group of documents which were thought to contain all non-privileged material, but which unbeknownst to the discloser contained privileged material, would be the sort of mistake envisaged. It would be a voluntary but mistaken act. It would be unintentional. However, if the mistake was a deliberate handing over of a document without a consideration that it was privileged, or forgetting that it was privileged, that would not be the sort of mistake covered by the section.
It will be apparent from comparing the two passages that there is room for overlap between the concepts of involuntary and mistaken disclosure. Privileged documents inadvertently attached to a deliberate disclosure of non-privileged documents may be
seen perhaps to be either.
48 Evidence Act 2006, s 65(2).
49 Body Corporate 191561 v Argent House Ltd [2008] 19 PRNZ 500 (HC).
50 At [38].
51 At [42].
[61] In addition to the voluntariness of disclosure, there is the second hurdle that must be passed to make out waiver: that the disclosure occurs in circumstances that are inconsistent with the claim of confidentiality. As Asher J noted in Body Corporate 191561, that is a different consideration to whether disclosure is inconsistent with the claim of privilege.
[62] In that case a body corporate was considering issuing proceedings against the building’s developer. From that point, and even after proceedings were issued, the body corporate secretary sent copies of legal advice and expert reports to the unitholders. The developer still owned some units. So it received the advice and reports. The secretary knew that was happening. She had overlooked advice from the body corporate’s solicitors not to send copies to the developer/unitholder.
[63] Asher J held that disclosure to the developer/unitholder/first defendant was inconsistent with privilege (because it was released to an adverse litigant). But it was not inconsistent with a continued claim of confidentiality (because all recipients were unitholders in the complex – it just so happened that one of them was also the first defendant). Thus in Body Corporate 191561, the disclosure was (1) voluntary, (2) inconsistent with privilege, but (3) not inconsistent with a continued claim of confidentiality. So waiver was not made out in that case.
[64] Turning to the present case, I accept the defendants’ submission that Mr Tulloch was attempting to maintain confidentiality of the emails. It is likely he had deleted them from the inbox, sent items and deleted items folders in his computer. It seems that Mr Thompson may have done likewise. Mr Tulloch did not think about the hard drive, server or back-up systems. As he said in evidence, had he thought about it, he would have appreciated that it was almost impossible to permanently remove material from a computer or server. But he did not think about it. His position is therefore exactly as if he was, in another age, someone who clears his desk before it is sold only to find that some confidential papers have been left behind in a secret compartment or have just fallen away behind the drawers. The situation is also analogous to the examples given by Asher J of material falling out of a suitcase or inadvertently left attached to a non-privileged document at the time of
inspection.52 (The legal equivalents of T E Lawrence accidentally leaving the manuscript of Seven Pillars of Wisdom in a railway station tearoom, and Dylan Thomas that of Under Milk Wood in a pub. The latter was found; the former was not.) Where inadvertence is the dominant cause of disclosure, it is unlikely to be found to be voluntary.
[65] The facts here are unlike those in Body Corporate 191561. Here there was no deliberate transmission of the material to the plaintiffs. Nor, like the partial waiver cases, was there a deliberate transmission of part of a privileged communication for some collateral effect. Here there was simple inadvertent transfer of control, without appreciation that it would enable access to private communications left somewhere within the IT system. I accept that the placing of the emails (in electronic form) in the control of the plaintiffs was inadvertent.
[66] The plaintiffs therefore fall at both hurdles. First, disclosure to them of the emails was involuntary. Secondly, the circumstances of disclosure are not inconsistent with a continuing claim to confidentiality.
Conclusion
[67] I find therefore that privilege in the emails between Mr Tulloch and his solicitor has not been waived.
Disposition
[68] The defendants’ application is granted.
[69] The defendant applicants may have costs on a category 2 band B basis. If these cannot be agreed, memoranda may be submitted. But I encourage agreement.
Solicitors:
Talbot Law, Hamilton for Plaintiffs
Johnston Lawrence, Wellington for First and Fourth Defendants
Stephen Kós J
52 See e.g. Guiness Peat Properties Ltd v Fitzroy Robinson Partnership [1987] 2 All ER 716 (CA);
National Insurance Co Ltd v Whirlybird Holdings Ltd [1994] 2 NZLR 513 (CA).
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