FEDERAL COURT OF AUSTRALIA Airtourer Co-operative Ltd v Millicer Aircraft Industries Pty Ltd (subject to a Deed of Company Arrangement) [2004] FCA 948 EVIDENCE – whether communication made 'in connection with an attempt to negotiate a settlement' – whether direct connection – whether statements made were admissions. Federal Court of Australia Act 1975 (Cth) Evidence Act 1995 (Cth) Burg Design Pty Ltd v Wolki (1999) 162 ALR 639 cited Collins Thomson v Clayton (2002) NSWSC 366 followed Field v Commissioner for Railways for New South Wales (1957) 99 CLR 285 followed GPI Leisure Corporation Ltd (in liq.) v Yuill (1997) 42 NSWLR 225 followed Nodnara Pty Ltd v Deputy Commissioner of Taxation (1997) 140 FLR 336 cited THE AIRTOURER CO-OPERATIVE LIMITED V MILLICER AIRCRAFT INDUSTRIES PTY LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) AND MICHAEL JAMES HUMPHRIS AND LAURENCE ANDREW FITZGERALD IN THEIR CAPACITY AS DEED ADMINISTRATORS OF MILLICER AIRCRAFT INDUSTRIES PTY LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) N 1599 OF 2003 BEAUMONT J 23 JULY 2004 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1599 OF 2003 BETWEEN: THE AIRTOURER CO-OPERATIVE LIMITED APPLICANT AND: MILLICER AIRCRAFT INDUSTRIES PTY LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) FIRST RESPONDENT MICHAEL JAMES HUMPHRIS AND LAURENCE ANDREW FITZGERALD IN THEIR CAPACITY AS DEED ADMINISTRATORS OF MILLICER AIRCRAFT INDUSTRIES PTY LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) SECOND RESPONDENT JUDGE: BEAUMONT J DATE OF ORDER: 23 JULY 2004 WHERE MADE: SYDNEY THE COURT RULES THAT: 1. On the application for security for costs, the evidence given by Mr Humphris as to the statements made by Mr Knox as to the solvency of the applicant is admissible. THE COURT ORDERS THAT: 2. The applicant pay the respondents' costs of their objection the subject of this rule. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1599 OF 2003 BETWEEN: THE AIRTOURER CO-OPERATIVE LIMITED APPLICANT AND: MILLICER AIRCRAFT INDUSTRIES PTY LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) FIRST RESPONDENT MICHAEL JAMES HUMPHRIS AND LAURENCE ANDREW FITZGERALD IN THEIR CAPACITY AS DEED ADMINISTRATORS OF MILLICER AIRCRAFT INDUSTRIES PTY LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) SECOND RESPONDENT JUDGE: BEAUMONT J DATE: 23 JULY 2004 PLACE: SYDNEY RULING ON ADMISSIBILITY OF EVIDENCE OBJECTED TO AS A COMMUNICATION 'IN CONNECTION WITH AN ATTEMPT TO NEGOTIATE A SETTLEMENT' WITHIN S 131(1)(a) OF THE EVIDENCE ACT 1995 (CTH) Beaumont J: Introduction 1 The respondents (Millicer Aircraft Industries Pty Limited, Michael James Humphris and Laurence Andrew Fitzgerald) have applied to the Court, pursuant to s 56 of the Federal Court of Australia Act 1975 (Cth), claiming that the applicant (The Airtourer Co-operative Limited) lacks the resources to meet an order for costs in the event of dismissal of the principal proceedings. In support of that particular claim, the respondents have sought to adduce some evidence, to which the applicant has objected on the ground that the evidence constituted a communication 'in connection with an attempt to negotiate a settlement' within the meaning of s 131(1) of the Evidence Act 1995 (Cth) ('the Act'). The material the subject of objection 2 Reliance is placed by the respondents (and objected to by the applicant) to the statements made in a letter dated 18 June 2004 written by the respondents' solicitors to the applicant's solicitors as follows: 'Our client has drawn to our attention a conversation recently between the administrator, Mr Michael Humphris and Mr Hugh Knox, a director of the Co-op. During the conversation, Mr Knox indicated that the Co-op had no money and for that reason, did not mind if they were unsuccessful in this litigation. In that event, Mr Knox said, the directors would be content to see the Co-op wound up.' 3 This is, of course, hearsay evidence, although in an interlocutory application. However, on the hearing of this voir dire, Mr Humphris was called and gave the following evidence in chief: 'You had a conversation with a Mr Hugh Knox in June of this year [i.e. 2004], is that correct? --- I did. That was on 3 June? --- It was. Who do you know Mr Knox to be? --- I understand Mr Knox is a director of the Airtourer Co-op. The conversation that you had with Mr Knox that was a telephone conversation? --- It was. Who initiated that conversation? --- I did. What do you recall about the conversation that you had with Mr Knox? --- On 3 June, your Honour, I called Mr Knox and discussed with Mr Knox and I basically suggested to Mr Knox that given that the costs of this matter were getting to serious stages I thought it was a sensible discussion for us to have to consider a commercial resolution of the matter. Mr Knox had actually sent me a letter on 21 May suggesting that at any time he would be available to discuss a resolution of that nature, so I had taken up that invitation through this conversation, through this telephone call. Mr Knox acknowledged that costs were certainly getting to a substantial point but indicated to me that that was not a concern for him as he had arrangements with his lawyers and was therefore not given to any cash difficulties coming out of having to pay legal fees at that time. Can I just stop you there, Mr Humphris. Can you, as best you can recall, put that part of the conversation in exact words for the benefit of the court? --- Yes, I can. Mr Knox indicated to me that he had, and my recollection of the words were that he had no concern about the cash impositions of legal fees as the Co-op had arrangements with its lawyers. He then indicated to me – sorry, I put it to Mr Knox that in the event that the Co-op did lose the action the Co-op could be facing significant costs which would have been of course our costs in the matter as well. Mr Knox indicated to me and my recollection of his words were at that stage once again he was not concerned about that as the Co-op actually had no funds and he would be quite comfortable to see the Co-op go into liquidation and in his words would be happy for me to be the liquidator. At that time I said well regardless of that I hoped it was not going to come to that point and suggested to him that a commercial settlement of $50,000 may have been appropriate. Mr Knox said to me that that was not possible as the Co-op couldn't even pay half of that amount. However, he would put it to his board and take the – given me to understand however that it was not possible for them to consider such an amount because they had no money.' 4 Mr Humphris was cross-examined by counsel for the applicant as follows: 'MR LEEMING: Mr Humphris, just so that I understand the position, you initiated the call to Mr Knox? --- I did. You called him at his home? --- I'm not sure whether it was at his home. I have a telephone number for him and I called that number. The purpose of your call was to discuss settlement of these proceedings? --- Correct. In that call you made an offer to him of a money sum to settle those proceedings? --- I did. Although I think you told Mr White [counsel for the respondents] that he told – that is, Mr Knox told you during that telephone conversation that the Co-op had no funds, you now know that's not true? --- I've only seen a balance sheet at 31 December. I can't confirm whether those funds are still in place or not. When you say 31 December do you mean 31 December 2003? --- I do, sorry. I wonder if you can please look at this document which is a letter you wrote on 4 March 2003. Might I hand a copy to your Honour as well?' 5 Counsel for the respondents objected to the tender of this letter on the grounds of relevance. I received it, subject to its relevance being later demonstrated for present purposes. 6 The letter, dated 4 March 2003 was written by Mr Humphris to Mr Graham Wood as a director of the applicant, as follows: 'I refer to your discussion with Mr Lesnikowski of my office on Friday 28 February 2003. I confirm that I met with Mr Hugh Knox of the Airtourer Co-operative Limited "ATC" prior to Christmas 2002 and discussed with him the ATC's desired outcome and my desired outcome for the type certificates owned by Millicer. Mr Knox stated that the ATC was comfortable with the legal advice it held with respect to the ownership of the type certificates. Likewise my legal advisors are comfortable that the type certificates are the undisputable property of Millicer. Putting the above positions aside I suggested to Mr Knox that both parties should consider their desired commercial oppositions. It is my position that I wish to recover the significant out of pocket expenses of the Administration incurred to date. It is not my position that I seek some form of profit on those expenses. Mr Knox stated that it was the ATC's position that it wished to control the future destiny of the type certificates for the benefit of its members and to ensure that the type certificates were not at risk of cancellation by the relevant authorities. Furthermore, Mr Knox expressed that the ATC did not see merit in certain third parties being involved in meeting the regulatory requirements attaching to the type certificates. The Administration has the power to deal with the sale and or transfer of the type certificates, accordingly, the appointment of, or removal of, third party dealings in the type certificates can be achieved. Accordingly, I advised Mr Knox that I am willing to sell the type certificates to the ATC to recoup all or a significant majority of the out of pocket expenses incurred to date. I suggested to Mr Knox that the ATC has a history of operating a business with already established credibility that may assist in the development of a case for funding to assist in the repurchase of the type certificates. Furthermore I also suggested that the ATC would have members skilled and experienced in dealing with regulatory authorities that may wish to present a joint application to the Federal Department of Transport for the provision of a grant to facilitate the repurchase of the type certificates by the ATC. Such acquisition would be to ensure that the regulatory authorities would have comfort that the type certificates are held by a capable party with a long term vested interest. Mr Knox expressed some interest in the proposition briefly outlined herein as a manner for regaining control of the type certificates. I remain willing to continue discussions in the above vain or alternative offers from the ATC. Accordingly, should you wish to discuss the matter further, please do not hesitate to contact myself on … .' 7 The cross-examination continued: 'Mr Humphris, that's a letter you wrote, didn't you, on 4 March 2003? --- Yes, I did. It refers to a meeting which you had with Mr Knox some time before Christmas 2002? --- It does, yes. Do you remember that meeting? --- I do. Just looking at the second page of that letter and focusing upon the second, third and fourth paragraphs on that page [the second paragraph commenced with 'Accordingly …'], first of all the second paragraph, at that meeting it's the case, is it, you told Mr Knox you were happy to sell back the certificates that are the subject of this litigation in order to recoup the costs that you and your firm have occurred as administrators of this company? --- Yes.' 8 Counsel for the respondents objected to this line of questioning, and the following discussion took place: 'MR WHITE: Your Honour, I object. This line of cross-examination is taking place in relation to a letter which preceded the relevant conversation by some months. There doesn't appear to be any foundation as to how this letter or the facts which preceded this letter has got anything to do with the conversation which Mr Humphris has given evidence of. HIS HONOUR: It goes to credit, does it? MR LEEMING: No, it doesn't go to credit at all. I think my friend is strictly speaking correct but this was preceded by an application by him that Mr Humphries wants to go to Melbourne. The point is this. We've just had a hearing on the voir dire about whether this conversation that occurred in June was without prejudice and no doubt your Honour will rule on that in light of the evidence that's --- HIS HONOUR: What you're trying to do is save Mr Humphris coming back. MR LEEMING: Yes, that's right. This for the substantive matter. HIS HONOUR: Please proceed.' 9 Accordingly, this line of questioning is not presently material. The parties' contentions on admissibility 10 On behalf of the applicant, reliance is placed upon s 131(1)(a) of the Act which provides: '131 Exclusion of evidence of settlement negotiations (1) Evidence is not to be adduced of: (a) a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute; …' 11 It is submitted for the applicant that Mr Humphris 'initiated [the telephone call] with the purpose of compromising the proceedings, and in that conversation an offer to compromise those proceedings was made'. The words 'in connection with' in s 131(1)(a) are, it is contended by the applicant, 'very broad words' and apply to the communication now relied upon by the respondents, being a 'communication .. made between persons in dispute … in connection with an attempt to negotiate a settlement of the dispute …'. 12 On behalf of the respondents, reliance is place upon the decision of Young J in GPI Leisure Corporation Ltd (in Liquidation) v Yuill (1997) 42 NSWLR 225. It was there held that the 'connection' described in s 131(1)(a) is a direct connection; and that the question whether there has been an 'attempt' to negotiate a settlement is one of nexus. 13 In Yuill, a letter (headed 'without prejudice') included statements that the party was willing to put in place a working mechanism for operation of any relevant claims, and contained other matters which that party would be willing to consider for approval. It was held that the communication in the form of the letter was not sufficiently close to 'an attempt to negotiate a settlement' of the dispute so as to be protected by s 131(1)(a). 14 Young J said (at 226): 'The paragraph in the exhibit states, in essence, that the party is willing to put in place a workable mechanism for operation of any claims to be made under the indemnity. It also contains other matters which that party would be willing to consider for approval. The question is whether that is in connection with an attempt to negotiate a settlement. "Connection" is a word that can have different connotations and can mean "in any way connected" or "directly connected". When faced with such a choice, a court reaches for the interpretation which produces a sensible operation of the statute conformable to the intention of the legislature and the purpose of the enactment: …' 15 His Honour continued (at 226): 'In Field v Commissioner for Railways for NSW (1957) 99 CLR 285 at 292, the High Court said of the scope of the privilege: "It depends upon what formed part of the negotiations for the settlement of the action and what was reasonably incidental thereto." There needed to be a "proper connexion with any purpose connected with the settlement of the action" (at 293). In Trade Practices Commission v Arnotts Ltd (1989) 88 ALR 69 at 71-73, Beaumont J reviewed and contrasted cases where the parties discussed a possible compromise on the one hand (privileged) and where they had discussions merely asserting their respective positions (not privileged).' 16 Young J held that the 'connection' referred to in s 131(1)(a) is a direct connection. 17 His Honour concluded (at 226 – 227): 'What then is an "attempt" to negotiate a settlement? Again, I think really it is a question of nexus. There may be many communications between parties, which one can read between the lines as saying that certain things may happen, and if those certain things happen, the dispute might be settled. I do not consider that generally such a communication would fall within the privilege in s131(1)(a). The present letter seems to me merely to be a communication which indicates that if the litigation can be dealt with in some practical way, the writer is open to suggestions. Alternatively it indicates that if a claim arises in the future, a mechanism can be put in place to deal with it. The letter does not suggest a method of compromising the underlying dispute. I do not consider that it is sufficiently close to "an attempt to negotiate a settlement" of the dispute to come within privilege.' 18 The respondents further rely upon the decision of Austin J in the Supreme Court of New South Wales in Collins Thomson v Clayton (2002) NSWSC 366, unreported, relying upon the decision in Yuill and the following observations of Young J in Nodnara Pty Ltd v Deputy Commissioner of Taxation (1997) 140 FLR 336 at 340 – 341: 'Unless there is evidence that at least one party was attempting to settle the dispute at such conference, it does not seem to me that the ground for a s 131 privilege is established. The only relevant decision that I have found, Trade Practices Commission v Arnotts Ltd …, is consistent with this approach. In that case, Beaumont J considered that what was said by a defendant at a settlement conference called by the plaintiff, a person who was both a regulatory authority and a litigant, was privileged because it should be inferred that the defendant attended the conference with a view to settlement: …' 19 In Collins Thomson, Austin J received into evidence a letter headed 'without prejudice' for the following reasons: 'The letter, on a proper reading, does not have the character of an attempt to negotiate a settlement. It is instead a statement, admittedly in response to a series of letters of offer, in which the author provides his analysis of the various proceedings between the parties. The letter is expressed in robust terms, advances categorical claims as to the likely outcome of the proceedings, and then rejects the offers in question. It goes on to say some things about Mr Ellison's position [Mr Ellison was proposed to be called as an expert] which, it seems to me, are relevant to the application to exclude Mr Ellison's evidence, and could not by any stretch of the imagination be regarded as connected, in the direct sense required by Young J's judgment, with an attempt to negotiate settlement. Essentially those observations are to the effect that the liquidator had substantially nothing to lose by prosecuting the various proceedings, and stood to gain in various respects.' 20 In response to these submissions, it is submitted for the applicant that the 'connection' here was sufficiently direct, since the call was initiated by Mr Humphris who then 'made a bona fide offer to compromise proceedings'; and the communication in response from Mr Knox was 'a direct response to that overture'. 21 On behalf of the respondents, it is submitted that Mr Knox's statements to Mr Humphris on 3 June 2003 and 4 May 2003 be analysed as follows: · The applicant was not paying fees to its solicitors, who were proceeding on a 'success basis'. · The applicant would be happy for Mr Humphris to be appointed as the applicant's liquidator as the applicant had no money. · On that basis, the applicant was not willing to discuss settlement in any meaningful sense at all. 22 Counsel for the respondents contend that these communications from Mr Knox are not a discussion or negotiation about settlement at all. 23 The respondents also rely upon observations by Burchett J in Burg Design Pty Ltd v Wolki (1999) 162 ALR 639 (at 646) that communications at a meeting between the parties were not privileged because they were 'not related to any attempt to settle the matter'. Ruling on admissibility 24 It is important to note the interlocutory context of the present collateral issue. The question here is not whether s 131(1) privilege attaches to any attempt to compromise the principal proceedings. The issue on this motion is whether the statement made by Mr Knox as to the solvency of the applicant is admissible, not in the principal proceedings, but on the present claim for security for costs. 25 As has been seen, as originally joined, the current dispute centred on the two paragraphs in the letter from the respondents' solicitors dated 18 June 2004; however, upon the calling of Mr Humphris, events have moved on, and I will confine attention to Mr Humphris' oral evidence, which is quite consistent with the statements made in these two paragraphs of the letter. It is, in my view, essential, for present purposes, to understand not only the terms of the communications between the parties, but also the surrounding context. 26 It will be recalled that the course of events proceeded as follows. 27 On 21 May 2004, Mr Knox had written to Mr Humphris suggesting that at any time, Mr Knox would be available to discuss a commercial resolution. 28 On 3 June 2004 Mr Humphris telephoned Mr Knox and suggested to him that since the costs of the principal proceedings 'were getting to serious stages [Mr Humphris] thought it was a sensible discussion for [the parties] to have to consider a commercial resolution of the matter'. Mr Knox said that costs were certainly getting to a substantial point, but this was not a concern for the applicant as he had 'arrangements' with his lawyers and 'was therefore not given to any cash difficulties coming out of having to pay legal fees at that time'. When the amount of costs if the applicant lost was put to Mr Knox, he said he 'was not concerned about that as the [applicant] … had no funds'; and that Mr Knox 'would be quite comfortable to see the [applicant] go into liquidation and … happy for [Mr Humphris] to be the liquidator'. 29 Mr Humphris said that he 'hoped it was not going to come to that point' and suggested a figure as a 'commercial settlement' of the principal proceedings. Mr Knox said 'that was not possible as the [applicant] couldn't even pay half of that amount. However, he would put it to his board … [but] it was not possible for them to consider such an amount as they had no money'. 30 It follows from this discussion that two distinct items here emerged: (i) an attempt by the respondents to compromise the principal proceedings at a figure arrived at as a 'commercial settlement'; and (ii) a statement by the applicant that, because it was insolvent, it could not even consider item (i). 31 In my opinion, considering the question under common law principles, item (i) would be privileged in the principal proceedings; but item (ii) would not be privileged in any event, and would certainly not be privileged in an application for security for costs. 32 That is to say, the discussion on 3 June 2004 had a double aspect, similar in my view to the context considered by the High Court of Australia in Field v Commissioner for Railways for New South Wales (1957) 99 CLR 285. There, in an action for damages brought against the Commissioner for Railways, the plaintiff alleged that whilst lawfully alighting from a train run by the Commissioner he was thrown on to the station and permanent way and suffered serious injury. Solicitors for the Commissioner opened negotiations for settlement of the action on a compromise basis in a letter marked 'without prejudice' and sought a medical examination of the plaintiff by a medical specialist appointed by the department. After further negotiations by correspondence headed 'without prejudice' an appointment was made for the plaintiff to attend the rooms of a medical specialist for examination. At such examination, in giving a history of his injury to the specialist, the plaintiff stated that he stepped out of a slowly moving train as it had overrun the platform at which he desired to alight and he thereby sustained injury. At the trial, the specialist who, having stated that he had obtained a history from the plaintiff, was then asked to narrate that history. Objection was taken to this evidence by the plaintiff's counsel upon the ground that the interview with the specialist was privileged as being 'without prejudice'. It was held by Dixon CJ, Webb, Kitto and Taylor JJ that the evidence was admissible in that it was not reasonably incidental to the settlement negotiations that such an admission should be protected. 33 Their Honours said (at 291): '…[T]he examination had a double aspect. Primarily it was to enable the defendant to obtain a medical report in order to form an estimate of his injuries for the purpose of making an offer of settlement. Failing settlement, the purpose was to enable the defendant's medical expert to give evidence of what he saw. The law relating to communications without prejudice is of course familiar. As a matter of policy the law has long excluded from evidence admissions by words or conduct made by parties in the course of negotiations to settle litigation. The purpose is to enable parties engaged in an attempt to compromise litigation to communicate with one another freely and without the embarrassment which the liability of their communications to be put in evidence subsequently might impose upon them. The law relieves them of this embarrassment so that their negotiations to avoid litigation or to settle it may go on unhampered.' 34 But their Honours added what follows (at 291 – 292): 'This form of privilege, however, is directed against the admission in evidence of express or implied admissions. It covers admissions by words or conduct. For example, neither party can use the readiness of the other to negotiate as an implied admission. It is not concerned with objective facts which may be ascertained during the course of negotiations. These may be proved by direct evidence. But it is concerned with the use of the negotiations or what is said in the course of them as evidence by way of admission.' 35 In my opinion, applying common law principles, the statements made by Mr Knox as to the solvency of the applicant were not admissions; rather they were objective facts which were ascertained during the course of the negotiations. 36 The present question is, of course, now governed by s 131(1)(a) of the Act. However, for the reasons given by Young J and by Austin J, there appears to be no basis for assuming, in enacting the Act, a departure from the common law principles considered in Field. I propose to receive the evidence. Ruling 37 Accordingly, I rule that, on the application for security for costs, the evidence given by Mr Humphris as to the statements made by Mr Knox as to the solvency of the applicant is admissible. costs order 38 It will be ordered that the applicant pay the respondents' costs of their objection, the subject of this rule. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont. Associate: Dated: 23 July 2004 Counsel for the Applicant: Mr M Leeming Solicitor for the Applicant: Norton White Counsel for the Respondents: Mr J White Solicitor for the Respondents: Cowley Hearne Lawyers Date of Hearing: 7 July 2004 Date of Judgment: 23 July 2004