Watson v McLernonWatson v McLernon & Ors Watson & Anor v McLernon; [2000] NSWSC 306

New South Wales Supreme Court

CITATION : Watson v McLernonWatson v McLernon & Ors Watson & Anor v McLernon; [2000] NSWSC 306 revised - 13/04/2000 CURRENT JURISDICTION: Supreme Court FILE NUMBER(S) : SC 3357/99; 3358/99 HEARING DATE(S) : 28 February-3 March 2000; 5 April 2000 JUDGMENT DATE : 13 April 2000

PARTIES : John Watson v Hugh McLernon & Ors; John Watson v Hugh McLernon & Ors JUDGMENT OF : Hodgson CJinEq at 1

P - R Ellicott QC & W Muddle COUNSEL : D - F Douglas QC & D L Williams A S Bell for Mr James SOLICITORS : P - Coudert Brothers D - Ebsworth & Ebsworth CATCHWORDS : Privilege - Legal professional - Identification of client - Illegal or improper purpose - Client does not give evidence - Onus and standard of proof. Jones V Dunkel (1959) 101 CLR 298 CASES CITED : Commissioner of Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501 at 546, 556 O'Rourke v Darbishire (1920) AC 581 at 604 DECISION : Dismissed - plaintiff to pay defendants' costs of proceedings

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

CORAM: HODGSON, CJ IN EQ.

Thursday, 13 April 2000

No. 3357/99: JOHN WATSON v McLERNON GROUP (INSURANCES) PTY LTD No 3358/99: JOHN WATSON v McLERNON GROUP (INSURANCES) PTY LTD

JUDGMENT

INTRODUCTION

1 HIS HONOUR: In proceedings 50078/99 in the Commercial List, McLernon Group (Insurances) Pty Ltd (MGI) and Guardian Funds Management Ltd (Guardian) are suing Bernard John Kelly, John Watson, and eight other defendants, including a company PolicyLink Ltd (PolicyLink). In those proceedings it is alleged that, by reason of breaches by Mr Kelly and Mr Watson of their duties as employees or officers of MGI and/or Guardian, a constructive trust has arisen in respect of the business of PolicyLink, and relief in the nature of an account of profits and/or damages is also sought. The solicitors acting for MGI and Guardian in those proceedings are Ebsworth & Ebsworth. 2 I am dealing with applications for final relief in two associated proceedings. 3 In proceedings 3357 of 1999, Mr Watson seeks injunctions against various defendants, including MGI, Guardian and Ebsworth & Ebsworth, to protect legal professional privilege which he claims in respect of records of communications between himself and Minter Ellison solicitors on about 18 January 1996. The other defendants in these proceedings are Hugh McLernon, a director of MGI and Guardian; Paul Rainford, another director of MGI, who became aware of the contents of these records in circumstances which I will outline; and Brent James, a director of a company Trojan Securities Pty Ltd (Trojan). 4 In proceedings 3358 of 1999, Mr Watson and Mr Kelly seek injunctions against the same defendants to protect legal professional privilege which they claim in respect of communications between themselves and/or Trojan on the one hand, and Minter Ellison on the other, between about May and about December 1995. 5 I will later set out what I see as the issues in this case. For the moment, I note that the principal issues are whether it was Mr Watson and/or Mr Kelly on the one hand, or Trojan on the other, who was truly the client of Minter Ellison; and whether any legal professional privilege which might otherwise arise is excluded on the basis of evidence that the communications were made in furtherance of an improper purpose of Mr Watson and Mr Kelly, namely dishonest breaches of their duties as employees and/or officers of MGI and/or Guardian. OUTLINE OF FACTS6 I will begin with a brief outline of facts, as to which there appears to be no substantial dispute in the proceedings. 7 In about November 1992, Guardian (then named McLernon Group Ltd) was proposing to become involved in a business of purchase and resale of life insurance and endowment policies, through a recently acquired company, MGI. With a view to Mr Kelly participating in that business, on 22 December 1992 a consultancy agreement was signed between Guardian, Mr Kelly and Mr Kelly's company Combined Associated Promotions Pty Ltd, in respect of the year commencing 1 February 1993. 8 On 26 February 1993, the directors of MGI decided to run this business under the name Life Insurance Policy Exchange (LIPE). 9 In early 1993, MGI employed Mr Watson in that business. Mr Watson reported to Mr Kelly, who was then General Manager of MGI. 10 Between about late 1992 and the middle of 1995, MGI used a computer consultant, Dennis Barton, to develop and improve a computer system for evaluating policies, and to deal with other questions arising in the conduct of the business. Much of this work was done by a person working for Mr Barton named Dick Haynes. 11 In January 1994, Mr Watson was given the task of overseeing the improvement of this computer evaluation system. 12 From about September 1994, Mr Kelly ceased working under the consultancy agreement and became an employee of MGI. It appears that both he and Mr Watson became directors of MGI on 1 October 1994. Mr Watson ceased to be a director on 8 March 1995, but was company secretary from 7 April 1995 to 15 December 1995. It appears that Mr Kelly continued as a director until 15 December 1995. 13 In October 1994, LIPE was being run from Sydney, under the management of Mr Kelly. Other persons in the Sydney office were Mr Watson, Erica Kelly (Mr Kelly's wife) and three or four support staff. There was a Melbourne office run by Libby Lakovic, who reported to Mr Kelly. There was a Perth office, run by Mr McLernon and his brother Peter McLernon. There were also two operators in New Zealand. 14 In late 1994 and early 1995, Mr James was in contact with Mr Kelly and Mr Watson concerning the possibility of their going into business with him. There is in evidence a letter from his company Trojan to Mr Kelly and Mr Watson dated 1 February 1995, which included the statement that the letter "serves to confirm the terms of our arrangement regarding the formation of a new company to source secondhand, with profit, endowment life assurance policies on behalf of an Endowment Trust to be set up by BZW or such other Merchant Banks." 15 On 27 February 1995, Mr Kelly wrote a letter to Mr David Smith, the Executive Chairman of AM Corporation (AM) referring to an earlier contact, and stating: "I have arranged for a summary document outlining the steps involved for purchase and pricing of mid-term endowments for a fund operated by AM Corporation." There were further communications between Mr Kelly and/or Mr Watson on the one hand, and Mr Smith on the other, during April and May 1995. 16 On 28 April 1995, Mr Kelly wrote a file note recording a telephone conversation with Mr Smith concerning AM's interest in mid-term endowments, which he left in an MGI file. 17 On 18 May 1995, Mr James took Mr Kelly and Mr Watson to Minter Ellison, solicitors, where they met the solicitors Julian Small (now deceased) and Margaret Calvert (now a partner of Ebsworth & Ebsworth). They sought advice concerning the rights and obligations of Mr Kelly and Mr Watson as employees of MGI and/or Guardian. Minter Ellison opened a file in relation to the matter in the name of Trojan. 18 On 26 May 1995, Mr James faxed a document to Minter Ellison concerning the advice which was sought: this is one of the documents in respect of which privilege is claimed in these proceedings. There is a note on this document dated 16 June 1995, written by Mr Small, to the effect that he left a message for Mr James. 19 On 19 June 1995, there was a further meeting between Mr Kelly and Mr Smith; and on 21 June 1995 Mr Kelly wrote a memorandum which notified Mr McLernon that he had had four meetings with Mr Smith over a period of 12 weeks. The memorandum reported a strong interest on AM's part to participate in the secondary insurance market. The memorandum also suggested that Mr Smith had raised with Mr Kelly the possibility that AM might offer a position to him, and that he had rejected that possibility. 20 On 28 June 1995, Mr James, Mr Kelly and Mr Watson again went to Minter Ellison, and apparently then received some oral advice from Ms Calvert. 21 On 10 July 1995, Mr McLernon faxed to AM what was referred to as a "discussion paper" concerning a possible deal between Guardian and AM. 22 On 12 July 1995, Minter Ellison wrote a letter to Trojan containing advice concerning the rights and obligations of Mr Kelly and Mr Watson as employees of MGI and/or Guardian. This document is one of the documents in respect of which privilege is claimed in these proceedings. The letter was passed on by Mr James to Mr Kelly and Mr Watson. 23 On 18 July 1995, Minter Ellison rendered an invoice to Trojan in respect of advice given to that time. Mr James received this invoice and passed it on to Mr Kelly and Mr Watson for payment. The invoice was in fact paid on or about 26 September 1995 by Mr Kelly and Mr Watson's company. 24 During August and September 1995, there were negotiations between MGI and AM for a joint venture in which they would each have a 45 per cent interest, and Mr Kelly and Mr Watson would have a 10 per cent interest between them. 25 On 11 September 1995, Minter Ellison wrote a letter to Mr Kelly and Mr Watson giving advice concerning their position in the proposed joint venture. It appears that Mr Kelly and Mr Watson asked Mr James to negotiate on their behalf with Mr McLernon concerning their position in the joint venture; and Mr James, with the authority of Mr Kelly and Mr Watson, showed this Minter Ellison letter to Mr McLernon. No privilege is claimed in respect of this letter. 26 On 13 September 1995, Mr McLernon faxed a letter to Mr Kelly commenting on the Minter Ellison letter. This was responded to by Mr James in a fax dated 15 September 1995, leading to further faxes on the same day from Mr McLernon to Mr James, and from Mr Kelly to Mr McLernon. 27 On 20 September 1995 Alan Rich, a director of AM, prepared a memorandum to the Board of AM advising that Mr Smith and Mr Rich recommended that AM proceed with the joint venture with MGI. However, following a meeting on 21 September 1995 between Mr Kelly, Mr Rich and Mr Smith, in which there was reference to Mr McLernon's role in the business, on 22 September 1995 Mr Rich informed Mr McLernon that AM would not be proceeding with the joint venture. 28 There is in evidence a memorandum dated 27 September 1995 from Mr Smith to Mr Rich, reporting on contacts which he had had with Mr Kelly, notably on 25 September, concerning the possibility of Mr Kelly leaving MGI and working with AM. 29 However, it appears that there were some negotiations during September concerning a possible revised deal between MGI and AM. 30 On 15 October 1995, Mr McLernon, on behalf of Guardian, wrote to a number of employees, including Mr Kelly and Mr Watson, giving formal notice that their employment would cease after three months. 31 On 16 October 1995, Mr Kelly wrote a memo to file recording a discussion with Mr McLernon concerning the letter to him of 15 October, in which Mr McLernon said that the contents of the letter were clear and that if the business did not start producing profits he would be downsizing. 32 On 13 November 1995, Mr Kelly sent a letter to Mr Smith, enclosing a draft business plan for a venture in the secondary insurance market. This plan identified LIPE as the only competitor. Under the heading "Capital Equipment Purchased" there appeared the following: