ASIC v Rich [2005] NSWSC 489

New South Wales Supreme Court

CITATION : ASIC v Rich [2005] NSWSC 489

HEARING DATE(S) : 23 May 2005

JUDGMENT DATE : 24 May 2005

JURISDICTION : Equity

JUDGMENT OF : Austin J

DECISION : Proceeding referred to mediation

CATCHWORDS : PRACTICE AND PROCEDURE - mediation - court's power to order referral to mediation where a party opposes mediation - duty to mediate in good faith - discretionary considerations - civil penalty proceedings

LEGISLATION CITED : Supreme Court Act 1970 (NSW), ss 110K, 110L, 110P

Aiton Australian Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996 ASIC v Rich (2003) 44 ACSR 682 ASIC v Rich (2004) 50 ACSR 500 Higgins v Higgins [2002] NSWSC 455 CASES CITED : Idoport Pty Ltd v National Australia Bank Ltd (No 21) [2001] NSWSC 427 Rich v ASIC (2004) 78 ALJR 1354 Singh v Singh [2002] NSWSC 852 Waterhouse v Perkins [2001] NSWSC 13

Australian Securities and Investments Commission (P) PARTIES : John David Rich (D1) Mark Alan Silbermann (D4)

FILE NUMBER(S) : SC 5934/01

R B S Macfarlan QC with J P A Durack SC (P) COUNSEL : D L Williams SC with M J Steele (D1, D4)

Georgina Hayden, Solicitor for Australian Securities and Investments Commission (P) SOLICITORS : Joanne Kelly, Solicitor (D1, D4)

LOWER COURT JURISDICTION :

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

AUSTIN J

TUESDAY 24 MAY 2005

5934/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V JOHN DAVID RICH & ANOR JUDGMENT 1 HIS HONOUR: Section 110K of the Supreme Court Act 1970 (NSW) provides as follows: "(1) If it considers the circumstances appropriate, the Court may, by order, refer any proceedings, or part of any proceedings, before it (other than any or part of any criminal proceedings) for mediation, and may do so either with or without the consent of the parties to the proceedings concerned. (2) The mediation is to be undertaken by a mediator agreed to by the parties or, if the parties cannot agree, by a mediator appointed by the Court, who may, but need not, be a person nominated and appointed in accordance with the provisions of a practice note issued under section 110O." 2 The hearing of this case is at last reaching the point where the main questions of provenance and admissibility of evidence will have been decided, subject to appeal, and the Court will move on to hear ASIC's "substantive" evidence. But this point has been reached only after a protracted hearing, no doubt at prodigious cost to the parties, which has placed the Court's resources under strain; and little certainty has yet been achieved on the contested evidentiary questions because two of my main rulings are subject to interlocutory appeals. Recently I decided to invite the parties to make submissions as to whether the Court should, of its own motion, order the mediation of the proceeding under s 110K. My idea is that the completion of the evidentiary phase is a natural "punctuation mark" in the hearing process, which might be exploited as an opportunity, perhaps the last opportunity, to investigate the prospect of a mediated resolution of the dispute. 3 At yesterday's hearing I stated my reasons for believing that it is desirable to consider mediation, notwithstanding that the final hearing of the case has been under way for many months. I invited each party to respond by making submissions, having informed them that I did not consider this to be an appropriate occasion for hearing evidence. In its submission, ASIC informed the Court that it did not oppose an order for mediation, so long as the mediation occurs within a reasonably short period of time. The defendants said, in their submission, that they oppose the making of such an order. Having considered the submissions of the parties, I have decided that mandatory mediation is appropriate. 4 I shall begin by setting out my main reasons for that decision, substantially as I stated them in court before hearing submissions. I shall then supplement those reasons in the course of dealing with some matters raised in the submissions, and finally explain the procedure that I propose to adopt. 5 Since this case began in early September 2004 there have been 80 sitting days, excluding today. In addition to many other issues, there have been major contested applications with respect to the search warrant issues, the Carter Report and the documentary tender. Although there has been a substantial amount of oral testimony, it has for the most part been evidence going to those issues and to the question of provenance of documentary material. So far the hearing has not moved beyond dealing with questions of admissibility of evidence. 6 ASIC originally envisaged that the hearing time for its case would be approximately three months. I assume that this is still ASIC's estimate, and that very little of the evidence comprising that three-month estimate has so far been heard. It is probable, in my view, that the presentation of ASIC's case will take at least three months from the time of commencement of the "substantive" phase. 7 Senior counsel for ASIC expressed concern, when I referred to ASIC's hearing estimate during yesterday's statement, that I might have created the impression that the estimate was awry through some fault on ASIC's part, and he invited me to point out that ASIC's estimate was in turn based on estimates given by the defendants of the length of cross-examination. It is not my intention to attribute fault to either party for the incorrect estimate, but only to record the fact that it has occurred, and has consequently led to some difficulties for the Court. 8 Although defences have been filed, the defendants have, according to the High Court's decision in Rich v ASIC (2004) 78 ALJR 1354, the benefit of the privilege against exposure to a penalty, and so they have not filed and served their affidavits or given discovery. If they go into evidence, there will be additional hearing time which could very easily occupy weeks (or more) rather than days. 9 Therefore the parties and the Court are facing a substantial extension of the original estimated hearing time. The total hearing time could easily be three times ASIC's original estimate. 10 Increased hearing time leads, of course, to increased costs. I assume, though I am not in a position to make an accurate estimate, that the parties have already incurred enormous costs in this litigation, and that costs will continue to be incurred at or near to the same rate for the continuation of the hearing. Additional costs will be involved if it remains necessary, as I understand that it is likely to be, for the Court to take some of the evidence in London. 11 Time and costs are affected by appeals. Of the three major judgments that I have delivered, one has been the subject of a successful appeal, and the second is at present the subject of an application for leave to appeal, to be heard with the appeal on 29 June and 1 July 2005. The issues addressed in this case are complex matters upon which there is frequently room for more than one view. 12 The effect of the Court of Appeal's judgment, reversing my decision on the Carter Report, is that it will probably be necessary for the Court and the parties to work through the Carter Report, paragraph by paragraph and opinion by opinion, to deal with admissibility and discretionary exclusion. That is likely to be a time-consuming process. The overall outcome of that step-by-step process is uncertain. The possible outcomes include rejection or admission of the bulk of the Report, or something in between. If the bulk of the Report is not rejected, it is likely that there will then be argument about whether to admit or exclude the supplementary Carter Reports. If the bulk of the Report is rejected, it is likely that ASIC will seek leave to tender another report, currently well advanced in preparation, according to senior counsel's statement to the Court on 17 May. Indeed, senior counsel for ASIC informed the Court yesterday that ASIC may seek to use the new report even if the bulk of the Carter Report is retained. There will be argument as to whether that leave should be granted, as well as the prospect that an adjournment will be needed so as to enable the defendants to deal with the new report. 13 If leave is granted for an appeal on the document issues, time will elapse while the appeal is heard and determined. In the case of the Carter Report judgment, which was dealt with expeditiously, nearly 11 weeks passed from the time of publication of my judgment to the time of publication of the Court of Appeal's judgment. One should assume that the document issues will also be dealt with expeditiously, but that there will be a similar lapse of time. Since, in the meantime, the evidentiary status of many of ASIC's documents may be under a cloud (as I understand the position, the grounds of appeal are wide-ranging), there will be issues as to whether it is more efficient, or less efficient, to proceed with oral evidence and cross-examination of witnesses on the basis that the documents are in evidence. 14 In these ways the interlocutory appeals seem likely to add substantially to the time and cost of the case. There must be a fairly high prospect of an appeal once the final judgment at first instance is handed down, whatever the outcome. That, again, will add to the cost and time consumed before the case is finally resolved. A realistic assessment of costs and time will also take account of the prospect that the unsuccessful party in the Court of Appeal will seek leave to appeal to the High Court. 15 Such a lengthy case, unexpectedly much more lengthy than was planned on the basis of ASIC's estimate, is placing strains on the Court's resources. Of course, if it is called upon to do so, the Court will provide the resources to ensure that the case is brought to its conclusion. But inevitably the allocation of the Court's resources to the extended hearing of this case is at the expense of the hearing and determination of other cases, and therefore there is an important public interest involved. 16 In my opinion, this combination of consumption of time, escalating costs and strain on the Court's resources provides an ample basis for the Court to exercise its power of mandatory mediation. The making of a mediation order may provide the opportunity for the parties to take stock of their positions away from the battleground of the courtroom. An independent mediator should be able to encourage the parties to look at the issues from a different perspective and in a different light, and mediation may provide the occasion for the parties to obtain advice from a broader range of sources than the specifically legal sources used in litigation. 17 Judicial thinking about the use of the Court's power to order mediation in commercial and other matters under s 110K of the Supreme Court Act, and to do so against the will of one or both parties, has developed considerably since the introduction of the mandatory mediation power in the year 2000: see, for example, Singh v Singh [2002] NSWSC 852; Higgins v Higgins [2002] NSWSC 455 (a case where mediation was ordered against the wishes of one of the parties, and was successful: see Singh at [3]). 18 Speaking extra-curially shortly after the introduction of s 110K, Spigelman CJ pointed out that the new section expressly says that the power to make a reference may be exercised with or without the consent of the parties, and he added: "It appears that, perhaps as a matter of tactics, neither the parties nor the legal representatives in a hard-fought dispute are willing to suggest mediation or even to indicate that they are prepared to contemplate it. No doubt this could be seen as a sign of weakness. Nevertheless, the parties are content to take part in the mediation conference if directed to do so by a judge. There is a category of disputants who are reluctant starters, but who become willing participants. It is to that category that the new power is directed" (address to LEADR Dinner, University and Schools' Club Sydney, 9 November 2000, cited with approval by Einstein J in Idoport Pty Ltd v National Australia Bank Ltd (No 21) [2001] NSWSC 427; BC200102972). 19 In the circumstances I have described, it would be rational, ex facie, for litigants in the position of ASIC and the defendants, confronted with the cost, delay and uncertainty of the continuation of the hearing, to explore thoroughly and vigorously whether a mediated outcome can be achieved, notwithstanding that each side has already devoted prodigious time and effort, at large cost, to the resolution of the matter by the Court. The public interest supports making an attempt to see whether that reasoning will prevail. The defendants informed the Court that mediation was likely to be futile. In my judgment, however, once the parties come to grips with the necessity to mediate in good faith in compliance with the Court's order, there is a non-negligible chance that the pragmatic and rational considerations to which I have referred will create a climate for constructive negotiations. 20 In their submissions, the defendants accepted that the Court has power under s 110K to order mediation even where a party or parties oppose that order being made. However, they noted that the power does not apply to criminal proceedings, and drew attention to the nature of the present proceeding which, they said, is a penal proceeding. They submitted that the Court should not order mediation in a penal proceeding if the defendants to the proceeding oppose that course, because penal proceedings raise considerations quite different from commercial disputes, where mediation is widely used. 21 This is a civil penalty proceeding in which ASIC seeks compensation and disqualification orders, to which the privilege against exposure to a penalty applies. They are, at least in that sense, "penal" in nature. However, the nature of the proceeding is not incompatible with a negotiated outcome. Indeed, there were originally four defendants in this case, two of whom (Mr Keeling and Mr Greaves) have withdrawn after orders were made with their consent (see ASIC v Rich (2003) 44 ACSR 682 and ASIC v Rich (2004) 50 ACSR 500), and ASIC informed me at yesterday's hearing that in one case the agreement was reached as a result of mediation. 22 It would be unacceptable for the Court to make an order imposing a penalty on the defendants without their consent and in the absence of a full hearing. But what is at stake here is quite different. The question is whether the Court should make an order imposing on the parties an obligation to submit to a procedure which will be fruitful only if the parties consent to the outcome. The "non-voluntary" consequences of the Court making a mediation order are that once the order has been made, the parties have a duty to participate in the mediation in good faith (s 110L) and to contribute to the cost of the mediation (s 110M). In my opinion the penal aspect of the present proceeding is not an obstacle to requiring the defendants to participate, in good faith, in the mediation. It is a serious matter to add to the costs of the parties, but there is a prospect of a mediated resolution of the proceeding, with the huge saving of the costs of further litigation. The costs of mediation to explore that prospect will be well spent. 23 The defendants informed the Court that under no circumstances would they voluntarily put themselves in a position whereby their right to penalty privilege, vindicated by the High Court, would be adversely affected. They drew attention to the statutory duty to mediate in good faith, imposed by s 110L, noting the suggestion by Levine J in Waterhouse v Perkins [2001] NSWSC 13, at [95], that one of the sanctions for failing to act in good faith under that section might well be contempt of court. They referred to Aiton Australian Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996, where Einstein J examined the case law and academic writing dealing with "the essential or core content of an obligation to mediate in 'good faith'" (see Idoport Pty Ltd v National Australia Bank Ltd (No 21), at [47]). In the Aiton case (at [156]) his Honour said that the essential content of the obligation was: "(1) to undertake to subject oneself to the process of negotiation or mediation …; (2) to undertake in subjecting oneself to that process, to have an open mind in the sense of: (a) a willingness to consider such options for the resolution of the dispute as may be propounded by the opposing party or by the mediator, as appropriate; (b) a willingness to give consideration to putting forward options for the resolution of the dispute". 24 As far as I can see, there will be no risk of adversely affecting the right to penalty privilege, if the mediation that I have in mind in this case is carried out. Section 110P(4) states that evidence of anything said or of any admission made in a mediation session is not admissible in any proceedings before any court, tribunal or body. Section 110P(5) says that a document prepared for the purposes of, in the course of, or as a result of, a mediation session, or a copy of such a document, is not admissible in evidence in any proceedings before any court, tribunal or body. The only exceptions are in cases where all persons identified in attendance at the mediation session or identified in the document consent to the admission of the evidence (s 110P(6)(a)) or there are reasonable grounds to believe that disclosure is necessary to prevent or minimise the danger of injury to any person or damage to any property (ss 110P(6)(b) and 110Q(c)). 25 In summary, the prospect, less than overwhelming though it may presently be, that when confronted with the need to mediate the parties might find the basis for a negotiated outcome, is sufficient to justify the making of a mediation order notwithstanding the defendants' opposition to it, when one has regard to the huge commitment of time and financial resources of the parties that will be required if the case runs to its conclusion, and the pressure that this unexpectedly long trial is placing on the Court's resources. 26 I do not intend to follow the optional procedure provided in Practice Note 125, in the special circumstances of this case. The selection of a suitable mediator will be a matter of crucial importance to the potential success of the mediation. Section 110K provides for the mediator to be selected by agreement of the parties, not (in the first instance) by the Court. I shall give directions for the parties to negotiate with a view to agreeing on the identity of the mediator on or before Friday 27 May 2005. I am prepared to discuss with counsel, in chambers, the names of appropriate candidates, but it will be no discourtesy to the Court if no such discussion takes place. The costs of the mediation will be governed by s 110M and I shall direct that the parties negotiate with a view to reaching an agreement as to costs by Friday 27 May 2005. In the absence of agreement on the identity of the mediator or the question of costs, I shall hear submissions and make orders on Monday 30 May 2005. 27 I agree with ASIC that it is important that the mediation take place quickly. In this regard, I think the appropriate course is to direct the parties to use their best endeavours to ensure that the mediation process is completed prior to the hearing by the Court of Appeal, on 29 June, of the leave application with respect to the documentary tender.