New South Wales Supreme Court CITATION : Coal Management Operations & Processing Pty Limited v Resource Pacific Limited [2009] NSWSC 573 HEARING DATE(S) : 22 May 2009 JURISDICTION : Equity Division Commercial List JUDGMENT OF : Brereton J EX TEMPORE JUDGMENT DATE : 22 May 2009 DECISION : Defendant may obtain expert opinion – defendant to serve reports on other parties – Court to determine at later date whether evidence may be adduced. CATCHWORDS : EVIDENCE – expert evidence – application to use expert evidence – where defendant seeks to obtain expert report on "coal preparation process" and "management practice" within coal industry – whether person with relevant expertise exists – whether any such specialised body of knowledge exists – Held – defendant may obtain expert opinion – Court to determine at a later stage if evidence may be adduced. LEGISLATION CITED : (NSW) Uniform Civil Procedure Rules 2005, r 31.19, r 31.20 CATEGORY : Procedural and other rulings Coal Management Operations & Processing Pty Ltd (plaintiff) Resource Pacific Ltd (defendant) First Cross-Claim: Resource Pacific Ltd (cross-claimant) Paul John Jury (XD1) PARTIES : David Hughes (XD2) Carol Esther Holley (XD3) Geoffrey Toby Rose (XD4) Coal Management Operations & Processing Pty Ltd (XD5) Second Cross-Claim: Paul John Jury (cross-claimant) Resource Pacific Ltd (XD1) FILE NUMBER(S) : SC 50051/08 Mr JB Whittle SC w Mr BJ Burke (plaintiff/XD5) COUNSEL : Mr MR Elliot (defendant/XC1) Ms KH Barrett (XD1-4) O'Hearn & Bilinsky Lawyers (plaintiff/XD5) SOLICITORS : Mallesons Stephen Jaques (defendant/XC1) Clayton Utz (XD1-4) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST BRERETON J Friday 22 May 2009 50051/08 Coal Management Operations & Processing Pty Limited v Resource Pacific Limited JUDGMENT (ex tempore) 1 HIS HONOUR: In these Commercial List proceedings the plaintiff Coal Management Operations & Processing Pty Limited sues the defendant Resource Pacific Limited, a publicly listed company, for sums totalling in excess of $30 million said to be due under a Process Improvement Agreement and Termination Agreement made between them. Resource Pacific cross-claims first, against Coal Management for declarations that the relevant contracts are void on the ground that they were procured by breaches of duties of the former directors of Resource Pacific, of which Coal Management is said to have notice; and, secondly, against the former directors of Resource Pacific for compensation and other relief for breach of those directors' duties. The present application is brought by Resource Pacific for directions, pursuant to UCPR, r 31.19 and 31.20, in connection with the use of expert evidence. 2 Although the possibility that Resource Pacific would seek to adduce expert evidence had been adverted to at an earlier stage in the proceedings, and although directions for the service of evidence were made earlier this year, it was not until 12 May that a request was made to the Court for expert evidence directions, albeit that there had been some exchange of correspondence over the preceding fortnight in that behalf. At first, Resource Pacific sought leave to engage two experts: · One, said to be with expertise in "coal preparation process", to prepare a report containing statements of fact and opinion relevant to whether the "process improvement" proposed by the plaintiff was, in fact, an improvement in the coal preparation processes at the relevant colliery; and · A second with "management expertise", to prepare a report containing statements of fact and opinion relevant to whether the former directors of the cross-claimant breached their duties as directors in the manner alleged in the cross-claim. 3 However, in the course of the correspondence, the written submissions and the argument, the nature of the expert evidence and the particular issues which it is proposed to address has been somewhat, and I think significantly, refined. 4 Essentially, what Resource Pacific now proposes, in respect of the process improvement issue, is a report from an independent expert, with expertise in coal preparation processes, as to what such an expert would have reported if asked to provide an independent report on the proposed enhancement at or about the time of the Board meeting that took place on 13 November 2007. Resource Pacific contends that prudent directors would have insisted on an independent expert report before adopting the proposal for process improvement, attended as it was with significant financial obligations; that the report that was, in fact, before the Board on that occasion was not truly an independent one; and that had an independent report been obtained, the opinions expressed and advice given would have been quite different (and, implicitly, not supportive of the proposal). 5 It may be, as has been argued by counsel for the cross-defendants, that directors acting reasonably needed to do no more than have regard to the report that was, in fact, provided; however, I do not think that it is open to me to conclude that question at this stage, and effectively to prevent the cross-claimant from proving the case which it wishes to mount. 6 The course of argument established that proof that an independent report would have provided different advice would be essential, at least to Resource Pacific's claim for damages or compensation against the directors. The absence of such a report would at least arguably be fatal to that claim, on questions of causation of loss. In those circumstances, it seems to me that Resource Pacific has established a reasonable basis for seeking to adduce such evidence. It ought to be apparent, however, from what I have said that, if it is to be of utility, the expert opinion requested should not be a retrospective opinion as to whether the process improvement was in truth an improvement in the coal preparation processes, but it should be a report reflecting what a relevant expert would have given if asked to provide an independent report to the Board on the proposed process improvement as at December 2007. 7 The other category of proposed expert evidence has also been significantly modified so that what Resource Pacific now proposes is, in effect, an opinion as to whether there was any and, if so, what standard practice in the coal industry in or about 2007 so far as due diligence investigations in respect of transactions such as those in question in this case. I readily accept that it would have been of no utility to the Court whatsoever to have an opinion from an expert with so-called "management expertise" as to whether the cross-defendants had breached their duties as directors as was originally proposed. The content of a director's duty of skill and diligence is very much informed by the context of the particular company, the particular background of the director and the expertise that that director brings to the Board in question, and includes whether the director is an executive or non-executive director. Nonetheless, it seems to me clear that one of the factors which must inform the content of a director's duty, faced with a proposed transaction of this kind, includes whether there is a standard industry practice. It seems to me, therefore, that evidence of such a standard practice would be of relevance and of potential assistance, in resolving whether the directors acted with due care, skill and diligence. 8 The strongest argument against permitting such evidence is that there is nothing before the Court to suggest that any person with relevant expertise exists, or that any relevant practice exists, or that there is any specialised body of knowledge in this area. My mind has wavered as to whether I should afford the cross-claimant an opportunity to identify an appropriate expert and the precise questions that would be asked, or whether I should act on judicial knowledge that there is in New South Wales and elsewhere in Australia a substantial coal industry, in which there must be personnel who are familiar with practices in that industry. It does seem to me, at least in the context of a publicly-listed company such as Resource Pacific, that it is reasonably probable that there would be industry standards so far as the investigation of major transactions before their adoption is concerned. Moreover, having regard to the course that I propose to take in connection with this evidence overall, I think costs will be minimised if I allow Resource Pacific an opportunity to explore the issue and obtain whatever report it can, and then review whether such evidence should be permitted to be adduced. That essentially leaves the risk of any costs occasioned by this exercise where they should lie – with Resource Pacific – for the time being at least. 9 I propose, therefore, to afford Resource Pacific an opportunity to obtain the two reports it seeks, on the subject matter to which I have referred, in their more refined form. Once those reports have been obtained and served, the Court will then consider whether Resource Pacific should have leave to adduce evidence in terms of those reports and, if minded, to grant such leave, then permit the cross-defendants an opportunity to obtain such responsive expert evidence as they may wish. 10 Direct that by 17 July 2009 the cross-claimant may serve: (a) a report of an expert with expertise in coal preparation processes, being a report as to what that expert would have advised had he or she been requested to provide an independent expert report to the Board of Resource Pacific Limited in or about December 2007 in connection with the "process improvement" proposed by the plaintiff at the Newpac Colliery. (b) the report of an expert with expertise in management in the coal mining industry as to whether there was any and if so what standard practice or practices in that industry as to the due diligence inquiries, procedures, and processes undertaken by reasonably prudent directors of coal mining companies: (i) in or about December 2006, in connection with transactions such as the Operating Contract the subject of these proceedings; and (ii) in or about December 2007, in connection with transactions such as the Process Improvement Agreement and the Termination Agreement the subject of these proceedings. 11 Adjourn the proceedings to 31 July 2009 at 9.30 before me for further directions. On that occasion the Court will consider inter alia whether leave to adduce evidence contained in any such report should be granted. 12 On the last occasion I suspended the operation of orders 4, 4(a) and 5 made on 6 February 2009. That suspension will continue until further order. 13 So far as the costs of today are concerned, it seems to me that each party has had a measure of success and a measure of failure and costs of the application should be costs in the proceedings. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.