Supreme Court New South Wales Medium Neutral Citation: Smith v Australian Executor Trustees Limited; Creighton v Australian Executor Trustees Limited (No 2) [2018] NSWSC 875 Hearing dates: 8 June 2018 Decision date: 14 June 2018 Jurisdiction: Equity Before: Ball J Decision: The notice of motion filed on 29 May 2018 be dismissed with costs. Catchwords: EVIDENCE – Privileges – Client legal privilege – Loss of privilege pursuant to s 122(2) of the Evidence Act 1995 (NSW) – Inconsistency of the client's conduct with the maintenance of the confidentiality – Whether a claim for privilege inconsistent with a pleading of reliance – Whether a forensic advantage attaching to disclosure of a privileged document is relevant to determining inconsistency Legislation Cited: Civil Liability Act 2002 (NSW) Corporations Act 2001 (Cth) Evidence Act 1995 (NSW) Cases Cited: Hancock v Rinehart [2013] NSWSC 1978 Mann v Carnell (1999) 201 CLR 1; [1999] HCA 66 Wayne Lawrence Pty Ltd v Hunt [1999] NSWSC 1044 Category: Procedural and other rulings Parties: Willis Australia Limited (Applicant on Motion | Second Cross-Defendant to First Cross-Claim) Australian Executor Trustees Limited (First Respondent on Motion | First Defendant and First Cross-Claimant) IOOF Holdings Limited (Second Respondent | Second Cross-Claimant on First Cross-Claim) Representation: Counsel: MR Elliott SC with E Bathurst (Applicant on Motion | Second Cross-Defendant to First Cross-Claim) Dr RCA Higgins SC with S Lawrance (Respondents on Motion | First and Second Defendants and First & Second Cross-Claimants on First Cross-Claims) Solicitors: Minter Ellison (Applicant on Motion | Second Cross-Defendant to First Cross-Claim) Corrs Chambers Westgarth (Respondents on Motion | First and Second Defendants and First and Second Cross-Claimants on First Cross-Claims) File Number(s): 2015/171592 & 2015/306222 Publication restriction: None Judgment Introduction 1. Before the Court are two representative proceedings brought against Australian Executor Trustees Limited (AET) arising out of the collapse of Provident Capital Limited (Provident). AET was the trustee for holders of debentures issued by Provident under the provisions of Chapter 2L of the Corporations Act 2001 (Cth) (the Act) pursuant to a trust deed made between Provident and AET. In both proceedings, the representative parties, who are holders of Provident debentures, allege that AET breached duties it owed under s 283DA of the Act as a consequence of which they and those who they represent suffered loss and damage. They seek to recover that loss and damage under s 283F of the Act. 2. By a notice of motion filed on 29 May 2018, the second cross-defendant to the first cross-claim filed in both proceedings, Willis Australia Limited (Willis), seeks production of five documents discovered by the cross-claimants to the cross-claim, AET and IOOF Holdings Limited, AET's parent company, which are the subject of a claim for client legal privilege. Willis claims that there has been an implied or express waiver of that privilege. 3. In order to understand Willis's contentions, it is necessary to give a simplified account of some of the issues in the case. 4. By the first cross-claim, AET seeks indemnity from insurers who provided financial institutions professional indemnity insurance to IOOF and its subsidiaries, including AET, in respect of the claims brought by the plaintiffs against it. The insurers changed over time, but relevantly the cover was first obtained from AXIS in 2010. The insurers have denied liability, including on the basis of cl 3.16 (or equivalent clauses) in the AXIS policy (and later policies), which is said to have the effect of permitting the insurers to refuse to pay a claim directly or indirectly arising from the insolvency or external administration of any issuer of unlisted and/or unrated debentures (the Exclusion). 5. AET denies that the Exclusion operates in this case, but if it does, it brings an alternative claim against Willis, the insurer broker which placed the insurance. 6. In the claim against Willis, AET asserts that: 1. Willis owed it a duty of care; 2. relevantly, it breached that duty of care by failing to "exercise reasonable care and skill in negotiating and effecting insurance coverage for AET that did not include exclusions in the nature of the [Exclusion], or alternatively insurance coverage which exempted AET's operations from exclusions in the nature of the [Exclusion]" and by failing to "advise IOOF and/or AET of the effect, or possible effect, that the [Exclusion] would have in relation to its insurance coverage for liabilities arising from its role as the trustee for debenture holders holding unlisted and/or unrated debentures and promissory notes"; 3. by reason of those breaches AET suffered loss. 1. How that loss was suffered is explained in evidence filed on behalf of AET and IOOF. In particular, Mr Gary Riordan, who is the General Counsel and was until October 2017 General Manager – Trustee Services for IOOF, has sworn an affidavit which is proposed to be read at the trial, which states: 196. At no time prior to August 2015 did a representative of Willis ever draw to my attention to the existence or the possible effect of the exclusion in relation to unlisted or unrated debentures or promissory notes in IOOF's professional indemnity policies placed with AXIS. To the best of my knowledge, no representative from Willis advised any IOOF officer of those matters. At all times, I relied upon Willis to ensure that IOOF's financial lines insurances provided comprehensive coverage for all of its businesses (including AET's trustee business), and to inform me if such coverage could not be obtained or if there were any significant gaps in that coverage. As part of this, I relied on Willis' renewal reports and any other written and oral advices in my review of IOOF's policy wordings. As my attention was not drawn to the particular exclusion by Willis, I did not have regard to the exclusion as giving rise to an actual or potential gap in cover for IOOF. 197. Had I been informed that the exclusion might result in IOOF having an uninsured risk in relation to the conduct of AET in its capacity as a debenture trustee, I would have taken the following steps: (a) considered the nature and extent of the risk. As noted above, generally an uninsured risk in excess of $10 million dollars was not acceptable to IOOF. In order to calculate the extent of the risk I would have considered the total amount of unlisted or unrated debentures on issue in respect of which AET was the trustee. (I note that at all times since 2009 that amount was significantly in excess of $10 million); (b) discussed the issue with Mr Stanelos; (c) instructed Willis (or had Mr Stanelos instruct Willis) to contact AXIS to clarify its interpretation of the exclusion; (d) if AXIS' response was to the effect that the exclusion would not operate to limit indemnity for claims against AET as a debenture trustee (subject to Willis confirming this interpretation with the excess layers) I would have been satisfied with this, although I may have requested that AXIS (and, if necessary, excess insurers) put its position in writing; (e) if AXIS' response was to the effect that the exclusion would or might operate to limit indemnity for claims against AET as a debenture trustee, I would have instructed Willis to negotiate with AXIS (and, if necessary, excess insurers) to remove the exclusion from the policy (either generally or, failing that, in respect of the operations of AET). This is because I would have perceived the risk to be greater than the $10 million risk limit which IOOF was willing to bear; (f) if AXIS was (and, if necessary, excess insurers were) willing to remove the exclusion from the policy, I would have instructed Willis to accept those terms; and (g) if AXIS was not willing to remove the exclusion, I would have instructed Willis to seek alternative cover from other insurers which did not include the exclusion. 1. Similarly, Mr Michael Stanelos, the Head of Facilities and Assistant Company Secretary for IOOF, has sworn an affidavit in which he says: 79. I reviewed the proposed AXIS professional indemnity policy wording before instructing Mr Cray to proceed with placement of that insurance and, in doing so, must have reviewed the exclusion in clause 3.16. However, I did not understand that it might apply to claims by debenture holders of the kind made against AET in the present proceedings. At all times, both in this and subsequent policy years, I relied on Willis to advise IOOF if the coverage provided under any of AXIS' proposed policy wordings would or might not be adequate to meet IOOF's needs, including in respect of subsidiaries such as AET. My reliance on Willis in this way included reliance on its various renewal reports and other oral and written communications regarding proposed policy wordings, which I invariably read around the time they were received by IOOF. In subsequent years, my practice was to review any new or amended clauses in the professional indemnity policy wording, rather than all clauses afresh. 1. At the time of taking out the AXIS policy, IOOF obtained advice from Allens in relation to it. The documents that are sought to be produced relate to that advice. They consist of the following: 1. Copies of AXIS's professional indemnity wording printed by Allens and marked with Allens' handwritten annotations, which were retained in Allens' possession until after the commencement of these proceedings; 2. A handwritten note of a telephone call on 12 November 2010 between Allens and two internal lawyers of IOOF; 3. A paragraph in the minutes of an IOOF board meeting on 23 November 2010 recording Mr Riordan relaying Allens' advice to the IOOF board; 4. An email dated 7 December 2010 from an IOOF internal lawyer to Allens requesting legal advice; and 5. Copies of a memorandum of advice dated 17 December 2010 from Allens to IOOF. 1. Section 122 of the Evidence Act 1995 (NSW) relevantly provides: 122 Loss of client legal privilege: consent and related matters (1) … (2) Subject to subsection (5), this Division does not prevent the adducing of evidence if the client or party concerned has acted in a way that is inconsistent with the client or party objecting to the adducing of the evidence because it would result in a disclosure of a kind referred to in section 118, 119 or 120. (3) Without limiting subsection (2), a client or party is taken to have so acted if: (a) the client or party knowingly and voluntarily disclosed the substance of the evidence to another person, or (b) the substance of the evidence has been disclosed with the express or implied consent of the client or party. (4) The reference in subsection (3)(a) to a knowing and voluntary disclosure does not include a reference to a disclosure by a person who was, at the time of the disclosure, an employee or agent of the client or party, or of a lawyer of the client or party, unless the employee or agent was authorised by the client, party or lawyer to make the disclosure. (5) A client or party is not taken to have acted in a manner inconsistent with the client or party objecting to the adducing of the evidence merely because: (a) the substance of the evidence has been disclosed: (i) in the course of making a confidential communication or preparing a confidential document, or (ii) … (iii) … (iv) … (b) … (c) … (6) … 1. Willis contends that AET has lost the privilege attaching to the documents referred to in paras 9(a), (b), (d) and (e) because it has acted in a way that is inconsistent with the maintenance of the privilege within the meaning of s 122(2). In relation to the document referred to in para 9(c), Willis says that AET has lost privilege in respect of that document because a representative of Willis was present at the IOOF board meeting at which the Allens advice was disclosed, and the privilege was not preserved by s 122(5). Documents (a), (b), (d) and (e) 1. Section 122(2) of the Evidence Act reflects the test for whether a party has impliedly waived privilege as stated by the High Court in Mann v Carnell (1999) 201 CLR 1; [1999] HCA 66, where the Court said that what brings about the implied waiver is "the inconsistency, which the courts, where necessary informed by considerations of fairness, perceived, between the conduct of the client and maintenance of the confidentiality; not some overriding principle of fairness operating at large": at [29] per Gleeson CJ, Gaudron, Gummow and Callinan JJ. 2. In the present case, the conduct that is said to give rise to the inconsistency is a pleading of a case in negligence. That is said to give rise to inconsistency in three ways. First, the allegation that Willis owed AET a duty of care carries with it an implied assertion of vulnerability of AET to the conduct of Willis. Willis contends that it would be inconsistent for AET both to raise the question of vulnerability and maintain the claim for privilege when the legal advice it received at the time was relevant to the question of vulnerability. Second, AET asserts in its pleading, consistently with the requirements of s 5B of the Civil Liability Act 2002 (NSW), that the risk of harm (that the policy would not respond) was a risk in relation to which a reasonable person in the position of Willis would have acted in a way that Willis failed to act (that is, by negotiating a policy that did not include the Exclusion or advising IOOF of the Exclusion). That pleading necessarily requires the identification of the circumstances in which Willis was in; and those circumstances included the fact that IOOF had obtained legal advice from Allens to the effect of the advice Allens had given. Third, AET asserts that it relied on Willis in relation to the Exclusion. It would be inconsistent for AET to assert that it relied on Willis and at the same time to maintain a claim for privilege over documents relevant to that reliance. 3. In final submissions, Mr Elliott SC, who appeared for Willis, all but conceded that Willis could not succeed on the first way it put its case and accepted that the second way it put its case depended on the Court finding that AET had lost privilege in the document referred to in para 9(c). 4. Accepting for the moment that the pleading makes an implied assertion concerning vulnerability, or at least impliedly raises the issue of vulnerability as a critical indication of the existence of a duty of care, what is relevant to the question of AET's vulnerability was the opportunity it had to obtain advice on the policy and the extent to which it exercised that opportunity, not the contents of the legal advice. Consequently, there is no inconsistency in the assertion of the existence of a duty of care and the maintenance of the privilege. 5. The circumstances in which Willis acted or failed to act included whether it knew that IOOF had obtained advice from Allens on the policy and what it knew about that advice, not on the advice itself. That raises the question whether a representative of Willis was present at the board meeting at the time the contents of the Allens' advice was disclosed and, if so, whether as a result of that disclosure IOOF has lost privilege in the advice. There is no separate question of implied waiver. 6. That leaves the third way in which Willis puts its case. In its submission, essential to a consideration of whether IOOF relied on it in relation to the Exclusion is what other advice it had on that subject. Consequently, the maintenance of the privilege would be inconsistent with a pleading of reliance. In this respect, Willis submitted that the pleading of reliance is analogous to an express or implied pleading of a state of mind. Courts have frequently held that a party cannot put in issue its state of mind and, at the same time, maintain a claim for privilege over communications that bear on that state of mind. As Brereton J explained in Hancock v Rinehart [2013] NSWSC 1978: 15 While it is correct that the assertion of a client's state of mind may found a waiver of privilege the position is that, unlike some cases of waiver, this is not clear-cut but involves questions of the fairness and reasonableness of insisting on the privilege in the circumstances. Thus, in Council of New South Wales Bar Association v Archer [2008] NSWCA 164; (2008) 72 NSWLR 236, Hodgson JA, with whom Campbell and Handley JJA agreed, said (at [48]): ...What would involve inconsistency and relevant unfairness is the making of express or implied assertions about the content of the privileged communications while at the same time seeking to maintain the privilege. In this respect it may be sufficient that the client is making assertions about the client's state of mind in circumstances where there were confidential communications likely to have affected that state of mind. 16 The discretionary and balancing nature of the exercise is illuminated by the observations of Hodgson CJ in Eq, as he then was, in Wayne Lawrence Pty Ltd v Hunt [1999] NSWSC 1044 (at [12]), applied by Bergin J, as her Honour the Chief Judge then was, in Garratts Ltd v Thanga Thangathurai [2002] NSWSC 39: It does not seem to me that the assertion of a belief must, in all the circumstances, be taken as consenting to evidence being led of any legal advice or confidential communication that could be relevant to whether such belief was held or the reasonableness of such belief. It seems to me that factors relevant to whether that consent is to be considered as having been given or whether privilege is taken to have been waived would include the significance of the belief to the case as a whole, the relevance of the reasonableness of the belief to the case as a whole, the probability or otherwise of the legal advice being relevant to the holding of the belief or being relevant to its reasonableness, and in circumstances where the Court inspects the legal advice in question in order to make a decision, the extent to which the legal advice does in fact bear upon the holding of the belief or its reasonableness and the extent to which the legal advice relevant to those matters is inextricably bound up with the legal advice going to other questions as to which there has been no consent or waiver. It seems to me that on the basis of all those matters at least the Court has to make a judgment as to what is reasonable and what is fair in the particular case. 1. It must be remembered, however, that the decision of Hodgson CJ in Eq in Wayne Lawrence Pty Ltd v Hunt [1999] NSWSC 1044 was handed down before the decision of the High Court in Mann v Carnell and before s 122 of the Evidence Act was amended to reflect the test of waiver stated in that decision. The essential question remains one of inconsistency. As Brereton J pointed out, that question cannot, though, be resolved by the simple application of logic, since the inconsistency that must be identified is between particular conduct (in this case, express assertions) and the maintenance of a statutory right. Necessarily, identification of an inconsistency of that sort depends on questions of fact and degree. 2. In my opinion, there is no inconsistency in this case. There is no obvious connection between reliance on one person and reliance on another. There is no reason why, for example, AET could not take the position that it relied on both Willis and Allens. Consequently, there is no inconsistency between an allegation that IOOF relied on Willis in relation to the Exclusion and the maintenance of a claim for privilege on advice on which IOOF might or might not also have relied. That conclusion is reinforced by the fact that it is unclear whether the advice obtained from Allens bears directly on the scope of the Exclusion. 3. Of course, it is possible to imagine circumstances in which the advice from Allens might assist Willis's cases in relation to reliance. So, for example, if the advice from Allens was to the effect that the Exclusion did not apply in the circumstances of this case, it might be put to AET's witnesses that they relied on the advice from Allens and not on Willis. Conversely, if the advice from Allens was that the Exclusion did apply in the circumstances of this case, it might be put to those witnesses that they were not concerned about the Exclusion at all. But two points may be made about that. First, legal advice obtained by one party if made available to the other will frequently provide that other party with a forensic advantage that they otherwise would not have. But that is not the criterion by which the question of inconsistency is to be judged. It is accepted that parties in those circumstances must live with the forensic disadvantage because of the public policy in favour of the maintenance of the privilege; and that is why the loss of the privilege must come from the conduct of the person who claims it. Second, the fact that the advice might have forensic utility whatever it says reinforces the point that its contents cannot be critical to the question whether IOOF relied on Willis in a way that would give rise to an inconsistency. Document (c) 1. Two issues arise in relation to the minutes of the IOOF board meeting on 23 November 2010. The first is whether Mr John Grant, who at the time was an employee of Willis, was present at the meeting when Mr Riordan reported to the board on the substance of the advice given by Allens. The second is whether, if he was, the privilege in that part of the board minutes that records the substance of the advice is lost or whether it is preserved by s 122(5). 2. Mr Grant no longer works for Willis and was not called to give evidence on the question. Instead, Willis relies on the minutes which show that Mr Grant attended the board meeting. The minutes do not disclose that Mr Willis left at any time before the conclusion of the meeting. 3. Mr Bruce Woodhouse, who is the solicitor for AET and IOOF, gave evidence on information and belief from Mr Riordan that Mr Riordan attended the board meeting, that Mr Grant attended a portion of it and was involved in providing a report to the board in relation to the renewal of IOOF's financial lines insurances during the course of which Mr Grant provided certain advice to the board and answered certain questions, and that Mr Riordan believes that Mr Grant then left the meeting, following which Mr Riordan relayed the legal advice he had received from Allens. The board then ratified the decision to renew IOOF's insurances. Mr Woodhouse also says that he has been informed by Mr Riordan that it is Mr Riordan's "usual and considered practice not to disclose legal advice received by IOOF to the directors of IOOF in the presence of guests at Board meetings … and Mr Riordan has no reason to believe that he or the Board did not follow their usual practices on this occasion". 4. I am not satisfied that Mr Grant was present at the board meeting at the time the substance of the advice from Allens was disclosed to the board. 5. Although the minutes do not disclose that Mr Grant left the board meeting before it concluded, in my view, the high likelihood is that he did. It is not plausible that he remained at the meeting while other matters were discussed by the board. The likelihood is that Mr Grant left the meeting at some stage after he had given his presentation to the board. The question is whether that was immediately after he had given his presentation or only after the board had finished dealing with the subject of insurance. The minutes shed no light on that question. 6. The only other evidence on the question is the evidence on information and belief from Mr Woodhouse. To the extent that Mr Woodhouse gives evidence of Mr Riordan's recollection of what actually occurred at the board meeting, I would place no weight on it. The board meeting occurred a number of years ago. It is not likely that Mr Riordan would still have an actual recollection of what occurred; and I would not be prepared to accept that he does unless he gave that evidence himself and was cross-examined on it. 7. However, Mr Woodhouse also gives evidence on information and belief of what Mr Riordan's practice was. That evidence strikes me as plausible; and in the absence of anything else, I accept it. It follows that I accept that Mr Grant was not present at the board meeting when Mr Riordan disclosed to the board the substance of Allens' advice. 8. Having regard to that conclusion, it is not necessary to consider whether the privilege was lost as a consequence of the disclosure to Mr Grant. However, had I been required to consider that question, I would have concluded that the privilege had been lost. 9. Section 122(5) says, in effect, that the privilege will not be lost merely because there has been a disclosure of the advice in the course of a confidential communication. There can be no question that the disclosure of legal advice at a board meeting was disclosure in the course of making a confidential communication. Consequently, under s 122(5) the privilege could not have been lost merely by reason of that disclosure. However, the question still remains whether the privilege would have been lost under s 122(2). In my opinion, it would have been. The conduct that is inconsistent with the maintenance of the claim for privilege is the assertion that Willis was negligent in the advice that it gave about the operation of the Exclusion or in failing to obtain a policy without the Exclusion. That necessarily raises the question whether Willis acted reasonably in the circumstances and part of those circumstances is what it was told about the advice that had been obtained from Allens. It would be inconsistent for AET to assert that Willis was negligent and, at the same time, to take objection to the adducing of evidence about what Willis was told that bears on that question. What brings about the inconsistency is not the relevance of the Allens' advice to any conclusion formed by Willis but the prior disclosure of that advice to Willis and the assertion that Willis was negligent in the circumstances that include that prior disclosure. In other words, AET could not assert that Willis was negligent in the circumstances and at the same time object to Willis adducing evidence of what those circumstances were. Orders 1. It follows from what I have said that the notice of motion filed on 29 May 2018 must be dismissed with costs. ********** 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. Decision last updated: 14 June 2018