In B J Bearings Pty Ltd v Whitehead [2016] VSC 44 Hargrave J considered an application for preliminary discovery and set out the applicable principles.  It is a useful recap of the law written very elegantly but one of the best wordsmiths sitting on the Victorian Supreme Court.

FACTS

The possible litigation arose out of a sale of business and issues of restraint of trade.  As such the facts are involved.  For about 30 years prior to 1 February 2012 (the ‘sale date’), companies controlled by the first respondent, William (Bill) Whitehead and his wife, Brenda Whitehead, conducted retail and wholesale businesses in the sale of industrial products including bearings, industrial consumables and power transmission products in Gippsland, Victoria, from premises including 13 Endeavour Street, Warragul (the ‘BJB businesses’) [1].

On the sale date, the Whitehead companies sold the BJB businesses to the applicant, B J Bearings Pty Ltd for a total price of about $6.4 million [2].

The terms of the sale agreements included:

1. Mr and Mrs Whitehead were each employed by the applicant for a period of three years with Mr Whitehead being the managing director and Mrs Whitehead the administration manager.
2. non-competition clauses and made express reference to further restraints in Deed Polls executed by Mr and Mrs Whitehead operating for a period ending three years after their employment ceased [3].

The restraints in the Deed Polls prevented Mr and Mrs Whitehead from, amongst other things, directly or indirectly:

(1) being involved in any business in competition with the applicant or any related entity (as defined in the Corporations Act 2001 (Cth)) or the BJB businesses;

(2) canvassing, soliciting or enticing away clients or customers of the BJB businesses, or attempting to do so;

(3) employing, soliciting or enticing away any employee of the applicant, its related entities or the BJB businesses, or attempting to do so; or

(4) counselling, causing, or otherwise assisting any other person to perform any such act.

Under the Deed Polls there was an express exception allowing Mr Whitehead to continue acting as a director or employee of BJ Bearings (Dandenong) Pty Ltd (‘BJB Dandenong’), a company engaged in the same or similar businesses as the BJB businesses within the municipality of Greater Dandenong but those restraints applied to him in his capacity as a director of BJB Dandenong. Mr Whitehead resigned as a director of that company on 1 July 2012. BJB Dandenong is now owned and controlled by Christopher Nugara [5 ].

Mr and Mrs Whitehead ceased employment with the applicant on or about 31 January 2015.  The restraints in their Deed Polls became effective until 1 February 2018 [6 ].

The third respondent, Douglas Reid, was employed in the BJB businesses for about 25 years prior to the sale date, and about 28 years prior to him resigning as its General Manager on 5 June 2015. Through his company, Ace Industrial Pty Ltd, the second respondent,  Reid commenced a business in direct competition with the BJB businesses in about July 2015. Ace conducts its business from premises  200 metres from the applicant’s premises [7].

Ace commenced business at the time of settlement by the applicant of a large claim against it by Mr Whitehead claiming $818,000 plus interest for alleged entitlement to payment for consignment stock [8].

The Court referred, at [9], to an affidavit by a manager employed by the applicant’s ultimate shareholder, Inenco Group Pty Ltd who deposed that:

(1) Mr Whitehead and Mr Reid have a long-standing close personal relationship.

(2) an unidentified person stated at a social occasion in August 2015 that Ace was half-owned by Mr Whitehead’s daughter, Bronwyn Whitehead.

(3) ASIC records indicate that Mr Reid owns all of the issued shares in Ace, but only half of them beneficially. The identity of the beneficial owner of the other half is not disclosed and is unknown to the applicant.

(4) Ace has spent about $1.5 million to commence its operations, and would likely require an overdraft facility of more than $100,000 to conduct its business ‘as it ramps up’.

(5)Ace has massively over-invested in the establishment of its business to an extent ‘far more than would be required for a start-up enterprise in this industry’.

(6) Mr Whitehead has a significant reputation in the industry, particularly in the Gippsland region

(7) Mr Whitehead has intimate knowledge of the applicant’s customers, prices and discounts, margins, supply channels and staff. The [BJB] business relies heavily on goodwill.

(8) A competitor with the assistance of Whitehead’s knowledge and reputation would be capable of harming the applicant’s reputation and market share very significantly.

(9) Mr and Mrs Whitehead or companies associated with them are the landlords of the premises from which the BJB businesses are conducted, and have terminated those leases effective on 10 January 2016 unless extended by agreement. They are also the lessors of the premises nearby from which Ace conducts its business in competition with the BJB businesses.

(10) He has been informed by employees of the BJB businesses that Mr Whitehead has sought to entice them away from their current employment.

(9) since Mr Reid resigned from his employment with the applicant, several of the applicant’s key employees have resigned and obtained employment with Ace.

(10)  Mr Whitehead has been involved in requests that the applicant supply products to BJB Dandenong for the purpose of on-supply to Ace, and that Mr Nugara has admitted that this is the case.

(11) Mr Whitehead has been approaching a supplier to the BJB businesses, seeking to have that supplier supply Ace.

(12) Mr Whitehead attended Ace’s premises on numerous occasions and maintains his own offices in or adjacent to those premises.

(13)  Mr Whitehead has visited many suppliers in the industry in which the BJB businesses .

(14) He believes Ace’s business has, notwithstanding its recent commencement, already had a significant adverse effect on the applicant’s profitability and, because many of the applicant’s key staff now work for Ace, its goodwill and reputation has already been irrevocably damaged. Mr Gray deposes that, although the damage is ‘mainly in Warragul thus far’, he expects further damage may follow to the BJB businesses in Leongatha.

(15) Based on the above matters, and other matters referred to in his affidavit, Mr Gray believes that:

(a) Mr Whitehead has assisted and continues to assist Ace in starting up its business, including being involved in soliciting employees of the applicant and building relationships between Ace and customers of and suppliers to the applicant;

(b) Mr Whitehead is funding the establishment of Ace’s business; and

(c) Ace and Mr Reid are well aware of the restraints on Mr Whitehead in the Deed Poll and are assisting him to breach those restraints.

 

DECISION

Rule 32.05 application

The applicant’s counsel acknowledged that, if preliminary discovery was ordered in respect of the identity of the beneficial owner of the 50 per cent parcel of Ace’s shares not owned by Mr Reid beneficially, that may identify a prospective defendant and would in any event be sufficient for its purposes [12].

The responding parties took varied positions:

• The respondents opposed any preliminary discovery order or, if an order is to be made, opposes the scope of the orders sought on general grounds [14].
• Ace and Mr Reid did not oppose the making of preliminary discovery orders, but opposed the broad scope of the orders sought and seek confidentiality orders to prevent the applicant from inspecting documents containing confidential information about Ace’s business [14].
• Mr Whitehead opposed the making of a preliminary discovery order against him on three principal grounds:

(1) the applicant has failed to make ‘all reasonable inquiries’ as required by r 32.05(b) which makes the application fatal because the Court’s discretion to make a preliminary discovery order under r 32.05 is only enlivened where each of paragraphs (a), (b) and (c) are established on the evidence

(2) the evidence establishes that the applicant has sufficient information to enable it to decide whether to commence a proceeding against Mr Whitehead

(3) The applicant has already decided to commence a proceeding against (at least) Mr Whitehead.

His Honour found, at [18], that the information available to the applicant establishes:

•   there was reasonable cause to believe that the applicant has or may have a right to obtain relief in the Court from, at least, the respondents.
• there was no question that the respondents have or are likely to have had in their possession documents relating to the claims which the applicant is considering advancing by a proceeding.

Regarding the reasonable inquiries issue the Court set out the principles at [19] :

• Rule 32.05 should be given a liberal or benevolent construction.
• the fact that an applicant for preliminary discovery already has enough evidence to establish a prima facie case against a proposed defendant does not mean that the applicant has sufficient information to enable it to decide whether to commence a proceeding. An applicant may still ‘need information to know whether the cost and risk of litigation is worthwhile. 
• an applicant for preliminary discovery is entitled to be cautious before making a decision to embark upon costly litigation This consistent with the policy underlying the Civil Procedure Act 2010 generally, and the ‘proper basis certification’ requirements in s 42 of that Act in particular.
• in determining whether an applicant has in fact already decided to commence a proceeding, irrespective of the outcome of the application, the Court should not give too much weight to posturing in correspondence prior to the making of the application, particularly correspondence alleging the existence of a strong case but nevertheless seeking preliminary discovery by letter prior to making a formal application to the Court
• ‘What constitutes “reasonable inquiries” is a question of fact, to be considered in all the circumstances of the particular case.

The Court reviewed the correspondence noting:

• the applicant’s solicitor in its 4 December 2015 letter referred to the restraints contained in the Deed Poll, Whitehead’s involvement in the Ace business and the damage that involvement was causing the applicant and sought detailed undertakings from him — to the effect that he would cease involvement in the Ace business until 1 February 2018, take all steps necessary to have Ace repay any funding provided to Ace by him or on his behalf and to irrevocably renounce any beneficial interest in any Ace shares.  [21].
• Mr Whitehead’s solicitors responded by letter, at stating [22], :

 – denying that he or his daughter had any beneficial interest in the issued shares of Ace;

– denying that either his wife or any company or trust in which he or his wife is interested  in the issued shares of Ace;

– denying that there had been a loan to Ace;

– denying that there had been any guarantee or like instrument to assist Ace to procure funding; and

– denying that he, his family or the related entities had any financial involvement with Ace, .

– refusing to give the undertakings sought

– arguing why the restraints in Mr Whitehead’s Deed Poll were unenforceable

– proffering undertakings by Mr Whitehead  that he would not attend Ace’s premises, other than to conduct inspections in his capacity as landlord until 1 July 2016 and that he would not communicate with a customer of the BJB businesses between 1 February 2014 and 31 January 2015, not communicate with  a supplier, potential supplier, client or potential client, employee or potential employee of Ace ‘for the purpose of benefitting Ace’ and would not advise, provide any loans to or obtain any beneficial interest in Ace.

the Court specifically noted that the offer of undertakings expiring on 1 July 2016 involved reducing the maximum period of the restraints by 19 months [24] & The undertakings were proffered on condition that equivalent undertakings were given by Ace and Mr Reid and Mr and Mrs Whitehead being released from the restraints in their respective Deed Polls and Mr Whitehead and the related entities being released from all allegations contained in the proposed statement of claim enclosed with the letter from the applicant’s solicitors [25]. The solicitors for Ace and Mr Reid refused to give the undertakings sought, contended that they were unreasonable and noted that the proposed statement of claim ‘contains significant errors’ [26].

• Ace and Reid’s solicitors refused to provide an ‘explanation of and relevant documents concerning’ the beneficial ownership of the 50 per cent shareholding in Ace which Mr Reid does not own beneficially, Ace’s sources of funding from the time of its incorporation to date and Ace’s lease of the premises and offered undertakings which also  expired on 1 July 2016 [27] & [28].

The Court did not accept Whitehead’s contention that the applicant has failed to make all reasonable inquiries because, unlike the request made of Ace and Mr Reid to their solicitors it did not seek production of information (explanations) or documents from Mr Whitehead in the face of his denials and proffered undertakings [30].

The Court noted that the relevant focus of the rule is on whether the applicant has sufficient information to enable it to decide whether to commence a proceeding [33]  and the fact the applicant was adopting a cautious approach before making a decision to embark upon costly litigation was not a ground for criticism.

The fact that the applicant has satisfied the necessary pre-conditions to the making of a preliminary discovery order does not mean that an order must be made [36].

Mr Whitehead contended that the Court should exercise its discretion to refuse any form of preliminary discovery order in circumstances where the information contained in the documents sought is likely to be of a confidential and commercially sensitive nature and relates to dealings in a rural community [37].  The Court rejected that submission stating that issues of confidentiality and commercial sensitivity can be dealt with by appropriate orders — limiting the scope of the preliminary discovery or by imposing confidentiality restraints appropriate to the circumstances [38] Inspection of the discovered documents  was to be limited to nominated legal representatives of the applicant, on terms that they will not, until further order, show any discovered document or disclose any information derived from a discovered document to the applicant [40]. Once the applicant’s legal representatives have inspected the documents, they simply advise the applicant that the foreshadowed proceedings should not be issued. If not, then the parties should engage in sensible discussions with a view to agreeing what documents can be shown to officers of the applicant to enable it to decide whether to commence a proceeding against the respondents or other persons.  If agreement cannot be reached, application can be made to the Court pursuant to liberty to apply [41].

ISSUE

This is a very useful judgment in setting out both the law but a methodology in approaching applications and dealing with the issue of confidential documents.