Michael v RJ Chalmers & Co;; Edwards v Causbrook & Associates;; Smidmore v RJ Chalmers & Co

1. [1]

   HIS HONOUR: These three matters are related. At the relevant time the plaintiffs, Mr Michael, Mr Smidmore and Mr Edwards were partners in a law firm, Neville and Edwards. The defendants, RJ Chalmers & Co Pty Ltd and Darrel Causbrook trading as Causbrook & Associates, were accountants. The three plaintiffs, together with their respective wives and superannuation funds, commenced proceedings in this Court against Mr Causbrook as a result of losses said to have been sustained by them as a result of entering into investments recommended by him in 2003 and 2004. Mr Michael and Mr Smidmore, again with their wives and superannuation funds, have also sued Chalmers & Co for losses said to have arisen from investments recommended between 1999 and 2002.

2. [2]

   By a notice of motion the plaintiffs seek an order that the defendants give discovery of certain categories of documents. By the time the motion came on for hearing the issue had been resolved between the plaintiffs and Chalmers & Co, and in respect of Mr Causbrook the dispute was confined to three categories.

3. [3]

   The allegations in the three proceedings are in similar terms. Put shortly, it is pleaded that the defendants provided professional services to the plaintiffs, in the course of which they recommend investment in a number of commercial enterprises, described in the pleadings as “investment products.” In doing so, it is alleged, they provided information to the plaintiffs which was inaccurate, failed to provide other information which was relevant, and failed adequately to consider the plaintiffs’ relevant personal circumstances, their financial positions and their risk profiles. As a result the plaintiffs suffered loss and damage (which, for present purposes, need not be specified). The defendants are said to have been in breach of their duty of care, giving rise to causes of action in negligence and breach of contract. In addition, they are alleged to have been engaged in misleading or deceptive conduct within the meaning of s 12DA of the Australian Securities Commission Act 2001 (Cth) and s 42 of the Fair Trading Act 1987 (NSW).

4. [4]

   To elucidate the nature of the proceedings, Mr Romaniuk SC, who appeared with Mr Masur for the plaintiffs, focused on the pleading in an amended statement of claim by Mr Michael against Mr Causbrook in respect of one of the investment products, “Timbercorp Olive Project 2003.” Mr Romaniuk also took me to passages from the report of Dolman Bateman, forensic accountants, dealing with Mr Michael’s case generally and the Olive Project in particular. It is apparent that the pleading of Mr Michael’s case in relation to that project is based upon the report.

5. [5]

   The author of the report, Ms Fiona Bateman, examined material relating to three investment products recommended by Mr Causbrook, including the Olive Project. She calculated losses suffered by Mr Michael in relation to each of them. As to Mr Causbrook’s advice, she summarised her assessment generally at par 15 of her report, as follows:

6. [6]

   In the course of her analysis of the material leading to these conclusions, Ms Bateman noted Mr Michael’s account that Mr Causbrook had presented himself “as having the professional knowledge and experience to be able to assist him in matters relating to wealth creation and taxation”, and that he communicated to Mr Causbrook “that he lacked financial sophistication and knowledge and that he employed Mr Causbrook to act in his best interests in these areas.” She also noted that Mr Causbrook was an authorised representative of Timbercorp Securities Limited (“Timbercorp”), the project manager of the investment. Accordingly, he had a limited range of products to “sell” to his clients, and was not providing “independent” advice to Mr Michael as he was not able to sell other products.

The pleadings

1. [7]

   Mr Michael’s amended statement of claim refers to three plaintiffs: himself, his wife and their superannuation fund. The second defendant, by reference to the firm Causbrook & Associates, is described simply as “Causbrook”, but I shall continue to refer to Mr Causbrook in that capacity. The statement of claim pleads Mr Causbrook’s qualification not only as chartered accountant but also as a financial and investment planner (pars 72-3) and the plaintiffs’ retainer of him in both those capacities (pars 76-7). It pleads his recommendation of investment in the Olive Project through conversations and the provision by Mr Causbrook of a report (pars 78-9).

2. [8]

   Relevant information provided by Mr Causbrook is pleaded in par 80, as follows:

3. [9]

   Paragraph 81 sets out relevant information which was not provided by Mr Causbrook, as follows:

4. [10]

   Paragraphs 82-84 plead that the plaintiffs purchased the investment product as a result of Mr Causbrook’s recommendation, that they paid him for his services, but that the product “has no current value and will have no value in the future.” Paragraph 85 pleads Mr Causbrook’s duty of care “to act reasonably in the provision of financial investment services, and recommendations in respect of those services and the product, including a duty of care not to cause economic loss.” Paragraph 86 pleads breach of that duty, as follows:

5. [11]

   Put shortly, Mr Causbrook’s defence is that he was not a qualified financial investment planner and did not provide services of that nature to the plaintiffs in relation to the Olive Project or, indeed, at all. He provided accounting, taxation and advisory services only.

6. [12]

   He acknowledges having arranged and attended a meeting between Mr Michael, Mr Edwards and Mr Smidmore and a representative from Timbercorp, when that representative provided advice to them about Timbercorp products. He also acknowledges having provided Mr Michael with material relating to the Olive Project, including prospectuses, cash flow summaries and “independent research.” This material contained information about the project, including its risks, projected returns, ongoing financial commitments and tax deductions. The report referred to in par 79 of the amended statement of claim was a “template document authored and provided by Timbercorp” which, among other things, recommended that persons deciding whether or not to invest in the project should obtain advice from a qualified financial advisor. In effect, he denies having recommended investment in the project, doing no more than advising that it was a “tax effective investment.”

7. [13]

   Generally, Mr Causbrook puts in issue par 80 of the amended statement of claim, concerning the information said to have been supplied by him, and par 81, detailing the information said not to have been supplied. As to par 81, this includes subparagraphs (m) and (n), concerning disclosure of fees and of commissions payable to him by Timbercorp in relation to the product, and the lack of independence and capacity to recommend other investment products occasioned by his status as an authorised representative of Timbercorp.

8. [14]

   In response to par 85, he denies the particular duty of care alleged. As to par 86, he denies any breach of a duty of care for negligence as alleged. Other matters are raised in defence, but they are not relevant for present purposes.

The motion

1. [15]

   As I have said, at the hearing of the motion discovery was sought from Mr Causbrook only and the categories of documents sought were narrowed to three: those numbered 5, 6 and 9. Categories 5 and 6 are as follows:

2. [16]

   Category 9 is as follows:

Some relevant law

1. [17]

   UCPR Pt 21 deals with discovery. Provision for an order that a party give discovery of documents by reference to particular classes (or “categories”, the term used in the present motion) is to be found in r 21.2. An order for discovery may be made only in relation to a document which is relevant to a fact in issue in the proceedings: r 21.2(4). Rule 21.1(2) provides:

2. [18]

   It is relevance which is the central issue here. I put to one side documents concerning investments said to have been recommended by Chalmers & Co, to which I shall return. At this stage I shall focus on documents related to the investments said to have been recommended by Mr Causbrook himself. Counsel for Mr Causbrook, Mr Carroll, objected to discovery of documents in category 9, and in category 5 and 6 insofar as they require the production of documents relating to clients of Mr Causbrook other than the plaintiffs, on the basis that they are not relevant to any fact in issue in the proceedings. Mr Romaniuk submitted that the documents could bear upon Mr Causbrook’s knowledge of matters relevant to the existence, content and breach of his duty of care, that knowledge being relevant in law on the issue of negligence (and breach of duty for the purpose of the contract claim). Similarly, he argued that that knowledge was relevant to the claims under the Australian Securities Commission Act and the Fair Trading Act.

3. [19]

   In relation to negligence Mr Romaniuk took me to a considerable body of authority, comprising cases dealing with claims for personal injury and economic loss. In particular, he took me to Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16, 216 CLR 515. This was a case of economic loss which, Mr Romaniuk said, identified the features to be considered on this issue, including the knowledge of the defendant as to the likelihood of damage, notions of assumption of responsibility or known reliance, and the vulnerability of the plaintiff to the risk. To understand his argument on this question, it is sufficient to set out two passages from the judgments in that case.

4. [20]

   The first is in the plurality judgment (Gleeson CJ, Gummow, Hayne and Heydon JJ) at [22]-[24] (530-1):

5. [21]

   The second passage is from the judgment of McHugh J. His Honour considered the issue of the plaintiff’s vulnerability to the risk of injury from the defendant’s conduct at [80] ff, and said at [87]:

6. [22]

   As to the statutory claims, Mr Romaniuk referred to some decisions relating to s 52 of the Trade Practices Act 1974 (Cth). In Campbell v Backoffice Investments Pty Ltd [2009] HCA 25, 238 CLR 304, French CJ at [26] drew a distinction between the approach to conduct as misleading or deceptive “when the public is involved, on the one hand, and where the conduct occurs in dealings between individuals on the other.” In relation to the latter the Chief Justice said:

7. [23]

   In Miller & Associates v BMW Australia [2010] HCA 31, 241 CLR 357, French CJ and Kiefel J said at [14] (368):

8. [24]

   In S & I Publishing Pty Ltd v Australian Surf Lifesaver Pty Ltd (1998) 43 IPR 581, the Full Court of the Federal Court, in a case concerning the alleged taking of the name or trade indicia of a trade rival, stated principles relating to s 52 at 587-588. The Court set out nine propositions, the sixth of which is relevant for present purposes:

9. [25]

   In Campomar Socieadad, Limitada v Nike International Limited [2000] HCA 12, 202 CLR 45, also an intellectual property case involving the application of s 52, the Court observed at [33] (63) that “where there is … a finding of intention to deceive, the court may more readily infer that the intention has been or in all probability will be effective.”

10. [26]

    I turn, then, to the categories of documents sought here. At this stage I shall consider documents relating to investments said to have been recommended by Mr Causbrook. It is convenient to deal first with category 9.

Category 9

1. [27]

   It will be recalled that this category of documents relates to claims by other clients of Mr Causbrook in relation to the subject investments. As I have said, Mr Carroll’s position was that those documents are not relevant. However, he interpreted the category to be directed only to complaints made against Mr Causbrook, and conveyed his instructions that there were no such documents. However, Mr Romaniuk explained that the category also extended to documents relating to Mr Causbrook’s involvement in disputes on behalf of other clients about deficiencies in the investment products at the time that he was advising the plaintiffs about them. In oral argument Mr Carroll acknowledged that this was so, although he was not able to say whether there were documents of that kind. He did not develop submissions in response to Mr Romaniuk’s argument that such documents would be relevant.

2. [28]

   Clearly, they would be for the reasons articulated by Mr Romaniuk and in the light of the authorities to which he referred. Mr Causbrook’s involvement in claims by other clients for refund of money, restitution or compensation arising from their investment in the products could establish that he knew, or ought to have known, that those products were deficient or, at least, that questions arose about their quality. As the authorities establish, this would be relevant to the issues of duty and breach in relation to the Common Law claims, and to misleading or deceptive conduct for the purpose of the statutory claims. It would also be relevant to the issue of the independence of the advice tendered by Mr Causbrook which, as I have said, is one of the breaches of duty particularised in par 86 of the amended statement of claim. It is also raised as a particular of misleading and deceptive conduct for the purpose of the statutory counts: par 93(e)(x).

Categories 5 and 6

1. [29]

   These categories relate to commissions and other benefits, financial and non-financial, received by Mr Causbrook in relation to the investment products, together with documents relating to the disclosure of those commissions and benefits. As I have said, Mr Carroll questioned the relevance of documents of that kind insofar as they relate to other clients of Mr Causbrook.

2. [30]

   It was clarified in correspondence and in argument that it is only documents arising at times when Mr Causbrook was advising the plaintiffs about the investments that are sought under these categories. Here also, Mr Romaniuk submitted that these documents would be relevant to the issue of the independence of Mr Causbrook’s advice. The measure of commissions and other benefits obtained by Mr Causbrook through the sale of these products to other clients could bear on what Mr Romaniuk described as his motivation or intention in recommending them to the plaintiffs.

3. [31]

   Mr Carroll’s argument in response centred upon par 81(m) and (n) of the amended statement of claim, alleging a failure to disclose details of fees and/or commissions payable to Mr Causbrook by Timbercorp and his status as an authorised representative of that company. He approached the matter on the basis that what is sought by these categories is material suggesting that Mr Causbrook had a practice of not disclosing to his clients information of that kind, indicative of his awareness that he was under an obligation to do so. He argued that Mr Causbrook’s state of mind is irrelevant: if he failed to disclose those matters when he was under a duty to do so, he would be in breach of that duty whether he was aware of it or not. Insofar as the material sought might be a foundation for the admission of tendency evidence, pursuant to s 97 of the Evidence Act 1995, he referred me to the decision of Santow J in Mahlo v Westpac Banking Corporation (Unreported, 21 November 1996), in which his Honour refused to order discovery of material which might have fallen into that category and reviewed authorities on that question.

4. [32]

   However, I am persuaded that the material is relevant on the basis for which Mr Romaniuk contended. No issue of tendency evidence is raised, and it is not necessary to examine the decision of Santow J. Material relating to commissions and other benefits he might receive could bear upon Mr Causbrook’s motivation to recommend the investment products to the plaintiffs and call into question the independence of that advice.

5. [33]

   Investments recommended by Chalmers & Co

6. [34]

   As noted, the categories of documents sought extends to investments said to have been recommended by Chalmers & Co. Indeed, the motion as it was originally drafted sought such documents in relation to all 9 categories. As I understand it, Mr Causbrook took over the affairs of the plaintiffs from Chalmers & Co. It is here that the part of Mrs Bateman’s report relating to Mr Causbrook’s advice to Michael to transfer his investments to his superannuation fund, referred to at paragraph 5 above, comes into play.

7. [35]

   Put shortly, as Mr Romaniuk explained it, that advice amounted to a breach of Mr Causbrook’s duty in respects similar to those pleaded in relation to the investments recommended by him. The advice encompassed other investments (in much the same commercial field) which had been earlier recommended by Chalmers & Co. Mr Romaniuk argued that this matter falls within the issues raised by the current pleadings and should be seen as relevant for the purpose of the present motion. Nevertheless, he acknowledged that there may need to be a further amendment of the statement of claim and handed up the amendments proposed.

8. [36]

   However, I think there is force in Mr Carroll’s response that there is no reference to any claim arising from the investments recommended by Mr Chalmers in the amended statement of claim as it stands. Further, while this matter and the proposed amendments were foreshadowed in correspondence, there was no application before me to amend and Mr Carroll told me that he was not in a position to deal with such an application at that time.

9. [37]

   I think Mr Carroll’s point is properly taken. While the foreshadowed claim is related to the current pleadings, it is a new claim which has not been pleaded and in respect of which issue has not been joined. This is a matter which the parties may be able to resolve, but as matters stand it is not appropriate to order discovery of documents sought on this basis.

Order

1. [38]

   Accordingly, in each of the three proceedings I order the second defendant to provide discovery of the documents in categories 5, 6 & 9 relating to the investments referred to in the current amended statement of claim. I shall deal with any directions which may be required and, if necessary, hear the parties on costs.