In the matter of Metal Storm Limited (in liquidation) (receivers and managers appointed) (No 2)

1. [1]

   HER HONOUR: Objection has been taken to the admissibility of evidence by reason of section 5D(3)(b) of the Civil Liability Act 2002 (NSW) or section 11(3)(b) of the Civil Liability Act 2003 (Qld), being hindsight evidence as to what a corporate plaintiff would have done differently if the defendant had not been negligent.

The substantive claim

1. [2]

   The Australian Special Opportunity Fund LP (ASOF) sues Equity Trustees Wealth Services Limited (Equity Trustees) for loss caused by Equity Trustees’ failure to appoint a controller during the “decision period” within the meaning of sections 9 and 441A of the Corporations Act 2001 (Cth) following the appointment, on 27 July 2012, of voluntary administrators to Metal Storm Limited. In The Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Limited (2015) 323 ALR 570; [2015] NSWCA 22, the Court of Appeal held that Equity Trustees breached its duties under a Security Trust Deed by failing to appoint a controller during this period: at [79] and [132].

2. [3]

   The Court of Appeal further held that the evidence of damage was sufficient to warrant a further hearing on that issue, and remitted the case for that purpose: at [163] and [180]. Although the terms of the remitter were to determine the quantum of the ASOF’s entitlement to equitable compensation for breach of trust and for damages for breach of contract, it presses only the latter. ASOF claims two types of loss: a “loss of opportunity” claim being the value of the lost opportunity to purchase the assets of Metal Storm Ltd and its US subsidiary Metal Storm Inc; and a “wasted costs” claim, being the costs incurred by ASOF in the administration of Metal Storm Ltd which would not have been incurred if a controller had been appointed. The assessment of damages thus calls for a comparison between what happened and what it is said would have happened if a controller had been appointed during the “decision period”. Each scenario must be established by evidence.

The witness

1. [4]

   In support of its claim, ASOF relies on the evidence of five lay witnesses, including Jeffrey Lind Easton. Mr Easton is the only witness who gives evidence on behalf of ASOF, in the sense that the other witnesses were former employees of Metal Storm Limited or Metal Storm Inc, apart from Shmuel Bar-Or, an American entrepreneur who invested in funds managed by The Lind Partners LLC. Mr Easton gave a presentation to Mr Bar-Or in late 2012 about a potential investment in ASOF in respect of Metal Storm Ltd.

2. [5]

   In eight affidavits, Mr Easton gives evidence in respect of ASOF’s investment in Metal Storm Limited, his dealings with the administrators appointed to the company and, relevantly, what he would have done if Equity Trustees had appointed a controller during the decision period. It is this evidence to which Equity Trustees takes objection under the civil liability legislation, either of Queensland or New South Wales.

Which legislation applies?

1. [6]

   The contract in respect of which ASOF sues Equity Trustees for breach is a Security Trust Deed, which provides that it is governed by the law of Queensland. Equity Trustees submitted that the application of civil liability legislation goes to the issue of whether it has a liability to ASOF on its claim in the proceedings and thus the substantive law of the contract applies: Kerr v Australian Executor Trustees (SA) Ltd [2019] NSWSC 1279 at [501]–[511]. Thus, the applicable legislation was said to be the Civil Liability Act 2003 (Qld). ASOF submitted that the New South Wales legislation applied as the admissibility of evidence is “classically” a procedural matter and the lex fori applies. It submits that Kerr is distinguishable as it deals with civil liability provisions dealing with apportionment, not evidence.

2. [7]

   I agree with ASOF that the rules of evidence are procedural, and therefore are governed by the law of the forum, since they are “rules which are directed to governing or regulating the mode or conduct of court proceedings”: John Pfeiffer Pty Ltd v Rogerson (2000) 203 CLR 503 at 543–4; Bain v Whitehaven and Furness Railway Company (1850) 3 HL Cas 1 at 19; Mahadervan v Mahadervan [1964] P 233 at 243. While there are exceptions where rules of evidence are in fact of a substantive character such as the Statute of Frauds, I do not consider that section 5D(3)(b) of the Civil Liability Act 2002 (NSW) or section 11(3)(b) of the Civil Liability Act 2003 (Qld) is a rule which affects the “existence, extent or enforceability of rights”: John Pfeiffer at 544. The learned authors of Nygh’s Conflict of Laws in Australia (9th ed., LexisNexis, 2014) give section 5D(3)(b) of the New South Wales Act and its interstate analogues as an example of a rule of evidence governed by the law of the forum, although no authority is cited, and I have not found a case that so holds. But the learned authors’ view is consistent with the view that I have reached and thus the New South Wales legislation applies.

3. [8]

   As the New South Wales and Queensland legislation is relevantly the same, it does not much matter. Section 13(3)(b) of the Civil Liability Act 2002 (Tas) is also relevantly the same, whilst Western Australia’s legislation is in different terms considered at [20]. There are no similar provisions in other states or territories of Australia. [1]

4. [9]

   The parties did agree that the civil liability legislation — whether NSW or Queensland — applied to ASOF’s claim. In Rahme v Benjamin & Khoury Pty Ltd [2019] NSWCA 211, where Macfarlan JA (with whom Bathurst CJ and McCallum JA agreed), observed [131] that “negligence must be an element of the plaintiff’s claim” in order for the legislation to apply to the claim; see also Cassegrain v Cassegrain [2016] NSWCA 71 at [83]–[84]. Now that ASOF’s claim is put in contract only, it is evident that negligence is an element of their claim. This is because the Court of Appeal found it necessary to find negligence in order to hold that the provisions in the Security Trust Deed excluding liability did not apply: at [122]–[132].

The legislation

1. [10]

   Part 1A of the Civil Liability Act 2002 (NSW) concerns “Negligence” and Division 3 is headed “Causation”, commencing with section 5D which provides:

2. [11]

   Whilst section 5D(3)(a) reflects and preserves the common law, sub-section (b) has been described as “an important departure from the common law”: Villa, Annotated Civil Liability Act 2002 (NSW) at [1A.5D.080] (3rd ed., Lawbook Co, 2018). The Explanatory Note for the Civil Liability Amendment (Personal Responsibility) Act 2002 (NSW), which introduced section 5D into the Act, sheds no light on why the law was changed in this way but, in Neal v Ambulance Service of New South Wales [2008] NSWCA 346, Basten JA (with whom Tobias JA and Handley AJA agreed) had regard to extrinsic material when considering the section, noting that it was introduced in response to the Review of the Law of Negligence, Final Report (2002), which stated at [7.40] in respect of sub-section (b), extracted at [38] of his Honour’s judgment:

3. [12]

   Most judgments on this section concern individual plaintiffs, for example, Neal v Ambulance Service of New South Wales (drunk who refused to be treated by ambulance officers) and Reed v Warburton [2011] NSWCA 98 (owner builder suing plumber who burnt down his house). Lym International Pty Limited v Marcolongo (2011) 15 BPR 29,465; [2011] NSWCA 303 warrants particular mention as ASOF submitted that it applies to the facts to hand. Mrs Marcolongo owned land in Mona Vale on which a building containing shops and residential units was constructed. A property developer excavating an underground car park on adjacent land damaged Mrs Marcolongo’s building. Mrs Marcolongo sued the developer but did not give evidence as she was elderly. Instead, her son, who was a real estate agent living in the building and who acted on his mother’s behalf in connection with the building work, gave evidence. The developer submitted that it would have been open to the son to give evidence of what he would have done had he been told of the developer’s plans: the prohibition in section 5D(3)(b) did not apply to him as “the person … suffering the harm” was Mrs Marcolongo. Campbell JA, with whom Basten JA and Sackar J relevantly agreed, considered at [229]:

4. [13]

   Several cases have considered the section where the plaintiff was a corporate entity, although only in any detail in AVWest Aircraft Pty Limited (as trustee for AVWest Aircraft Trust v Clayton Utz [2018] WASC 167. The first case to consider section 5D(3)(b) for a corporate plaintiff was AI McLean Pty Limited v Hayson [2008] NSWSC 927, where two corporate plaintiffs brought professional negligence proceedings against solicitors for failure to ensure that options were validly exercised. The sole director of both plaintiffs was Mr McLean, who did not give evidence. The defendants asked Bergin J to draw a Jones v Dunkel inference by reason of the plaintiffs’ failure to call Mr McLean. The plaintiffs submitted that any evidence which Mr McLean could have given would have been inadmissible by reason of section 5D(3)(b), whilst the defendants submitted that the Act did not apply as the events in question occurred before the Act commenced. Her Honour concluded that the Act did apply to the proceedings and further, at [245]:

5. [14]

   In Wingecaribee Shire Council v Lehman Brothers Australia Limited (2012) 301 ALR 1; [2012] FCA 1028, a group of local councils sued their investment advisor in respect for negligent advice to invest in complicated financial products which did not weather the global financial crisis. Council officers gave evidence as to what they would have done if they had been told about the attributes of the financial products. Rares J noted at [1124]:

6. [15]

   In UGL Rail Pty Limited v Wilkinson Murray Pty Limited [2014] NSWSC 1959, UGL Rail sued an acoustic engineer for negligent advice in relation of the installation of acoustic panels in a railway tunnel. UGL Rail sought to rely on evidence given by Mr Johnson, an engineer at Alstom responsible for the management of the project, of what he would have done if proper advice had been given. Alstom’s connection with UGL Rail should be explained. The NSW Government had entered into a contract with two joint venturers to build the tunnel. The joint venturers entered into a sub-contract with Alstom for the systems installation component of the work including the design, construction and testing of sound absorbent panels to be installed in the tunnels. Alstom entered into a consultancy agreement with the acoustic engineer, including advice on sound absorbent panels to be installed in the tunnels. UGL Rail bought the transport business of Alstom and the relevant contracts were assigned from Alstom to UGL Rail, including the consultancy agreement with the acoustic engineer. It is perhaps easy to see in these circumstances why Ball J considered that section 5D(3)(b) would not preclude Mr Johnson of Alstom giving evidence for UGL Rail. At [191]:

7. [16]

   In Gunns Limited v State of Tasmania [2015] TASSC 52, Gunns Limited wanted to develop a vineyard called “Tamar Ridge Wines”. Mr Lyons was the operations manager of “Tamar Ridge Wines” and responsible for the development. Gunns applied for a licence to take a quantity of water from a watercourse for a dam to be constructed for the purposes of irrigating the vineyard. Gunns was given permission to build the dam, and did so, but its application for the water licence was extensively delayed and, when approved, was for far less water than was needed. Gunns sued the Tasmanian government for damages and Pearce J noted at [84]:

8. [17]

   In Geju Pty Limited v Central Highlands Regional Council [2016] QSC 279 (appeal allowed on other grounds: Central Highlands Regional Council v Geju Pty Ltd [2018] 3 Qd R 550; [2018] QCA 38), Geju Pty Ltd purchased a block of land believing that it was zoned industrial when it was in fact zoned as rural. The company sued the council claiming to have been misled by a town planning certificate. The “guiding mind” of Geju was Brian Birch (at [1]), although it is not explained how the judge came to regard Mr Birch as such. The Court of Appeal noted that Mr Birch was an experienced developer: at [16] per Fraser JA with whom McMurdo JA and Brown J agreed. In any event, McMeekin J noted at [122]:

9. [18]

   In Lanai Unit Holdings Pty Limited v Mallesons Stephen Jacques (No 2) [2018] 3 Qd R 28; [2017] QSC 251, the plaintiff sought to amend its pleading to add further claims of negligence against a law firm. The plaintiff was the trustee of a unit trust and carried on business as a property developer in Mackay. The defendants opposed the amendments given the delay in seeking to amend the pleading, and the absence of any adequate explanation for it. His Honour Jackson J noted that there was no suggestion of prejudice to the defendants by reason of the delay and, in this context, noted at [106]:

10. [19]

    In AVWest Aircraft Pty Limited v Clayton Utz, the plaintiff company sued solicitors in respect of negligent advice. At the time the advice was given, Mr Roberts was the sole director of the plaintiff company and took all material business and financial decisions on behalf of the company. Mr Burton was responsible for the financial accounting and day to day administration, including contractual administration, of the group of companies of which the plaintiff was a member, and reported to Mr Roberts on all material matters of finance and administration. Mr Roberts and Mr Burton’s affidavits deposed to what they would have done if the solicitors had given non-negligent advice. Objection was taken to this evidence, and in one of those strange turns of life, I was counsel making the objection without success, my opposing counsel is now the President of the Court of Appeal of New South Wales, and his Honour’s substantive judgment is, I understand, on appeal. My appetite to critically review Vaughan J’s judgment is thus at an historic low. As ASOF relied on it, I will tentatively do so.

11. [20]

    Vaughan J considered section 5C(3) of the Civil Liability Act 2002 (WA), which provides: (differences to the NSW legislation marked)

12. [21]

    His Honour considered that, although section 5 of the Interpretation Act 1984 (WA) provided that “person” includes a company, the interpretive rule did not apply as the intent and object of the legislation was inconsistent with it. In reaching this conclusion, Vaughan J agreed that little significance should be given to Parliament’s use of the personal pronouns “he or she” which was no more than a modern drafting convention and, 50 years ago, the convention would have been to use “he” to mean, in most circumstances, he, she or it: at [65]. Rather, Vaughan J reached this conclusion because of the impossibility of there being any “evidence of the injured person” where the injured person was a company as a company cannot give evidence at all except through its officers: at [73]–[74]. In light of this, his Honour concluded at [77]:

13. [22]

    Consequently, the section had no application to a corporation and Mr Roberts and Mr Burton’s hindsight evidence was admitted and treated with the caution ascribed by the common law. To proceed otherwise was considered to have presented difficulties, at [71]:

14. [23]

    For myself, I do not think that the need to have a voir dire to determine whether evidence is admissible or not is particularly problematic, although Equity Trustees were not tempted by my invitation to have one here. Further, whatever inconvenience may be occasioned by a voir dire will likely be less than admitting hindsight evidence, enduring cross examination of the witness who gave it sufficient to support a respectable submission that the witness’ credibility is now such that their evidence should not be accepted, and considering all of this evidence and submissions to determine whether the hindsight evidence should be accepted or not, for example, AVWest Aircraft Pty Limited (as trustee for AVWest Aircraft Trust v Clayton Utz (No 2) [2019] WASC 306.

15. [24]

    ASOF, relying on AVWest, submitted that the legislation was relevantly the same, and that the section did not preclude a person from giving evidence on behalf of a corporation. I do not think it can be said that the Western Australian legislation is relevantly the same: the New South Wales legislation has significant differences in language to the Western Australian legislation and thus AVWest is of limited assistance as to the meaning of the New South Wales legislation, although Vaughan J’s approach to construing the section is of some assistance.

16. [25]

    Finally, in PPK Willoughby Pty Limited v Baird [2019] NSWSC 704, a company sued a law firm in relation to negligent advice concerning the status of land it was proposing to buy. A director of the company, Graeme Webb, deposed to what he would have done if he had known that the land was subject to flood development control restrictions. Objection was taken to his evidence and the plaintiff company submitted that section 5D(3)(b) did not apply as the “person … suffering the harm” was the company and not its director. Harrison J rejected the offending paragraph of Mr Webb’s affidavit at [6]–[7]:

17. [26]

    Thus, justices in New South Wales, Queensland and Tasmania have had little hesitation construing section 5D(3)(b) and its equivalents as able to preclude an officer of the company (sole director (AI McLean), “guiding mind” (Geju), director (PPK), operations manager responsible for project (Gunns) or decision maker (Lanai)) giving hindsight evidence for a company, although Ball J expressed reservations in respect of an employee of a related company, who appeared to be sufficiently removed from the corporate entity to inform his Honour’s concerns.

18. [27]

    Considering the provision myself, section 21 of the Interpretation Act 1987 (NSW) provides:

19. [28]

    Section 3 of the Civil Liability Act 2002 (NSW), “Definitions” draws attention to this in a note:

20. [29]

    Section 5D(3) prescribes how the question of what “the person who suffered harm would have done” in a counterfactual should be resolved. It is to be determined subjectively: what that person who suffered harm would have done, not what a reasonable person would have done. The section identifies the evidence which may be examined to ascertain what that person on the balance of probabilities would have done, and specifically excludes any statement made by that person after suffering the harm unless the statement is against their interest.

21. [30]

    Whilst a corporation is an abstract concept, it is not without voice. A corporation can make a statement through its officers or authorised representatives. Where the admissibility of statements containing hindsight evidence is in question, then the answer must be whether the statement of the natural person is a statement “made by the person” who suffered harm, that is, the corporation. In some cases, this will be obvious: a sole director and shareholder is effectively the same thing as the corporation and a statement by them may readily be considered to be a statement made by the corporation. A statement by a former, disenchanted chair of the board of a large publicly listed corporation may be a different matter entirely. A statement by a shadow director may be different again. It may be the case that, if objection is taken to the admissibility of hindsight evidence sought to be given by a person with a past or present association with a corporate plaintiff then a voir dire will be needed to ascertain whether a statement by that person is a statement “by” the corporation under section 5D(3)(b). If it is, then the evidence is not admissible.

Mr Easton and ASOF

1. [31]

   ASOF, formerly “The August Lind Special Opportunity Fund, LP”, is a Delaware limited partnership, organised as such on 9 December 2010. There is no evidence as to what a limited partnership incorporated in Delaware, USA, is. Is ASOF a corporation, body corporate or politic and thus a person under the Civil Liability Act 2002 (NSW)? It is not clear to me that ASOF is a corporation but it does seem to fit within the broader descriptions of “body corporate or politic”. That ASOF brings proceedings in this Court implies that it has sufficient personality to fit within this description.

2. [32]

   The Lind Partners LLC, an investment fund manager based in New York, manages ASOF. Mr Easton is the managing director of The Lind Partners LLC. Mr Easton founded The Lind Partners LLC in December 2010, which I note is also when ASOF came into existence. There was a Limited Partnership Agreement, which is not in evidence, but which it appears from the financial statements of ASOF governed the provision of services by The Lind Partners LLC to ASOF. I also note that Mr Easton’s middle name, “Lind”, appears in the names of both ASOF (when it came into existence) and The Lind Partners LLC and thus I infer that Mr Easton or his family have some connection with both entities.

3. [33]

   Mr Easton is responsible for making final decisions regarding the investment and use of ASOF’s assets, although he makes those decisions in consultation with senior members of his team as well as external consultants. Mr Easton does not give any details of the membership of “his team” or its senior members.

4. [34]

   According to the financial statements for ASOF for the year ended 31 December 2012, The Lind Partners LLC was responsible for managing ASOF’s investment activities and was also responsible for managing the administrative matters of ASOF. Admiral Administration (US) LLC was the administrator for ASOF and received $3,000 a month for its services. The notes to the financial statements record that, in respect of the value attributed to ASOF’s investments:

5. [35]

   The notes to the financial statements also record that The Lind Partners LLC is authorised to admit limited partners to ASOF, to accept additional capital contributions from existing partners, and to deal with requests from partners to withdraw their capital.

6. [36]

   In respect of related party transactions, the notes to the financial statements record that The Lind Partners LLC does not charge ASOF a management fee in connection with the services that it provides to ASOF. The Lind Partners LLC is, however, entitled to a performance allocation and also to be reimbursed by ASOF for operational expenses (primarily rent and staff compensation) incurred by The Lind Partners LLC in connection with its delivery of services to ASOF in accordance with ASOF’s Limited Partnership Agreement. In respect of “subsequent events”, the financial statements noted that The Lind Partners LLC had evaluated events through to 7 May 2013, being the date that the financial statements were available to be issued.

7. [37]

   By 31 December 2013, Lind Partners Australia LLC was responsible for ASOF’s overall management and, according to the financial statements, had “complete discretion regarding [ASOF’s] assets in accordance with [ASOF’s] investment objectives”. The Lind Partners LLC was responsible for managing the administrative matters of ASOF. Thus, Lind Partners Australia LLC had taken over the role of The Lind Partners LLC in admitting further partners, accepting additional capital contributions, dealing with withdrawal notices and receiving a performance allocation. Mr Easton’s connection with Lind Partners Australia LLC is not known. Neither Lind Partners Australia LLC nor The Lind Partners LLC charged a management fee in connection with the services provided to ASOF and both were reimbursed for operational expenses incurred in connection with delivery of services to ASOF. Administration (US) LLC remained the administrator of ASOF.

8. [38]

   Having regard to this evidence, can Mr Easton’s statements of hindsight evidence be considered to be a statement “made by the person” who suffered harm, that is, ASOF. On the available evidence, can Mr Easton be regarded as ASOF’s sole director, “guiding mind”, director, person responsible for the project in question or decision maker, or is he more distant in the nature of an employee of a related company giving evidence in a sufficient dispassionate capacity that his statements cannot be considered to be a statement made by ASOF? On the evidence available to me, I am not satisfied that a statement made by Mr Easton is a statement made by ASOF. There is insufficient evidence as to the nature of ASOF, its relationship with The Lind Partners LLC and its relationship with Mr Easton for me to be satisfied that this is the case. Accordingly, I admit the hindsight evidence and will give it appropriate weight consistently with Chappel v Hart and Rosenberg v Percival.