Carrafa v Asfar (No. 2)

This is the Court’s second judgment in these proceedings. In its May 2020 judgment, the Court granted leave to the plaintiffs to file its Third Further Amended Statement of Claim, joining Mr Simon Fletcher as the fifth defendant, and Mr John Fletcher as the sixth defendant to the proceedings, and vacating the hearing listed to commence that month: Carrafa v Asfar [2020] NSWSC 530 (“the first judgment”). This judgment should be read with the Court’s first judgment. Events, matters and persons are referred to in both in the same way.

This judgment determines the relief sought on a motion dated 11 October 2021 brought by the fourth defendant, Mr Baddams of Swaab Attorneys and which seeks access to documents over which the plaintiffs claim client privilege. Persons, events, and things are referred to in this judgment in the same way that they are in the Court’s first judgment.

Paragraphs [3] to [21] of the first judgment set out the broad factual background to the contest in these proceedings. For convenience that part of the first judgment is repeated here. The plaintiffs are the trustees in bankruptcy of the bankrupt estate of Mr Peter Ronald Evans.

With this background the nature of the present contest may be shortly described.

The present contest, in which Swaab Attorneys contends that the plaintiffs’ claims for client privilege have been lost by doctrines of waiver under Evidence Act 1995 (‘Evidence Act’), s 122(2), arises out of another contest. In that other contest the plaintiffs contend that the claims of Cleveland and Ficaro and Swaab Attorneys for client privilege over documents have been lost due to their alleged misconduct which is said to enliven the operation of Evidence Act, s 125(1).

The background to the present contest is as follows. After the Court’s first judgment, during preparation for another hearing the plaintiffs issued notices to produce to Cleveland, Ficaro and Swaab Attorneys. These notices to produce included claims for documents that were the subject of claims for client privilege, with the plaintiffs contending that the documents should be produced as they were communications in furtherance of the commission of a fraud within Evidence Act, s 125(1).

Cleveland, Ficaro and Swaab Attorneys applied to set aside these notices to produce on the grounds that the client privilege should be maintained. In November 2020 to facilitate the determination of this issue, the Court directed that the parties exchange concise bundles of documents that each party said either supported or either in support of or against the plaintiffs’ contention that Evidence Act, s 125 operated to defeat Cleveland and Ficaro’s claims for client privilege over the documents caught by the notices to produce.

The documents were supplied by March 2021 and submissions in chief and in reply were exchanged by May 2021. On 28 May 2021 the solicitors for the plaintiffs notified the solicitors for Cleveland, Ficaro and Swaab Attorneys that it proposed to amend existing evidence in the proceedings filed on behalf of Mr Micheletto, before the Court determined the Evidence Act s 125 issue. The change was foreshadowed to Mr Micheletto’s affidavit evidence of 11 October 2018, with respect to the date on which Mr Micheletto said he first became aware of the caveat over the Hardys Bay property lodged on behalf of Cleveland and Ficaro and the reference in that caveat to the 2016 deed. On 23 June 2021 the plaintiffs’ solicitors informed the Court of this issue requiring the plaintiffs to swear a further affidavit. On 9 July 2021 the plaintiffs’ solicitors, Polczynski Lawyers, served the foreshadowed affidavit of Mr Micheletto. The contents of this affidavit and the way in which it contrasts with Mr Micheletto’s earlier evidence is analysed later in these reasons.

In response to Mr Micheletto’s new affidavit of 9 July 2021, YPOL, the solicitors for Swaab Attorneys on 23 July 2021 served a notice to produce on the plaintiffs seeking documents, including documents passing between the plaintiffs and their solicitors which would be the subject of claims for client privilege. On 11 August 2021 the plaintiffs produced non-privileged documents in response to the Swaab Attorneys notice to produce.

On 26 August 2021, Polczynski Lawyers provided a list of the documents responsive to the notice to produce issued by YPOL on behalf of Swaab Attorneys, over which the plaintiffs still maintained client privilege. The list comprised a document entitled “Index of Legal Professional Privilege Documents” (“the LPP Index”). Polczynski Lawyers also provided a schedule apparently representing a report taken from Polczynski Lawyers’ computer systems representing work in progress, or WIP, on behalf of the plaintiffs for the period between 5 May 2016 and 29 July 2016 (“WIP Schedule”).

Correspondence continued between the parties, the submissions were exchanged in relation to the present challenge to the plaintiffs’ privilege claim to the documents in the LPP Index and the WIP Schedule, and the issue was listed for oral argument which took place on 21 November 2021.

The challenge to the plaintiffs’ claims of client privilege in the LPP Index and the WIP Schedule require examination, first of the existing pleading is and then of some contested and uncontested events occurring between these parties between April and August 2016, matters to which these reasons now turn.

The plaintiffs plead their case in their Third Further Amended Statement of Claim (“the pleading”). This section of these reasons relevantly summarises the pleading, which is a complex document of 77 pages and 87 paragraphs with numerous sub paragraphs. Its effect can however be compressed into a reasonable compass.

Everything set out in this section of these reasons should be taken as an allegation that is advanced by the plaintiffs in the pleading, although not every statement is expressed as an allegation. All the allegations in the pleading are yet to be tested at a final hearing, although some of them are uncontested.

The pleading commences with an overview of allegations of the important events between 2010 and 2017 relating to the alleged invalidity of the April 2012 will (paragraphs [15] to [39]). And then the focus of the pleading moves to an account of the transactions relating to the important events of June to August 2016 in the case against Cleveland, Ficaro, Swaab Attorneys and the new defendants, the Fletchers (paragraphs [40] to [65]).

Overview of the allegations relating to the April 2012 will. The plaintiffs plead that Ms Rosemary Evans’ will of April 2012 was invalid. The 2012 will, which gave her estate to Mr Asfar and made him her executor, was fraudulently procured by the misconduct of persons including Mr Asfar.

Judgment was entered in favour of Cleveland and Ficaro in the Supreme Court in December 2012 in the sum of $369,067.23. This corrects an error in the first judgment at [9] that a judgment of this amount was entered in December 2013.

Ms Evans died in July 2015 and probate of her will was granted to Mr Asfar and in the administration of the estate he transferred the Hardys Bay property into his name. But the plaintiffs allege that the grant of probate to him is liable to be set aside on the grounds that the 2012 will was executed in suspicious circumstances. Instead of the 2012 will, the plaintiffs seek admission to probate of Ms Evans 2010 will, which gave her estate to her son, Mr Evans, and appointed him as her executor. The plaintiffs further plead that Mr Asfar is not the proper executor of Ms Evans’ estate and that her estate vests in or is to be distributed to the plaintiffs as trustees of Mr Evans bankrupt estate. In the alternative the plaintiffs allege that Mr Asfar holds the estate on bare trust for them as trustees of Mr Evans bankrupt estate.

On 6 June 2016, Cleveland, Ficaro and Mr Asfar entered the June 2016 deed which obliged Mr Asfar to pay $400,000 to Cleveland within 28 days of removal of the caveat lodged by the Official Trustee over the Hardys Bay property. Mr Asfar applied for a home loan to the Commonwealth Bank of Australia (CBA) and secured a loan in the sum of $550,200 secured by first mortgage over the Hardys Bay property in favour of CBA. Of the funds borrowed by Mr Asfar from the CBA, $400,000 was paid to Cleveland and Mr Asfar received $129,270.

Between June 2016 and April 2017 Mr Asfar drew down further amounts on the CBA home loan such that on 13 April 2017 a total of $783,415 was owed by Mr Asfar to the CBA.

On 18 November 2016 the plaintiffs lodged a caveat over the Hardys Bay property claiming that the bankrupt, Mr Evans, is the beneficiary of the estate of Rosemary Evans.

On 3 April 2017 the plaintiffs entered into an agreement with Mr Asfar for the removal of the plaintiffs’ caveat on the basis that the Hardys Bay property would be sold, which it was later in April 2017. On settlement the amount outstanding to the CBA of $783,415.60 was paid and after other expenses were met the amount of $377,302.50 was paid into a controlled monies account and the plaintiffs’ caveat was withdrawn.

The plaintiffs claim that Mr Asfar is liable on these grounds to transfer to them the funds in the controlled monies account. But even if the 2012 will is found to be the valid will of Ms Evans, the plaintiffs claim that upon its true construction it operates for the benefit of the bankrupt, Mr Evans and the plaintiffs are entitled on this alternative basis to the contents of the controlled monies account.

The Case against Cleveland, Ficaro and Swaab Attorneys. The plaintiffs plead that Cleveland was incorporated in the British Virgin Islands and Ficaro in Australia. Cleveland and Ficaro retained Swaab Attorneys as their attorneys from April 2016 in proceedings they brought in this Court seeking a freezing order over the Hardys Bay property, ultimately resulting in a judgment of Kunc J on 15 April 2016, Cleveland Investments Global Ltd v Ficaro Pty Ltd [2016] NSWSC 473 (“the 2016 proceedings”). Mr Baddams was the partner at Swaab Attorneys with carriage of the 2016 proceedings on behalf of Cleveland and Ficaro.

The plaintiffs plead that at no stage in the period 15 April 2016 to 5 June 2016 did Cleveland or Ficaro have any legal or equitable rights either against Mr Asfar or the Hardys Bay property.

The plaintiffs plead that Cleveland’s and Ficaro’s cases in the 2016 proceedings in support of their claim to a freezing order over the bankrupt’s property, including the Hardys Bay property, were put in the following way. They acknowledged they did not have an immediate right to possession of the Hardys Bay property, as they were only unsecured creditors of the bankrupt, Mr Evans. They accepted that their claim against the bankrupt could only proceed through the initial interposition of the Official Trustee, who could then call for the bankrupt’s assets. Cleveland and Ficaro claimed that they had requested the Official Trustee to lodge a caveat over the Hardys Bay property but had been unable to obtain the Official Trustee’s consent to that course. Cleveland and Ficaro put to the Court that they were attempting to have a private trustee appointed in place of the Official Trustee and the private trustee would then be able to consider the lodgement of a caveat over the Hardys Bay property. Cleveland and Ficaro explained that the rationale for their seeking the freezing order was that the assets held by Mr Asfar should properly be in the hands of the bankrupt’s trustee in bankruptcy and in the meantime those assets needed to be frozen for the benefit of all creditors in the bankruptcy. Put shortly, the Cleveland and Ficaro case in the 2016 proceedings was said to be that the Official Trustee was the proper plaintiff but they needed to act in the meantime to preserve the bankrupt’s assets because the Official Trustee was being slow to act.

The plaintiffs plead that on 14 April 2016, Cleveland and Ficaro obtained the consent of the plaintiffs to act as the trustees in bankruptcy of the bankrupt’s estate. This communication on behalf of Cleveland and Ficaro, like most of those that follow, was made through Mr Baddams at Swaab Attorneys. This summary does not always record that fact but may be assumed to be the means of most communications of this type and the legal steps taken, on behalf of Cleveland and Ficaro.

In mid-April 2016, the plaintiffs plead that Cleveland and Ficaro each provided a written undertaking to the Official Trustee to indemnify the Official Trustee in respect of any claims arising from the improper lodgement of a caveat on the title to the Hardys Bay property.

On 15 April 2016, the plaintiffs plead that Cleveland and Ficaro successfully made an ex parte application for a freezing order against Mr Asfar. Cleveland and Ficaro gave the usual undertakings to damages and quantified the liabilities then owed by the bankrupt to them of $516,598.16. Cleveland and Ficaro explained their case to the Court for a freezing order in the 2016 proceedings, as outlined earlier in these reasons. But Cleveland and Ficaro said that their claim to a freezing order was unlimited in amount, rather than being limited to the sum of $516,598.16, because due to the bankruptcy of the bankrupt his assets would need to be distributed among all his creditors after meeting the remuneration of the plaintiffs. And the plaintiffs plead that the freezing order that was obtained that day was being sought for the benefit of all creditors in Mr Evans bankruptcy.

Between 27 April 2016 and 6 June 2016, the plaintiffs plead that negotiations took place between Mr Asfar on the one hand and Cleveland and Ficaro on the other hand to resolve the subject matter of the freezing order application.

The plaintiffs plead that on 2 May 2016, lawyers on behalf of Mr Asfar proposed by telephone to Mr Baddams that Mr Asfar would use the Hardys Bay property as security to obtain the funds necessary to pay any settlement sum to Cleveland. In the proper chronology, elsewhere in the pleading it appears that the plaintiffs were appointed trustees of the bankrupt’s estate in place of the Official Trustee on or about 6 May 2016.

The plaintiffs plead that on 18 May 2016, Mr Baddams informed the plaintiffs in writing that he did not have instructions from Cleveland and Ficaro to engage with the plaintiffs at that stage and thereafter would not further assist or support the plaintiffs.

On 25 May 2016 consent orders were made in the 2016 proceedings, with Swaab Attorneys mentioning the matter in Court. The plaintiffs plead that by those consent orders the freezing orders ceased to have effect on that date.

On 6 June 2016 the parties entered the 2016 deed, which the plaintiffs’ plead was drafted by Swaab Attorneys, with amendments made by the lawyers acting on behalf of Mr Asfar during negotiations between 19 May 2016 and 6 June 2016.

The plaintiffs plead that the 2016 deed was executed and contained the following terms, in summary:

The plaintiffs plead that on 7 June 2016 Cleveland and Ficaro withdrew the April 2016 undertaking of the indemnity, and the same day the solicitors for Mr Asfar informed Mr Baddams that a lapsing notice was being lodged that day in respect of the caveat of the Official Trustee. The plaintiffs further plead that the caveat of the Official Trustee lapsed on 13 July 2016 and on 15 July 2016 Cleveland and Ficaro lodged their caveat on the title to the Hardys Bay property.

Finally on 21 July 2016 the plaintiffs plead that Swaab Attorneys settled the transactions pursuant to the 2016 deed, when the CBA advanced $529,270 to Mr Asfar, which was disbursed by the payment of $400,000 to Cleveland under the 2016 deed and the payment of $129,270 to Mr Asfar. Cleveland and Ficaro provided Mr Asfar with a withdrawal of caveat in registrable form for their caveat over the Hardys Bay property.

And the plaintiffs plead that in conformity with the confidentiality provisions of the 2016 deed Cleveland, Mr Baddams and Swaab Attorneys did not inform the plaintiffs of the 2016 deed, the settlement, and the payment of the settlement sum by Mr Asfar to Cleveland.

The pleading then identifies the various claims for relief against all the defendants arising out of these pleaded facts. For present purposes in the interlocutory contest between the plaintiffs and Swaab Attorneys the various duties pleaded against Swaab Attorneys are the focus. More detail of these allegations in the pleading is required but by reference to the primary case made in the pleading against Cleveland.

In substance the plaintiffs’ claims for relief contend that Cleveland and Ficaro owed fiduciary duties to the plaintiffs in the 2016 proceedings and that by a dishonest and fraudulent design they breached those fiduciary duties to deprive the plaintiffs of the value of the Hardys Bay property. This appears to be a plea under the second limb of Barnes v Addy (1874) LR 9 Ch App 244.

The plaintiffs plead that Cleveland assumed a fiduciary obligation to the Official Trustee, and then to the plaintiffs after 6 May 2016 when they were appointed in place of the Official Trustee, to further the interests of the estate of the bankrupt as a whole, and not to pursue its own self-interest to the detriment of the estate of the bankrupt as a whole, and not to profit to the detriment of the estate of the bankrupt. The plaintiffs plead that Cleveland obtained the benefit of the freezing order on the basis that it was necessary to protect the interests of the estate of the bankrupt as a whole.

The plaintiffs plead that Cleveland breached its fiduciary duty by entering into an agreement upon the terms contained in the 2016 deed and then in performing that agreement by taking the following steps: not informing the plaintiffs of the 2016 deed or of any other features of Cleveland’s performance of the terms of the 2016 deed, whilst taking the settlement sum for itself, when Cleveland was only entitled to do so in conformity with its fiduciary duty, on behalf of the plaintiffs for the creditors of the bankrupt.

The plaintiffs plead that Cleveland’s breach of its fiduciary duty was part of a dishonest and fraudulent design. This plea is put several ways, but the principal theme was that the breach was occasioned by Cleveland keeping away from the plaintiffs every aspect of the 2016 deed and its performance by the parties to it whilst profiting from the 2016 deed at the expense of the general creditors of the bankrupt.

In the alternative, the plaintiffs plead that Mr Asfar held the Hardys Bay property on bare trust for the plaintiffs is elaborated by a pleaded contention that Cleveland received the settlement sum with knowledge that Mr Asfar had breached his duty as trustee of the Hardys Bay property for the estate of the bankrupt and therefore that Cleveland held the settlement sum on constructive trust for the plaintiffs. Although a little unclear in places, this first alternative plea (in paragraph [68] of the pleading) appears to be a plea under the first limb of Barnes v Addy, that does not require a finding of dishonesty but merely of knowledge of breach of trust or fiduciary duty.

The plaintiffs’ other alternative claim against Cleveland (in paragraphs [70A] to [70I] of the pleading) appears to be one to avoid the contract represented by the 2016 deed on public policy grounds on the basis that it circumvented the provisions of the Bankruptcy Act 1966 (Cth), in securing for Cleveland a priority over other creditors in receiving the settlement sum as opposed to proving for its debts as an unsecured creditor in the bankruptcy of the bankrupt.

It is unclear whether this plea is based on a statutory cause of action under the Bankruptcy Act or an equity at general law. The matters pleaded in this part of the pleading appear to draw upon a stream of equitable principles that is not often deployed but which is well-established. In substance the plaintiffs appear to plead that the 2016 deed and the conduct surrounding it were, although made bona fide between the parties thereto, were nevertheless a fraud upon third persons, and here upon the plaintiffs. When the relevant fraudulent intent is established, Equity’s jurisdiction to relieve against such bargains was described by Lord Hardwicke LC in Earl of Chesterfield v Janssen (1751) 2 Ves Sen 125 at 156; 28 ER 82 at 100 as proceeding from Equity’s view of “public utility” and he described that this kind of fraud “may be collected or inferred in the consideration of this Court from the nature and circumstances of the transaction, as being an imposition and deceit on the other persons not parties to the fraudulent agreement”: see also JD Heydon, M Leeming and PG Turner, Meagher Gummow and Lehane’s Equity: Doctrines and Remedies (2015, 5th ed, LexisNexis Butterworths) at [12–050]; J Story, Commentaries on Equity Jurisprudence (1920, Sweet and Maxwell) at 256 and W Ashburner, Ashburner’s Principles of Equity, ed Denis Browne (Butterworths London, 2nd ed, 1933) at 295 – 296. Somewhat related principles are the subject of Conveyancing Act 1919, s 37A.The Court mentions this matter at this point, because if this is an allegation of equities arising from a contract made in fraud of third parties, then the state of mind of the contracting parties that would justify the intervention of Equity needs to be made clearer in this part of the pleading.

The pleading then pleads the case against Ficaro (paragraphs [71] to [73I]) which is like the plea under the second limb of Barnes v Addy against Cleveland and its detail is not material for present purposes. It then turns to the case against Mr Baddams and Swaab Attorneys (paragraphs [74] to [77A]).

The plaintiffs plead a second limb Barnes v Addy case against Swaab Attorneys, contending in substance that Swaab Attorneys was aware of each element of the dishonest scheme in which Cleveland is alleged to have engaged, which scheme is outlined in greater detail above. The pleading alleges that Swaab Attorneys acquired knowledge of the dishonest scheme by taking instructions from Cleveland, making the various Court appearances to facilitate the scheme, drafting the 2016 deed and facilitating its execution, taking the legal steps to enable performance of the 2016 deed pleaded earlier, and keeping the 2016 deed confidential, including concealing it from the plaintiffs.

The pleading alleges that Swaab Attorneys knew of these facts and that the facts would indicate to an honest and reasonable person (paragraph [75]) that the funds being used by Mr Asfar to pay the settlement sum were being borrowed pursuant to a loan secured by mortgage over the Hardys Bay property, and that with that knowledge Swaab Attorneys knowingly assisted Cleveland to breach its fiduciary duty (and Ficaro to do the same) knowing those breaches were part of the dishonest and fraudulent design already pleaded against Cleveland and Ficaro.

The pleading claims relief against Swaab Attorneys for an account in respect of the monies deducted from the settlement sum before it was transferred to Cleveland and equitable compensation in the amount of the settlement sum and for any other losses arising from the entry into the 2016 deed and the receipt by Cleveland of the settlement sum (paragraph [77]).

The plaintiffs claim not only against Mr Baddams but Swaab Attorneys on the basis that Mr Baddams’ alleged wrongful acts and omissions were in the ordinary course of the business of Swaab Attorneys and with the authority of his co-partners under Partnership Act 1892, s 10. No allegation of dishonesty is made against members of the Swaab Attorneys partnership other than Mr Baddams.

As with Cleveland, all the allegations against Mr Baddams and Swaab Attorneys – particularly the allegations of dishonest conduct – are strongly denied and will be the subject of adjudication at the final hearing of these proceedings.

The current contest also requires some examination of events involving these parties that occurred between April and August 2016.

Many of the relevant events between April and July 2016 are uncontested. The account below is based on material from affidavits filed by both parties and on the LPP Index and the WIP Schedule, which allow some inferences to be drawn about the time at which the communications took place between the plaintiffs and Polczynski Lawyers that are the subject of the present contest.

A sequestration order under Bankruptcy Act 1966 (Cth) against the estate of Peter Ronald Evans was made on 11 March 2015. The Official Trustee in Bankruptcy was appointed as the trustee in bankruptcy in respect of Mr Evans’ estate.

On 14 April 2016, Mr Baddams acting on behalf of Cleveland and Ficaro approached Mr Micheletto to ascertain whether the plaintiffs would consent to being appointed as trustees of the bankrupt’s estate in place of the Official Trustee. The plaintiffs consented to the appointment.

The following day, the Official Trustee advised Swaab Attorneys that it did not intend to lodge a caveat over the Hardys Bay property. That same day, Cleveland and Ficaro approached the Equity duty judge, Kunc J and successfully obtained a freezing order against Mr Asfar. The legal representatives of Cleveland and Ficaro made the statements to the Court on that occasion that the plaintiffs have pleaded: see earlier in these reasons.

On 28 April 2016 Mr Baddams sent the Official Trustee written undertakings by Cleveland and Ficaro to indemnify the Official Trustee in relation to the somewhat strangely described activity of “the improper lodgement of a caveat” on the Hardys Bay property. And shortly afterwards the official trustee lodged a caveat on the title to the Hardys Bay property (“the OT caveat”).

On 6 May 2016, the plaintiffs were officially appointed in substitution for the Official Trustee and on 10 May Mr Micheletto confirmed their appointments to Mr Baddams.

On 18 May 2016, an important exchange took place between Mr Baddams and Mr Micheletto. Mr Baddams sent an email to Mr Micheletto stating as follows

Prior to this email Mr Baddams appears to have communicated his expectation that he would have instructions to engage with the plaintiffs at about that time. Mr Micheletto and Mr Baddams spoke that same afternoon. Their evidence conflicts to a degree. Mr Baddams claims he told Mr Micheletto that he did not have instructions to fund an application by the plaintiffs to extend the OT caveat and that the plaintiffs might need to seek alternative legal representation. The plaintiffs dispute that Mr Baddams suggested getting separate legal representation to Mr Micheletto but the plaintiffs did then retain their own solicitors.

The following day, 19 May 2016, the plaintiffs’ billing records record that Mr Micheletto contacted Mr Stephen Polczynski and Mr David Edney of Polczynski Lawyers seeking legal advice. This is the first cluster of solicitor client communications that are the subject of contest. The same day an employee of the plaintiffs undertook what the plaintiffs’ billing records describe as “property searches”. The LPP Index shows that the same day at 11:10 am, Mr Micheletto sent an email to Mr Polczynski and Mr Edney in which he “[provided] documents for the purposes of advice including attachments”. The same day Mr Micheletto also attended two conferences with Mr Polczynski and Mr Edney: one related to formulating a “preliminary strategy” and the other related to legal advice the plaintiffs were seeking from Polczynski Lawyers.

On 20 May 2016 at 8:51 am, Mr Polczynski emailed Mr Micheletto. The email is described in the LPP Index as “providing advice after review of documents”. At 9:11 am Mr Polczynski sent another email attaching an “addendum” to his earlier advice. And at 9:46 am, the LPP Index shows that Mr Micheletto responded to Mr Polczynski’s email “to arrange [a] telephone call to discuss [the] advice”.

On 25 May 2016 the freezing orders made by Kunc J ceased to have effect.

On 6 June 2016, Mr Asfar, and Cleveland and Ficaro all executed the 2016 deed. The essential terms of the 2016 deed are accurately described in the plaintiffs’ pleading as set out earlier in these reasons. The parties to the 2016 deed began taking steps to perform it soon after 6 June 2016.

On 7 June 2016, Mr Baddams advised the Official Trustee that the indemnity undertakings Cleveland and Ficaro had given the plaintiffs on 28 April 2016 were withdrawn.

On 14 June 2016, Cleveland and Ficaro lodged a caveat on the title for the Hardys Bay property (“the C&F caveat”). The C&F caveat claimed an estate or interest in the land described as a “charge over all the registered proprietor’s right, title and interest in the [Hardys Bay Property]” by virtue of a Deed of Settlement and Charge dated 6 June 2016. The parties to this deed were described as Mr Asfar, Cleveland and Ficaro. The relevant facts giving rise to the claimed interest were stated to be as follows:

On 16 June 2016, Mr Asfar’s solicitors served on the Official Trustee a lapsing notice in relation to the OT caveat, in accordance with Real Property Act, s 74I.

On 23 June 2016, Mr Baddams forwarded to Mr Micheletto his email of 7 June 2016 advising the Official Trustee that the undertakings provided by Cleveland and Ficaro had been withdrawn.

The OT caveat lapsed on 13 July 2016. Soon afterwards, on 21 July 2016 the transactions agreed upon in the 2016 deed took place. The CBA advanced $529,270 to Mr Asfar from which $400,000 was sourced to pay Cleveland and $129,270 to Mr Asfar.

The next cluster of communications between Polczynski Lawyers and Mr Micheletto in contest on the present motion occurred in mid-July 2016. On 15 July 2016 at 3:22 pm, someone at Polczynski Lawyers obtained a title search in relation to the Hardys Bay Property. The dealings recorded on the title search included the C&F caveat and an unregistered dealing with the dealing number prefix “LX” indicating that a lapsing notice had been served in respect of the C&F caveat. A minute later someone at Polczynski Lawyers obtained a copy of the registered form of the C&F caveat, which refers to the 2016 deed.

On 18 July 2016 at 10:36 am, Mr Edney emailed Mr Micheletto and others “providing [a] letter of advice including attachments”. The plaintiffs admit that this email was the communication by which Mr Micheletto first became aware of the C&F caveat and the related lapsing notice.

On 9 August 2016, the plaintiffs commenced proceedings in the Federal Circuit Court for examinations under Bankruptcy Act, s 81.

The next cluster of communications between Polczynski Lawyers and Mr Micheletto in contest on the present motion occurred in mid-August 2016. On 12 August 2016 at approximately 3:56 pm, someone at Polczynski Lawyers obtained another title search of the Hardys Bay property. The search result disclosed the existence of an Application for Preparation of Lapsing Notice, related to the Lapsing Notice on the title search of 15 July 2016. A short time later at 4:04 pm, someone at Polczynski Robinson obtained a copy of this application.

The immediate occasion for Swaab Attorneys’ present motion is Mr Micheletto’s affidavit of 9 July 2021, amending the evidence he gave in his affidavit of 11 October 2018.

In his affidavit of 11 October 2018, after describing Mr Baddams email to him of 18 May 2016, Mr Micheletto said (at [9] and [10]):

Mr Micheletto’s 9 July 2021 affidavit amended his earlier affidavit about his discovery of the existence of the 2016 deed. He explained that he first saw a copy of the 2016 deed or became aware of its terms when the deed was produced during the examination proceedings on 27 October 2016.

But he says that on 18 July 2016, he “became aware” that the C&F caveat had been lodged on the title for the Hardys Bay Property on 6 June 2016, that the caveat made reference to the 2016 deed, and that a title search for the Hardys Bay Property disclosed the existence of the lapsing notice. As the Swaab Attorneys submissions point out, Mr Micheletto’s 9 July 2021 affidavit did not explain how these matters came to his attention on 18 July 2016. Polczynski Lawyers say that the C&F caveat came to Mr Micheletto’s attention “by email from David Edney to Mr Micheletto (and others) dated 18 July 2016”. This is consistent with the plaintiffs’ available records: Mr Edney’s email of 18 July 2016 provided a “letter of advice including attachments”.

Swaab Attorneys submit and their submission can be accepted: that on the available evidence Mr Micheletto probably became aware of the C&F caveat, and of the existence of the 2016 deed as part of legal advice Polczynski Lawyers gave on 18 July 2016.

Mr Micheletto’s 9 July 2021 affidavit is some basis to infer that he did not understand the full picture from 18 July 2016. Mr Micheletto says in the new affidavit that he spoke on 25 July 2016 to Ms Crescen Alinea, a representative of the Official Trustee, who informed him that the OT caveat had not been withdrawn and that she was unaware that any lapsing notice had been served on the Official Trustee in respect of the OT caveat.

This information appears to have been incorrect. According to Mr Micheletto, he “only discovered on 12 August 2016” that the dealing comprising the lapsing notice was in fact a lapsing notice in respect of the OT caveat, which had lapsed on 19 July 2016, the day after he had access to the P&F caveat on 18 July 2016. The basis of his discovery on 12 August 2016 of the lapsing of the OT caveat is uncertain.

Some analysis is helpful. Although the 9 July 2021 affidavit was the occasion for the filing of the Swaab Attorneys motion, the affidavit did not change a great deal. The 9 July 2021 affidavit brings forward from November 2016 to 18 July 2016 Mr Micheletto’s knowledge of the C&F caveat and of a settlement agreement made between Cleveland and Ficaro and Mr Afsar on 6 June 2016. But the available evidence so far does not suggest that he knew the terms of the 2016 deed before November 2016. Moreover, on the apparently undisputed facts Mr Asfar had already disbursed the proceeds of the mortgage over the Hardys Bay property before Mr Micheletto had any knowledge of the C&F caveat or the 2016 deed. It is therefore difficult to see, how the new evidence challenges the plaintiffs’ case that substantial loss had occurred to the general creditors of the bankrupt before the plaintiffs became aware of the June 2016 deed and the caveat. An argument may be open that if Mr Asfar made further drawings on the CBA mortgage before November 2016, he did so when the alleged scheme was only partially rather than fully concealed from the plaintiffs. This is the only part of any potentially claimed loss that would seem to be affected by the new evidence.

The applicable legal principles are well-established. The challenge in most cases is how to apply those principles and this case is no different.

Until the enactment of Evidence Act, s 131A the question of whether the common law or the Evidence Act, s122 applied in pre-trial contests in respect of issues of loss of privilege due to waiver was a matter of some debate. But it is now clear from Evidence Act, s 131A that s 122 applies.

The principles relating to waiver of privilege at common law apply with equal force in relation to the statutory question posed by Evidence Act, s 122(2): Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Ltd (2013) 250 CLR 303 at 316; [2013] HCA 46 [31] – [32] (“Expense Reduction”). The statutory test of Evidence Act s 122(2) is whether the client or party concerned “has acted in a way that is inconsistent with the client or party objecting to” the production of a document, in the present circumstances.

Section 122(2) gives substantial statutory effect to the principles of waiver of privilege at common law, which the High Court stated in Mann v Carnell (1999) 201 CLR 1 at 13; [1999] HCA 66 at [28] – [29], as follows:

There are many cases discussing the application of these principles. It is only necessary to mention a few of them. Most recently in GR Capital Group Pty Ltd v Xinfeng Australia International Investment Pty Ltd [2020] NSWCA 266 (“GR Capital”), the New South Wales Court of Appeal (Macfarlan JA, McCallum JA and Simpson AJA agreeing) surveyed the authorities on waiver of privilege and (at [52]) drew the following principles from them:

The Swaab Attorneys submissions pressed upon the Court the significance of the following passage from Wayne Lawrence Pty Ltd v Hunt [1999] NSWSC 1044 (“Wayne Lawrence”), cited with approval by Macfarlan JA in GR Capital, in which Hodgson CJ in Eq (as his honour then was) said at [12]:

Macfarlan JA considered in GR Capital (at [54]) that authorities pre-dating Mann v Carnell must be “approached with caution”, because it is no longer correct to conclude that mere relevance to a fact put in issue by the privilege holder is sufficient to give rise to a waiver. But Swaab Attorneys submitted that the matters identified by Hodgson CJ in Eq in Wayne Lawrence in the passage above were not expressed to be determinative of the question of waiver. Hodgson CJ in Eq said that they were factors “relevant” to whether privilege is taken to have been waived. Swaab Attorneys submitted the Court may take Hodgson CJ in Eq’s reasoning into account on Swaab’s motion in its determination of relevant inconsistency. The Court accepts that submission provided the inconsistency test in Mann v Carnell is kept firmly in mind.

Hodgson JA returned to the same subject in Council of the New South Wales Bar Association v Archer (2008) 72 NSWLR 236; [2008] NSWCA 164 (Hodgson JA, Campbell JA and Handley AJA agreeing) (“Archer”) where after discussing his earlier judgment in Standard Chartered Bank of Australia Limited v Antico (1993) 36 NSWLR 87 at 93-95 and its consistency with Mann v Carnell he continued (at [48]), explaining the application of the relevant test:

In the same case, Handley AJA said of Hodgson JA’s statement at [48]:

Mention should be made of other widely accepted statements of principle in relation to the application of the inconsistency test. Neither relevance to the other parties’ claim nor reference by a party to a privileged document, without more, give rise to waiver; ordinarily there will need to be reliance on the contents of such a document: Hastie Group (in liq) v Moore [2016] NSWCA 305 at [57] (Beazley P and Macfarlan JA). And waiver may come about where a party makes an assertion as part of his case that puts the contents of the privileged documents in issue or necessarily places them open to scrutiny with the consequence that an inconsistency arises between the making of the assertion and the maintenance of the privilege: see DSE Holdings Pty Ltd v Intertan Inc (2003) 127 FCR 499; [2003] FCA 384 at [58] (“DSE Holdings”) and Commissioner of Taxation v Rio Tinto Ltd (2006) 151 FCR 341; 229 ALR 304; [2006] FCAFC at [47].

In support of its contention that privilege has been waived on the material in question Swaab Attorneys advance number of submissions which may conveniently be reproduced in the words of their written submissions.

These submissions were elaborated upon in submissions in reply and orally, but the above passages capture the substance of Swaab Attorneys’ case on their 11 October 2021 motion.

In response the plaintiffs argued in their written submissions that they have not waived privilege in the documents concerned with Mr Micheletto’s knowledge of the caveat for the following reasons, summarised in their written submissions as follows:

The plaintiffs develop contentions (b) and (c) above by referring to the pleading and the provision of the 2016 deed drafted by Swaab Attorneys that Cleveland and Ficaro were both precluded from informing the plaintiffs or the Official Trustee of the 2016 deed or the agreement contained within it. The plaintiffs’ submissions then continue:

And after discussing the authorities on the test of waiver the plaintiffs submitted:

Once again, these submissions were elaborated upon orally and were the subject of written submissions in reply, but the essential issues were joined through the above competing contentions on each side.

The present issue can be decided upon narrower grounds than the wide-ranging submissions advanced on both sides of this motion.

Swaab Attorneys argued (“thirdly” and “fourthly” in the passages of their submissions cited above) that fairness requires Swaab Attorneys to have access to all the evidence relevant to the Court deciding the plaintiffs’ application under Evidence Act, s 125, because the fraud that the defendants are said in the pleadings to have enabled is the same fraud that needs to be scrutinised for the purposes of Evidence Act, s 125. It was because of this type of argument that Swaab Attorneys sought the determination of this issue before the resolution of the Evidence Act, s 125 issues. But these contentions raise general fairness and do not go to the central question of inconsistency that the Court must address. As will be seen Swaab Attorneys’ second argument (“secondly” in the passages of their submissions cited above), based on the plaintiffs’ contention that they were “kept in the dark”, is closer to the issue for determination here.

Nor do some of the plaintiffs’ submissions address the central question of whether “the party concerned has acted in a way that is inconsistent with the…party objecting to” production of the documents. The plaintiffs argue that the matters related to Mr Micheletto’s knowledge, which are captured by the relevant title search documents, are already known to Swaab Attorneys. This contention rather begs the inconsistency question by saying that Swaab Attorneys know everything that they need to know about Mr Micheletto’s knowledge, because of what the plaintiffs have chosen to disclose to them.

The plaintiffs contend that Mr Micheletto’s affidavit does not put in issue his knowledge but merely clarifies an earlier statement and his knowledge “is not an issue in the proceedings on the pleaded case”, and his affidavit does not put that knowledge in issue.

This is an oversimplification. The plaintiffs say that they did not know of the terms of the 2016 deed until November 2016, and that after the clarification of the 9 July 2021 affidavit, they did not know of the existence of the 2016 deed before 18 July 2016 and even then, they did not know its terms. In substance Mr Micheletto contends that he only knew the limited information about the 2016 deed (that is the information he admits he knew) at these times and that he did not know any more than what he has admitted either at those times or any earlier.

The plaintiffs are really saying that the defendants should accept those statements and are not entitled to test them on the current state of the pleadings, because Mr Micheletto only referred to his knowledge but did not put it in issue. But Mr Micheletto is making and relying upon a negative statement about the limits on his knowledge that is relevant to an issue in the proceedings: namely, whether the plaintiffs suffered any loss warranting relief by way of equitable compensation, due to the defendants’ alleged attempts to conceal from them information about the 2016 deed, because the plaintiffs did not otherwise have the information.

The defendants have not admitted that any loss was suffered from anything they may have done, so the extent of the plaintiffs’ knowledge of the allegedly concealed information is a matter in issue on the question of final relief. The plaintiffs are claiming in their pleading that they have suffered loss warranting relief, essentially, because they were unaware of the concealed terms of the 2016 deed. It would be to act “in a way that is inconsistent with” the plaintiffs claim of privilege for them to rely upon their claimed unawareness of the concealed terms of the 2016 deed, a matter essential to their recovery of equitable compensation, against all defendants.

This can be put in the language of the cases. The plaintiffs’ assertion that they were unaware of the terms of the 2016 deed before November 2016 and of the existence of the deed before 18 July 2016 are inconsistent with the maintenance of the privilege, to adapt the formula in DSE Holdings. And to use the language of Archer at [48], the plaintiffs are making implied assertions about the content of the privileged communications, namely that they only communicate what the plaintiffs assert about the 2016 deed and they do not evidence earlier knowledge, something the plaintiffs cannot do while at the same time seeking to maintain the privilege.

The plaintiffs also contend that all Mr Micheletto really has done is to give evidence about the communication of information to him and such evidence does not of itself enliven doctrines of waiver of privilege. It can be accepted that merely giving evidence about a subject does not enliven doctrines of waiver. But there is more than that here to attract doctrines of waiver of privilege: namely, whether the plaintiffs have suffered any loss or damage from the defendants’ allegedly dishonest conduct, which, if established would warrant relief by way of equitable compensation.

The plaintiffs argue that their knowledge is not in issue because the defendants have admitted on the pleadings that they did not inform the plaintiffs of the settlement embodied in the 2016 deed and that they did not have an obligation to do so, in part because the 2016 deed required confidentiality. And the plaintiffs emphasise that the fraud alleged is concerned with the defendants’ actions, not the plaintiffs’ knowledge.

The defendants’ alleged intent is indeed a central issue in the proceedings. But merely to point to that issue and to the defendants’ failure to contest the plaintiffs’ contention that they did not inform the plaintiffs about the 2016 deed does not foreclose further debate on other issues on the pleadings to which the communications relate. What the plaintiffs knew of the 2016 deed and the settlement that it represented and how early they knew it, are also contested issues on whether the defendants’ alleged attempts at concealment were effective.

Mr Micheletto’s 9 July 2021 affidavit has perhaps brought this issue to the surface, because his evidence highlights the sources of his knowledge of the 2016 deed through privileged communications, but the issue was always there on the pleadings.

This issue can also be understood by analogy by looking at the ordinary tort of deceit. The dishonesty alleged here is to enliven an equitable remedy based on the second limb of Barnes v Addy in which the rules for proof of loss may be less demanding than those in tort, for which damage completes the cause of action. But leaving those differences aside, the defendant in an action in deceit is entitled to defend the action by saying in answer to a plaintiff’s case, “yes, you may prove that I dishonestly attempted to withhold information from you in order to cause the loss that you claim to have suffered, but you did not in fact suffer any loss because you already had all the information that you needed to avoid the loss”. Such a defendant is always entitled to test the state of the plaintiff’s knowledge of the allegedly concealed information on the issue of causation of damage.

There was little debate in the written or oral submissions as to the precise extent of any loss of privilege that would occur were the Swaab Attorneys contentions on the motion to be successful. At the hearing the matter was left in abeyance, with Ms Holmes, counsel for the plaintiffs, saying that the plaintiffs were not aware which categories of documents that the Swaab parties required to be produced as a result of any waiver. The Court indicated to the parties that the Court would give a description of the kind of documents that would probably fall within any waiver, so that the legal representatives of each side could work out which individual documents were the subject of a waiver and which were not.

That is the course that the Court will take. The logic of the previous section of these reasons answers the question of the extent of the waiver fairly clearly. The waiver of the client privilege extends to any otherwise privileged communication between the plaintiffs and their lawyers in which the plaintiffs are given or ask for information about the C&F caveat, the 2016 Deed, or the lapsing of the caveat and matters directly related thereto. The waiver would extend by the operation of Evidence Act, s 126 to other communications or documents that are reasonably necessary to enable a proper understanding of a communication or document in respect of which client legal privilege is lost under Evidence Act, s122.

But the waiver has limits. It will not include general legal advice or strategic advice about the plaintiffs’ options or causes of action as they were perceived in 2016. The waiver will not include advice that has nothing to do with the subjects that were identified in paragraph [113] above. It should be possible for the parties co-operatively to fashion a list based upon these guidelines. If the parties cannot agree upon a list then they can bring their final contests back to Court. The Court will direct those consultations to take place in about the next fortnight.

One incidental matter in issue between the parties did not receive separate attention in oral submissions at the hearing. Swaab Attorneys contended that the plaintiffs should be ordered to produce an unredacted copy of the retainer agreement with Polczynski lawyers. It is well established that retainer agreements between solicitor and client generally are not protected by client privilege: CSR Limited v Eddy (2008) 70 NSWLR 725; [2008] NSWCA 83 (“CSR”) at 739 (at 62) per Basten JA. But as Hodgson JA observed in CSR (at [7]) a retainer may be privileged, if it contains material which expressly or impliedly conveys legal advice or views or tactics or strategy.

It may be that the Court’s determination of the principal issues in this judgment have also incidentally resolved this issue. If it has not and the plaintiffs still seeks access to the redacted portions of the retainer agreement the plaintiffs will have to make the basis of their claim for client privilege over this material clearer than it currently is. If this cannot be resolved in consultations between the parties, the Court will decide it with the issues raised by the plaintiffs under Evidence Act, s 125.

Swaab Attorneys wanted the opportunity of reviewing further documents obtained as a result of loss of client privilege by the plaintiffs before they were called upon for final submissions in reply on the plaintiffs’ Evidence Act, s 125 waiver application. Swaab Attorneys will be allowed a further 2 weeks to put on those submissions once they have access to the additional documents.

Finally, the Court will deal with costs issues once it has determined both motions.

For these reasons, the Court makes the following orders and directions.