Yes Family Pty Ltd v Sphere Healthcare Pty Ltd

1. [1]

   HIS HONOUR: This is an application for preliminary discovery. The plaintiff, Yes Family Pty Ltd (“Yes Family”), is the owner of a property in Church Road, Moorebank that is subject to a lease to the defendant, Sphere Healthcare Pty Ltd (“Sphere”). It seeks preliminary discovery of documents from Sphere that it says it requires in order to decide whether or not to commence proceedings against Sphere in respect of alleged breaches of the lease.

2. [2]

   The application for preliminary discovery is made pursuant to r 5.3 of the Uniform Civil Procedure Rules 2005 (NSW). That rule provides:

3. [3]

   In Hatfield v TCN Channel 9 Pty Ltd [2010] NSWCA 69; (2010) 77 NSWLR 506 McColl JA summarised the principles relevant to an application for preliminary discovery as follows:

4. [4]

   A plaintiff is not entitled to preliminary discovery unless it is lacking something reasonably necessary to make a decision whether or not to institute proceedings. An applicant may be entitled to preliminary discovery of documents relevant to available defences, but preliminary discovery cannot be used to build up a case which an applicant has already decided, or could decide to bring (Morton v Nylex Ltd [2007] NSWSC 562 at [33] and cases there cited).

5. [5]

   Yes Family seeks orders that Sphere give discovery of the following documents or classes of documents:

6. [6]

   Yes Family is the assignee of the reversion. It acquired the Moorebank property by a transfer dated 26 October 2011.

7. [7]

   Sphere entered into a five-year lease commencing on 17 April 2008 with three options for renewal for a period of five years each with the previous owner. On 27 September 2010 the lease was varied by extending the term of the lease so as for it to expire on 16 April 2018. There are options for renewal for two further terms of five years.

8. [8]

   The terms of the lease include the following:

9. [9]

   Item 5 provides:

10. [10]

    Clause 7.6(a) provides:

11. [11]

    Clause 8.1 provides:

12. [12]

    There are two clauses of 8.2. Clause 8.2 is also a covenant against assigning or subletting without the lessor’s consent, which consent is not to be unreasonably withheld in certain specified events. The second clause 8.2 provides:

13. [13]

    On or about 16 June 2015 Yes Family served a notice under s 129 of the Conveyancing Act 1919 (NSW) on Sphere asserting that Sphere was in breach of various clauses, including clause 8 and clause 6.1. It required Sphere to remedy the alleged breaches by, relevantly:

14. [14]

    The alleged breaches were not particularised. In a letter dated 29 July 2015 from Marsdens Law Group, who acted for Yes Family, to Kardos-Scanlan, solicitors for Sphere, the plaintiff’s solicitor identified the alleged breach of 8.2 of the lease as being that:

15. [15]

    Further alleged breaches were described as follows:

16. [16]

    On 21 August 2015 Kardos-Scanlan responded to the s 129 notice and Marsden Law Group’s letter of 29 July with statements that included the following:

Possible cause of Action for breach of clause 8.2

1. [17]

   The plaintiff has adduced evidence that casts doubt on the assertion in Kardos-Scanlan’s letter of 21 August 2015 that the only assignment that occurred within the meaning of clause 8.2 of the lease due to a change of control was the result of issue of shares to Sphere’s financier in July 2014 which had been rectified by 3 October 2014. An Information Summary apparently published by Sphere dated May 2015 states that “Sphere is 100% owned by ROC Partners”.

2. [18]

   The same information memorandum stated that:

3. [19]

   The evidence of Sphere given through its solicitor, Mr David Sim, is that immediately before the restructure referred to in the letter from Kardos-Scanlan of 21 August 2015 the shareholders of Sphere were Fulcrum Capital Partners Fund No 1 GP, Fulcrum Capital Partners Fund No 1 LP, and Fulcrum Capital Partners No 1 B Pty Limited (collectively the Fulcrum Funds) and that immediately after the transfer of the shares held by AREO the shareholders of Sphere were again Fulcrum GP, Fulcrum LP and Fulcrum 1 B. He deposed to having been informed by Mr Paul Riley, the sole director of Sphere, and of each Fulcrum Entity, that ROC Partners Ltd is not a shareholder of Sphere nor is it a shareholder, unitholder or investor in the Fulcrum Funds, but is the manager of an advisor to investors in the Fulcrum Funds.

4. [20]

   If this is a full statement of the facts relating to ROC Partners’ role as known to Mr Sim, as is to be expected if the affidavit tells the whole truth, his evidence contradicts the statement in the document published by Sphere that it was 100 per cent owned by ROC Partners.

5. [21]

   Yes Family pointed to other evidence, including email correspondence from Mr Riley to a related company of the plaintiff in relation to a proposed acquisition of Sphere, in which Mr Riley referred to requirements of ROC that would be consistent with its having more than an advisory role to the investors in the shareholders of Sphere.

6. [22]

   The plaintiff submits that the evidence by Mr Sim that ROC Partners is not a shareholder of the defendant does not necessarily exclude the existence of agreements whereby ROC Partners may have beneficial ownership of shares in Sphere or may have entered into agreements that give it effective control of those shares. However, if that were the fact it could be expected to have been disclosed in the affidavit if the fact were known to Mr Sim.

7. [23]

   The plaintiff thus has contradictory materials on which it must make a judgment whether to commence proceedings in relation to a possible breach of clause 8.2.

8. [24]

   Yes Family submits that if clause 8.2 of the lease is given a purposive rather than a literal construction, it applies where any action is taken having the effect of altering the control of the lessee (clause 8.2(d)(i)) even if there is not a change in shareholding of the lessee. The affidavits of Mr Sim address the shareholding, but do not specifically address the wider question advanced by the plaintiff.

9. [25]

   I am satisfied that the plaintiff “may be entitled to make a claim for relief” in relation to a possible breach of clause 8.2 and also that it has made reasonable inquiries. It does not appear that there has been a change of shareholding other than as described in Kardos-Scanlan’s letter of 21 August 2015. No documents are required in order for the plaintiff to decide whether to bring proceedings in respect of the change of shareholding described in that letter. But Sphere says that the admitted breach has been cured.

10. [26]

    On a literal construction of the first sentence of clause 8.2 it is only where there has been a change in the shareholding of the lessee that effectively alters the control of the lessee that paras (a)-(d) apply. But the contrary construction is arguable. Counsel for the plaintiff submitted that on a purely literal construction which places emphasis on the words “in that case” in the second sentence of clause 8.2 the following subparagraphs would become otiose. I accept that such a contention is arguable and that it is arguable that clause 8.2 should be given a purposive construction such that a change in the beneficial shareholding of Sphere that effectively altered the control of Sphere, or the making of agreements that gave a third party effective control of Sphere, would be a contravention of clause 8.2 if not made with the consent of the lessor.

11. [27]

    In the face of the position taken by the defendant on the present application and what was said in Mr Sim’s affidavits and in Kardos-Scanlan’s letter of 21 August 2015, I accept that the plaintiff does not have sufficient documents in order to determine whether it is entitled to make such a claim for relief, notwithstanding the assertions in the information memorandum apparently published by Sphere that ROC Partners had acquired the ownership of Sphere. In relation to this issue I do not think that the plaintiff is seeking further documents to build up a case it has already decided to bring.

12. [28]

    Sphere submitted that when Yes Family served its notice under s 129 of the Conveyancing Act it had already determined that Sphere had committed breaches of the lease. Had it not had sufficient information to decide whether or not it could institute proceedings asserting alleged breaches of the lease, it could not properly have served the notices under s 129 of the Conveyancing Act. Moreover, it had subsequently made extensive inquiries and obtained documentation by reason of which it now asserts that there were breaches of the lease. Therefore this is not a case in which the plaintiff was unable to obtain sufficient information to decide whether or not to commence proceedings.

13. [29]

    I do not accept this submission insofar as it relates to the alleged breach of clause 8.2. The plaintiff has apparently contradictory information and I am satisfied it needs the documents to determine whether or not to commence proceedings.

14. [30]

    The documents or classes of documents described in paras (a)-(d) are sought in order that the plaintiff can determine whether to bring proceedings in which it sought a determination that it was entitled to terminate the lease for breach of clause 8.2.

15. [31]

    There was no submission that the categories of documents sought were wider than was required for the purpose of enabling the plaintiff to determine whether it may be entitled to a claim for relief in respect of a breach of clause 8.2. Nor did the plaintiff seek to widen the scope of the documents sought. I will make the order for discovery as sought in respect of the documents in (a)-(d).

Alleged breach of clause 8.1

1. [32]

   The second issue in respect of which the plaintiff wants preliminary discovery concerns the alleged breach of clause 8.1 that the lessee is not to sublet or otherwise deal with or part with possession of the premises. The plaintiff has alleged that Sphere has been in breach of that clause by allowing a wholly-owned subsidiary to manufacture infant formula products for export to China.

2. [33]

   Sphere’s subsidiary, Sphere Healthcare (Asia) Pty Ltd (“Sphere Asia”) was incorporated on 17 June 2014. Mr Sim deposes that he is informed by Mr Riley, the sole director of Sphere Asia, and believes it to be true that since its incorporation, Sphere Asia has not traded and was incorporated for the sole purpose of holding a licence issued by the “Certification and Accreditation Administration of the People’s Republic of China”. As appears from the letter of Kardos-Scanlan of 21 August 2015 quoted above, the defendant contends that Sphere Asia has not manufactured any products from the premises and nor has it distributed any products into China.

3. [34]

   Yes Family points to the terms of the “CNCA” certification and accreditation issued by the People’s Republic of China which identifies Sphere Asia as being an approved manufacturer of infant formula milk powder at the processing plant at Church Road, Moorebank which is the leased premises. Sphere itself is also an accredited manufacturer of various milk powder products, including formula milk powder which may or may not compass the infant formula milk powder for which Sphere Asia is the accredited manufacturer. Yes Family points to a regulation of the People’s Republic of China on registration and management of overseas producers of imported food applicable to the registration, supervision and management of overseas food-producing processing and storing firms that export food to China. The regulation provides that the CNCA organises experts or a designated institution to examine information submitted by the relevant authorities of the country where the “overseas food-producing firm” is located and despatches an assessment group to conduct onsite assessment when necessary. Yes Family submits that this, and the terms of the certificate of accreditation indicate that Sphere Asia is accredited as a manufacturer of infant formula. There is evidence that the production processes of infant formula are required to be kept separate from the production processes of pharmaceutical (or other pharmaceutical) products.

4. [35]

   The evidence that only Sphere Asia and not Sphere itself has approval from the Chinese government to manufacture and export infant formula to China is sufficient to establish that the plaintiff may be entitled to make a claim for relief against Sphere that it has breached clause 8.1 of the lease in dealing with or parting with possession of the premises so as to permit Sphere Asia to conduct the manufacturing of infant formula products for export to China. Even if the manufacture were conducted under a licence that did not involve Sphere’s parting with possession of the premises, it is arguable that such a licence would be a dealing with the premises that was a contravention of clause 8.1.

5. [36]

   Sphere Asia was incorporated on 17 June 2014. The evidence did not establish the dates on which Sphere Asia obtained approval to manufacture and export infant formula products to China. But Sphere’s information summary document dated May 2015 stated that such approval had been obtained for infant formula to be exported to China and it can be inferred that the approval was granted by that date.

6. [37]

   Again, the plaintiff has contradictory information. Sphere contends that Sphere Asia has not traded but was incorporated for the sole purpose of holding a licence issued by the Certification and Accreditation Administration of the People’s Republic of China. But it is at least arguable that the licence requires Sphere Asia and not Sphere to be the manufacturer of infant formula products to be exported to China. This is sufficient to establish that the plaintiff may be entitled to make a claim for relief based upon a breach of clause 8.1 of the lease.

7. [38]

   I accept that the plaintiff does not have sufficient information to decide whether or not to commence proceedings against Sphere asserting such a breach. I accept that Sphere may have or may have had possession of documents that could assist in determining whether or not the plaintiff is entitled to make such a claim for relief and an inspection of such documents would assist it to make such a decision. But it does not appear to me that all of the documents sought by the plaintiffs are likely to assist in the making of such a decision. Documents sought in paragraphs (f) and (g) would throw no light on who was manufacturing infant formula products from the premises.

8. [39]

   Invoices issued for the sale of infant formula manufactured or produced from the premises might establish either a claim or a defence to a claim by the plaintiff for a breach of the lease. Thus if the only invoices issued were issued not by Sphere Asia but by Sphere itself, either to a buyer in China or to Sphere Asia, that could be relevant to the existence of a defence to the plaintiff’s claim. On the other hand, if Sphere Asia issued invoices for the sale of infant formula products, or if invoices for the plant and equipment used in the manufacture of infant formula products on the premises were issued by a supplier of such plant and equipment to Sphere Asia, then that could demonstrate that Sphere Asia was carrying on manufacturing processes on the premises. Likewise, if plant and equipment for the manufacture of infant formula products were leased to Sphere Asia or Sphere, that could indicate that Sphere Asia either was or was not conducting manufacturing operations on the premises.

9. [40]

   I think the documents sought in paras (e), (h) and (i) would assist the plaintiff to make a decision as to whether to make a claim that there had been a breach of clause 8.1 and should be discovered.

10. [41]

    A related company of the plaintiff is a competitor of Sphere and Sphere Asia. Sphere has a legitimate concern that provision of invoices for the sale of infant formula manufactured or produced from the premises could provide the plaintiff or its related company with a competitive advantage in ascertaining the prices at which such products are sold and in identifying the persons to whom the products were sold. The identity of the particular purchasers of infant formula, the quantity of products sold and the prices at which they were sold would not be necessary to enable the plaintiff to determine whether or not proceedings asserting a breach of the lease should be brought.

Other potential breaches

1. [42]

   Yes Family submitted that there were two other potential breaches of the lease for which it required preliminary discovery in order to determine whether proceedings should be commenced in respect of the alleged breach. The first was whether there was a breach of clause 6.1 of the lease that the premises be used for “pharmaceutical production and warehouse facility”. Yes Family asserted that Sphere was in breach of that clause by using the premises for purposes other than pharmaceutical production and warehouse facility, being the manufacture of infant formula. It contended that this was not pharmaceutical production. It submitted that it needed to know the constituents of the infant formula produced from the premises in order to determine whether it could be correctly described as a pharmaceutical product rather than as a food.

2. [43]

   There are two answers to this contention. The first is that the plaintiff does not require the production of any documents in order to answer that question. It could simply buy a can of the infant formula in question and, if the statement of ingredients is insufficient for its purposes, it could have the product analysed by a chemist. The second answer is that none of the documents sought by way of preliminary discovery in the amended summons is addressed to this question.

3. [44]

   The plaintiff also contends that Sphere may be in breach of the lease by having made changes to the demised premises without its consent, in breach of clause 7.6. It points to a requirement that there be a full segregation of the production processes for infant formula from pharmaceutical products. It submits that it is not sure whether the infant formula processing plant was already installed when it purchased the premises in October 2011.

4. [45]

   However, the secretary of the plaintiff, Mr Yin, swore an affidavit on 5 November 2015 in which he deposed to having undertaken an inspection of the premises on 7 July 2015. He said that during the course of that inspection he noticed machinery on the factory floor, but was unsure whether the machinery was different from machinery that was on a previous occasion that he inspected the premises. In a later affidavit he deposed that at the time of that visit he had in his possession a plan of the layout of the premises as at the date the plaintiff purchased the premises on or about 8 November 2011. He deposed that he showed the plan to Mr Riley who said words to the effect, “I haven’t seen most of those rooms. This map is out of date and goes back to when Bob and John Powers were involved in the business.” Mr Yin deposed in his affidavit of 27 January 2016 that as a result of this conversation he understood that the premises had been modified by Sphere at some time after the plaintiff purchased them.

5. [46]

   It appears to me on the basis of the plaintiff’s evidence that it has sufficient information in relation to whether the premises have been altered to decide whether or not to commence proceedings insofar as it might seek to establish a breach of the covenant against alteration of the premises without the lessor’s consent.

6. [47]

   For these reasons the plaintiff is entitled to preliminary discovery of the documents in paras (a), (b), (c), (d), (e), (h) and (i) of para 1 of the summons subject to the redaction of the invoices the subject of para (e) of details identifying the quantity of infant formula the subject of the invoices, the prices at which infant formula was sold, and the identity of purchasers, unless the purchaser of products sold is Sphere Asia. However, the redaction should not extend to the supplier of products. The plaintiff should bring in short minutes of order to give effect to these reasons.

7. [48]

   I will hear the parties on costs. Prima facie the defendant should pay the plaintiff’s costs of the application.