Legal Insight Issue 7
Pre-Litigation Requirements: Transitional Period
In past editions of Legal Insight, we discussed the amendments to the Civil Procedure Act, 2005 ("CPA") relating to mandatory pre-litigation steps in all NSW Courts. To re-cap, the CPA now requires that parties take "reasonable steps" before commencing proceedings. Such steps may include telling the other party about the dispute, exchanging documents, seeking to negotiate reasonably and/or proposing or engaging in an alternative dispute resolution process. There is a transitional period of 6 months before these amendments take effect.
The transitional period suspends the operation of the new provisions until 2 October 2011. In practice this means:
- If a dispute arose before 1 April 2011 and proceedings are commenced on or before 1 October 2011, the parties may proceed to litigation without having to comply with the new "reasonable steps" requirements;
- If a dispute arose before 1 April 2011, and proceedings are commenced on or after 2 October 2011, the parties must take "reasonable steps" before proceeding to litigation (subject to certain exceptions); and
- If a dispute arose on or after 1 April 2011, the parties must take "reasonable steps" before litigating (subject to certain exceptions) regardless of when proceedings are commenced.
It is expected that the pre-litigation "reasonable steps" provisions will apply in the Supreme Court from 1 August 2011. Similar rules will commence in the Federal Court from 1 August 2011. The new Federal Court pre-litigation requirements are part of the new Federal Court Rules and Civil Dispute Resolution Act, 2011, discussed further below.
New Federal Court Rules
From 1 August 2011, the existing Federal Court Rules will be replaced by a completely new set of rules ("Rules"). These Rules make stylistic changes, adopt plain English drafting and remove unnecessary or archaic terms. The new Rules have been designed to assist the Federal Court to implement the overarching purpose under Section 37M of the Federal Court of Australia Act, 1976 which is to:
- achieve a just determination of all proceedings before the Court;
- make efficient use of resources available;
- efficiently dispose of the Court's overall case load;
- dispose of all proceedings in a timely fashion; and
- achieve resolution of disputes at a cost that is proportionate to the importance and complexity of a matter.
The parties to Federal Court litigation and their legal advisors are both required to co-operate to achieve this overarching purpose.
The new Federal Court Rules will not impact on the current special rules that apply in corporations, bankruptcy and admiralty cases.
The Rules incorporate certain pre-litigation "genuine steps" provisions which are similar to the "reasonable steps" provisions referred to in the previous article. These provisions for Federal Court matters will commence on 1 August 2011.
Some of the more important changes made by the new Rules are as follows:
- both an applicant (when filing an Originating Application) and a respondent (when filing an Address for Service) must file and serve a "genuine steps statement";
- the Court will only make an order for further and better particulars if the party seeking the order does not have fair notice of the case to be answered, cannot conduct the case without further particulars and is prejudiced in its conduct of the case and the particulars in the pleading are inadequate;
- Interlocutory Applications do not need to be accompanied by an affidavit in certain circumstances, for example, where correspondence between the parties' solicitors is to be tendered at the hearing;
- discovery of documents has been restricted so that there will be no general right to discovery of documents. Discovery will need to be necessary for the determination of issues in the proceedings and be accompanied by a Court order. A party who gives discovery without a Court order is not entitled to any costs and disbursements of giving such discovery; and
- the costs rules have been simplified and the definition of party/party costs changed so that only costs that are fairly and reasonably incurred in the conduct of litigation may be recovered from another party pursuant to a costs order. The Federal Court costs scale will allow for a greater variety of items that may be subject to costs recovery. We believe that this scale will allow higher fees recovery in taxations of party/party costs. The form and initial procedures in the taxation of costs have also been simplified.
A completely new set of Federal Court Forms will operate from 1 August 2011. These forms and the new Rules will operate in respect of new and existing proceedings, unless otherwise ordered.
Insolvency Practitioners: Beware Making Representations on Fees
The NSW Court of Appeal recently heard a case regarding a potential estoppel against an administrator (cited as Paul's Retail Pty Limited v Morgan  NSWCA 217). The facts are as follows. At a creditors' meeting of Paul's Retail, resolutions fixing the administrator's remuneration were passed. The Court considered whether the administrator was estopped from exercising his statutory right to seek Court review of his remuneration pursuant to section 449E of the Corporations Act.
The Court did not accept certain oral evidence of alleged conversations between the administrator and Mr Dwyer, the sole shareholder/director of Paul's Retail, including that the administrator would not seek a review of his fees, would cap his fees and would not seek fees in excess of the caps. The Court noted that "… the significance of reference to the cap was that the administrator was authorised to make periodic payments on account of proper charges up to the limit imposed by the cap. As section 449E (4)(k)(ii) recognises, the capping of an administrator's remuneration does not preclude the administrator seeking review of the remuneration so capped …".
The Court also held that there was no evidence that Mr Dwyer relied to his detriment on anything said by the administrator. In those circumstances, the administrator was not estopped from approaching the Court to seek a review of his remuneration.
Notwithstanding the outcome in this case, administrators (and other insolvency practitioners, including liquidators and receivers) should be careful when making any representation or statement as to their remuneration, particularly when negotiating caps or limits to their proposed remuneration.
Employees and the Duty of Fidelity
A recent Federal Court Case, RLA Polymers Pty Limited v Nexus Adhesive's Pty Limited  FCA 423 (29 April 2011) highlights the continuing obligation of an employee, after his/her employment ends, to refrain from using or disclosing confidential information obtained during the course of employment. Known as the fiduciary duty of fidelity, this well established equitable "duty" protects a business' confidential information in the absence of any specific contractual agreement with their employee.
RLA Polymers ("RLA") was in the business of, among other things, flooring adhesives. Two of RLA's employees, Clewlow and Sofat, resigned from RLA and incorporated Nexus Adhesives ("Nexus"). Together with another former RLA employee, Nixon, they proceeded to develop and market their own flooring adhesives. The judge considered evidence showing that Clewlow, Sofat and Nixon shared the confidential information. Based on expert evidence, there were significant similarities in the composition of the competing products. The confidential information consisted of the type, weight and relative percentage of particular raw materials plus other information connected to the manufacture of certain RLA adhesives. It was observed that Nexus developed its product in 5 months rather than 9-12 months, being the estimated time frame provided by industry experts. Whether the respondents intended to develop their adhesives without relying on the confidential information was irrelevant.
Based on the "Springboard Doctrine", the judge found that each of Clewlow, Sofat, Nixon and Nexus used the confidential information to develop a competing product and in so doing were able to bring that product to market significantly faster and more cheaply than they would otherwise have been able to. Nexus was ordered to account for 5 ½ months of profit from the sale of its adhesive.
Unless hamstrung by a restraint of trade covenant, employees are free to set up business in competition with their former employer. However this is only if they use their own "stock of knowledge". An employee cannot use their former employer's trade secrets. Although this case highlights the implied rights of an employer in respect of confidential information, in practice, employers should take steps to safeguard their intellectual property by having appropriate employment agreements which clearly set out the employee's obligations following termination of employment.
Duties & Powers of a Bare Trustee
The recent full Federal Court decision in Bruton Holdings Pty Limited (In Liquidation) v Commissioner of Taxation (2011) FCAFC 79 dealt with the right of a bare trustee to be indemnified out of trust property for legal costs incurred in litigation affecting such property.
The facts were relatively simple:
- Bruton was the trustee of an educational trust established by a 1997 Trust Deed.
- The Trust Deed provided that the office of the trustee was "immediately terminated and vacated" if a liquidator was appointed.
- In 2007, a liquidator was appointed to Bruton by resolution of its creditors and accordingly Bruton ceased to be the trustee of the educational trust and became the bare trustee of the assets that constituted the trust fund, its powers governed by general law and/or statute.
- Prior to the liquidation of Bruton, money comprising an asset of the educational trust was held in the trust account of Bruton's solicitors.
- After the winding up of Bruton commenced, the Australian Taxation Office issued a Notice of Assessment seeking payment of substantial tax liabilities for the 2004 tax year. The ATO lodged a Proof of Debt with the liquidators of Bruton for the assessed amount. The ATO also served a statutory Garnishee Notice on Bruton's solicitors calling for payment of the monies held in their trust account.
- Bruton, by its liquidators, commenced legal proceedings seeking a declaration that the Garnishee Notice was void.
- The Federal Court at first instance found in favour of Bruton and the ATO appealed. That appeal was allowed and Bruton appealed to the High Court. The High Court appeal was successful and as a consequence, the Garnishee Notice was found to be void.
- A dispute then arose between the ATO and the liquidators of Bruton as to whether Bruton could access the funds held in its solicitors trust account to pay any shortfall between its total legal costs and the legal costs recoverable from the ATO arising out of costs orders made in the initial proceedings and appeal proceedings. The ATO commenced proceedings asserting that, as bare trustee, Bruton was not entitled to be indemnified from trust assets for those costs.
- The ATO succeeded at first instance and Bruton's liquidators appealed.
The Full Federal Court held that although Bruton was at all relevant times a bare trustee, its duties to discharge its obligations included a duty to maintain and protect the trust property. The Full Court found that Bruton's action in challenging the ATO's Garnishee Notice was an action that was necessary to protect the trust property against unauthorised appropriation to the ATO. Bruton's liquidators therefore succeeded on appeal and a declaration was made by the Full Federal Court entitling Bruton to be indemnified by exoneration out of the trust property for the costs of the prior proceedings.
Misleading or Deceptive Conduct in Mediation
In prior issues of Legal Insight we have addressed issues arising in mediations, in particular, the issue of misleading or deceptive conduct (now governed by Section 18 of the Australian Consumer Law, Competition and Consumer Act, 2010, previously Section 52 of the Trade Practices Act, 1974). A recent Federal Court decision highlights the substantial dangers of any misleading or deceptive statement in the context of settlement negotiations during a mediation.
In Pihiga Pty Limited –v- Roche (2011) FCA 240, a detailed commercial agreement executed between a number of parties was claimed to be void because Pihiga asserted that its entry into the settlement document had been induced by false or misleading and deceptive conduct on the part of the Respondents during a "without prejudice" mediation session.
Pihiga claimed that the Respondents:
- misrepresented the value of certain real estate;
- had no reasonable basis or honestly held belief as to the veracity of the valuations represented; and
- misled Pihiga as to the extent to which the valuations could be relied on.
The valuations referred to related to the price of assets being purchased under the proposed settlement agreement and were adopted at the mediation session for the purpose of the settlement negotiations.
The Respondents argued that the evidence Pihiga wanted to adduce at final hearing should not be allowed to be tendered because:
- the common law did not permit the content of "without prejudice" discussions to be adduced;
- the mediation agreement included provisions in which the parties agree that all things said or done during the mediation would be kept confidential, would be held on a without prejudice basis and that no documents and evidence brought into existence for the mediation could be introduced into evidence or relied upon in judicial proceedings for or against a party to the mediation; and/or
- the exceptions referred to in various subsections of Section 131 of the Evidence Act, 1995 did not permit such evidence to be adduced.
His Honour noted the following matters:
- the "without prejudice" communications rule protects admissions in the form of an offer to settle as well as communications between the parties generally in respect to issues in the dispute including assertions made of the strength and weaknesses of a party's case or an opponent's case;
- communications may be admissible to show that an agreement apparently made between parties during such negotiations should be set aside on the ground of misrepresentation, fraud or undue influence;
- in the absence of a concluded agreement, a clear statement made by one party in negotiations which is relied upon by the other party, and is intended to be relied upon and acted upon by that other party, may be admissible as giving rise to an estoppel; and
- if what was said by one party in mediation involves that party engaging in perjury, blackmail or some other "unambiguous impropriety", then the other party may be allowed to give evidence of what was said or written during "without prejudice" negotiations.
His Honour allowed Pihiga to take advantage of the exceptions referred to above to permit Pihiga to adduce evidence of what was said during the mediation and of the written representations made as to the value of real estate. Pihiga asserted that the settlement would not have concluded had they been advised of the true position in relation to the value of the real estate.
His Honour found that neither the common law "without prejudice" rule nor the provisions in the mediation agreement could be relied upon by the Respondent to restrain Pihiga from adducing the evidence it wished to adduce at the hearing. In any event, His Honour noted that the "without prejudice" rule does not extend to protect conduct which is misleading or deceptive and in contravention of Section 52 of the Trade Practices Act (now Section 18 of the Australian Consumer Law). Finally, because the making of the settlement agreement was in issue, His Honour found that Pihiga was able to adduce evidence of the matters canvassed during the mediation and that therefore certain exceptions in Section 131(2) of the Evidence Act applied.
Hugh & Associates is a Sydney based legal firm with extensive experience in commercial, finance and insolvency law and litigation. If you require legal advice in these areas, we would be pleased to assist you.
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