FEDERAL COURT OF AUSTRALIA

Hepburn v Teplitzky (No 2) [2010] FCA 802

THE COURT ORDERS THAT:

1.         The applicants pay the respondent’s costs of the notice of motion of 27 November 2009 on an indemnity basis.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1                          In 2004, each of the applicants, Mr Hepburn and Mr Clarke, was an employee of a company, Hydrocool Pty Ltd.  Mr Hepburn was also the managing director of Hydrocool.  The respondent, Dr Teplitzky, was the executive chairman and chief executive officer of Hydrocool.  A substantial disagreement emerged between Dr Teplitzky and Mr Hepburn about the future direction of Hydrocool.  Mr Hepburn was removed as the managing director of Hydrocool and his employment with that company was terminated in 2004.  Immediately following the termination of Mr Hepburn’s employment and appointment, a number of employees based at the company’s premises in Fremantle, Western Australia, including Mr Clarke, resigned from the company’s employment.  These employees and Mr Hepburn became shareholders in a new company, Thermoelectric Applications Pty Limited (Thermoelectric), and that company undertook a project which had previously been under consideration by Hydrocool.

2                          In 2006, Hydrocool commenced an application in this Court (NSD 1754 of 2006) against Mr Hepburn, Thermoelectric and a number of former employees of Hydrocool, including Mr Clarke.  The proceeding was transferred to the Western Australian District Registry of this Court.

3                          On 3 July 2009, Mr Hepburn and Mr Clarke commenced an application (WAD 111 of 2009) for contempt of court against Dr Teplitzky.  In that application, Mr Hepburn and Mr Clarke seek orders that Dr Teplitzky be found in contempt of this Court and that the Court impose “such term of imprisonment or such further or other penalty for such contempt” as the Court thinks fit.

4                          In the statement of charge relied upon by Mr Hepburn and Mr Clarke in support of their contempt application, they allege that Dr Teplitzky did not fully comply with a subpoena served upon him in relation to application NSD 1754 of 2006.  Mr Hepburn and Mr Clarke also allege that Dr Teplitzky had made statements in a letter he wrote to the Court dated 6 May 2008, which were false.  More specifically, the applicants said that, in his letter of 6 May 2008 to the Court, Dr Teplitzky had stated that he had copied all documents and files that were on his personal computer which related to Hydrocool to Mr Stephen Murphy and that he had then deleted and purged the files from his computer and that he retained no Hydrocool documents.  The applicants went on to allege that by a letter dated 3 April 2009, the solicitors for Hydrocool had stated that 3,000 computer files had been located on a hard drive that was installed in a computer tower in Dr Teplitzky’s possession but which was lawfully the property of Hydrocool.

5                          On 27 November 2009, the applicants filed a notice of motion in this proceeding, seeking an order that Dr Teplitzky produce for inspection the computer hard drive or hard drives to which Dr Teplitzky had referred in his letter to the Court dated 6 May 2008.  In his affidavit of 27 November 2009, Mr Hepburn deposed that the applicants sought the production of the hard drives by the respondent for the purpose of preparing and proving their contempt case.

6                          There were a number of directions hearings held in relation to the applicants’ notice of motion of 27 November 2009.

7                          At one of the directions hearings, I drew the attention of counsel then appearing for Mr Hepburn and Mr Clarke, to the principle that discovery was not available against a respondent in penal proceedings, as being a potential obstacle to the success of the applicants’ notice of motion.

8                          On 22 February 2010, Mr Hepburn and Mr Clarke filed written submissions in support of the notice of motion essentially to the effect that orders for the production of the hard drives should be made because Dr Teplitzky would not be able to rely upon any privilege against self-incrimination to resist production of the computer hard drives, because he had waived that privilege.

9                          Dr Teplitzky in his responsive written submissions, said that the order for production sought by Mr Hepburn and Mr Clarke was in the nature of discovery and that such an order would not be made in penal proceedings such as proceedings for contempt of court.  Dr Teplitzky referred to the case of Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 (Rich) and particularly to the following passage at 147-148, at [39] of the judgment of Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ:

The primary judge ordered that the appellants make discovery of documents by verified list.  That order would permit the appellants to object to production of any document on a ground of privilege.  At first sight, that might suggest that the appellants’ challenge to the order for provision of a verified list of documents is premature.  That is, it might suggest that any question of privilege is one about privilege from production rather than privilege from making discovery.  That is not so.  As Isaacs J pointed out in R v Associated Northern Collieries, once it is determined that the proceedings expose a person to penalty, the proper course is to refuse any order for discovery.  As Isaacs J said, to leave the party at risk of penalty to object to production of documents, having first listed them, may lead to the very mischief which the privilege is designed to prevent.  (Footnotes omitted.)

10                        On 24 February 2010, I dismissed the applicants’ notice of motion on the grounds that an order for discovery would not be made against a respondent to a penal proceeding (Hepburn v Teplitzky [2010] FCA 801).

11                        Dr Teplitzky then applied for indemnity costs and I made directions for the filing of submissions on the question of indemnity costs.  The parties duly filed their respective submissions.  Mr Hepburn and Mr Clarke contended that the submissions they had made in support of the motion were reasonably arguable.

12                        It has been accepted in many cases that a court may award indemnity costs where there is a special circumstance which would justify making such an order.

13                        In the case of Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401,Woodward J observed:

I believe that it is appropriate to consider awarding “solicitor and client” or “indemnity” costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success.

14                        In the case of J-Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers, Western Australian Branch (No 2) (1993) 46 IR 301 at 303, French J (as his Honour then was) observed:

It is sufficient, in my opinion, to enliven the discretion to award such costs that, for whatever reason, a party persists in what should on proper consideration be seen to be a hopeless case.

15                        Further, in Colgate-Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225 at 233, Sheppard J identified a number of circumstances in which a court would depart from the usual rule of awarding costs on a party and party basis and make an order for indemnity costs.  One circumstance identified by Sheppard J was where the proceeding was continued “in wilful disregard of…clearly established law”.

16                        In my view, this case is one where indemnity costs should be awarded on the basis of these authorities.

17                        The rule that a court will not order discovery against a defendant in a penal proceeding is of long standing and has its origins in the privilege against exposure to penalties.  As is apparent from the observations mentioned at [9] above, in applying that rule, the majority in Rich, referred to the case of R v The Associated Northern Collieries (1910) 11 CLR 738 (Associated Northern Collieries).  In Associated Northern Collieries at 744-747, Isaacs J examined at some length the authorities which have applied that rule.  The first case mentioned by Isaacs J was the case of Smith v Read 1 Atk 526 which went back to 1736.  Isaacs J referred to the following observations of Lord Chancellor Hardwicke made in that case:

There is no rule more established in equity, than that a person shall not be obliged to discover that which will subject him to a penalty, or anything in the nature of a penalty.

18                        The following observations of the majority in Rich at 142, at [24], are also pertinent in assessing the appropriateness of the applicants’ conduct in bringing this application:

Although the privilege against exposure to penalties had its origins in the rules of equity relating to discovery, when discovery and interrogatories were provided for under the rules made under the Judicature Act, the Court of Equity’s principle (that an order for discovery or for the administration of interrogatories in favour of the prosecutor, whether the prosecutor was the Crown or a common informer or some other person, should not be made where the proceeding was of such nature that it might result in a penalty or forfeiture) was applied more generally.  As was further pointed out in the joint reasons in Daniels Corporation, the privilege against exposure to penalty now serves the purpose of ensuring that those who allege criminality or other illegal conduct should prove it.  (Emphasis added.  Footnotes omitted.)

19                        In my view, the relief sought by this notice of motion was contrary to well-established precedent.  The applicants, properly advised, ought not to have brought this application because it was bound to fail.

20                        In those circumstances, I will order that the applicants pay the respondent’s costs of the notice of motion dated 27 November 2009 on an indemnity basis.

Associate:

Dated:         29 July 2010