Federal Court of Australia

Watson & Co Superannuation Pty Ltd v Dixon Advisory and Superannuation Services Ltd (No 3) [2023] FCA 988

ORDERS

THE COURT ORDERS THAT:

1.    The applicant’s interlocutory application filed on 3 July 2023 be dismissed.

2.    The costs of the application be reserved for consideration at the hearing of any settlement approval application or at the conclusion of the proceeding.

3.    Pursuant to s 53A of the Federal Court of Australia Act 1976 (Cth), the mediation commenced pursuant to Order 3 made by Justice Thawley on 6 February 2023 be reconvened and only concluded when the mediator reports to the Court that the mediation has no realistic prospects of success.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

(Delivered ex tempore, revised from the transcript)

LEE J:

A    INTRODUCTION: A NOVEL ISSUE

1    Before the Court is an interlocutory application which is said to engage, for the first time, a question posed but left unanswered in several earlier representative proceedings brought under Pt IVA of the Federal Court of Australia Act 1976 (Cth) (FCA Act).

2    The applicant, Watson & Co Superannuation Pty Ltd (Watson), seeks the production of documents going to the financial wherewithal of the second respondent, E&P Financial Group Limited (E&P). The documents, however, are sought in the context of a mediation (which has been suspended) and are therefore subject to the privilege attaching to without prejudice communications. The novel issue arises because notwithstanding the settlement privilege attaching to the documents, Watson contends that in the light of the Court’s supervisory and protective role, it is necessary and appropriate for the Court to intervene and order production so as to allow those advising Watson to form a view as to whether a proposed settlement of this litigation is in the interests of group members as a whole.

3    Before turning to the substantive application before the Court today, it is worthwhile stating briefly what this judgment is not about.

B    POWER, DISCRETION AND GOOD FAITH

4    Over the course of the last decade, there have been a number of applications in this Court (often not the subject of published reasons) whereby applicants have sought access to documents, typically insurance documents, which concern the question of whether or not a respondent is likely to be in a position to meet any judgment. I have dealt with a large number of these applications in the course of case management decisions, and production orders have often been made by consent.

5    Today is not an occasion to deal with issues of power and discretion in making such orders. In Evans v Davantage Group Pty Ltd (No 2) [2020] FCA 473, Beach J dealt with an application for access to insurance documents and, in doing so, considered the Court’s supervisory and protective role under Pt IVA. His Honour found (at [16] and [48]) that while this Court undoubtedly has power to make an order under s 23 of the FCA Act for the production of documents which engaged with the claims made by the applicant and group members, it was not an appropriate exercise of the discretion in the circumstances of that case to make an order. More recently, in The Owners – Strata Plan No 87231 v 3A Composites GmbH (No 6) [2023] FCA 188, Wigney J accepted the Court has power under s 23 of the FCA Act to order a party to produce documents which would not otherwise be discoverable, but may nonetheless assist a party to consider and assess potential settlement offers, including at a mediation. His Honour also found that it was not an appropriate case for the Court to exercise its discretion by making an order for production.

6    In the course of refusing those applications, Beach J and Wigney J indicated that the Court would be reluctant to exercise its discretion to compel the production of documents for the purpose of mediation where it would “confer an asymmetric commercial advantage in favour of one party at the expense of another”, or “give rise to asymmetric bargaining positions”: see Evans v Davantage Group Pty Ltd (No 2) (at [4] and [73]); The Owners – Strata Plan No 87231 v 3A Composites GmbH (No 6) (at [22]).

7    Without suggesting the discretion in refusing relief was not properly refused in the particular circumstances of those cases, it is somewhat unclear to me as to why this “asymmetry” could usually result from an order for production. Asymmetry means a lack of equality or equivalence between parts or aspects of something or of knowledge. Here, the whole purpose of the order is provide a symmetry of knowledge as to the financial position of E&P between both parties required to attempt to negotiate a resolution which, if approved, must have a particular character: that is, it is fair, reasonable and in the interests of specific strangers to the negotiations, being the group members.

8    If an order for mediation is made under s 53A of the FCA Act, the parties are required to participate in the mediation in good faith. As I said in Fuge v Commonwealth Bank of Australia [2019] FCA 1621 (at [97]), the content of a contractual obligation to mediate in good faith is not clearly defined. It is a concept which is often more easily considered by reference to examples of what constitutes a failure to comply with such an obligation. Certainly for a mediation of a Pt IVA proceeding where the mediation is seeking to resolve not only the controversy between the parties, but also affects the rights of absent group members, it is difficult to be prescriptive about what the obligation of good faith will ordinarily require.

9    More specifically, where there is a suggestion being made on behalf of a respondent at such a mediation that the game is not worth the candle because of insuperable difficulties going to recovery of any judgment, a failure to be forthcoming or dissembling as to the true financial position would not only raise the spectre of contravening various statutory and equitable norms, but also raise the question as to whether such a respondent would be engaging in the mediation in good faith. In a similar vein, s 37N of the FCA Act provides that the parties must conduct settlement negotiations in a way that is consistent with the overarching purpose: that is, to facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible. It is difficult to see how this duty is facilitated in circumstances where one party is playing a game of “hide the sausage” concerning its true financial position.

10    I hasten to stress that there is no suggestion in this case that E&P or those advising it have, in any way, conducted the mediation otherwise than in accordance with their professional and legal obligations. Given the identity of those acting for E&P, I am certain that it has been properly advised as to the necessity of participating in the mediation in good faith, and to do so consistently with the overarching purpose. I mention this as a passing observation as to how mediations in Pt IVA proceedings should be approached generally.

11    The difficulty that has arisen here is that for whatever reason, there appears to be a bona fide dispute as to the adequacy of information that has been provided in the context of a mediation ordered by Thawley J in February 2023.

C    THE EVIDENCE

12    In support of its application, Watson sought to adduce non-confidential and confidential affidavit evidence. It was frankly conceded by senior counsel for Watson, Mr Armstrong KC, that aspects of a “confidential” affidavit sworn on 3 July 2023 by Ms Vicky Antzoulatos (Antzoulatos Affidavit), the solicitor for Watson, were protected from disclosure by dint of s 131(1) of the Evidence Act 1995 (Cth) (Evidence Act). Section 131(1) provides:

Exclusion of evidence of settlement negotiations

(1)     Evidence is not to be adduced of:

(a)     a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute; or

(b)     a document (whether delivered or not) that has been prepared in connection with an attempt to negotiate a settlement of a dispute.

13    It was also not in contest that absent some bespoke order directed to the admissibility of such material, that the adduction of such evidence would amount a disclosure of communications made during the course of a mediation referred to under s 53A of the FCA Act, contrary to the prohibition in s 53B. Section 53B provides:

Admissions made to mediators

Evidence of anything said, or of any admission made, at a conference conducted by a mediator in the course of mediating anything referred under section 53A is not admissible:

(a)     in any court (whether exercising federal jurisdiction or not); or

(b)     in any proceedings before a person authorised by a law of the Commonwealth or of a State or Territory, or by the consent of the parties, to hear evidence.

14    On these bases, objections were raised by Dr Rush, counsel for E&P, to parts of the Antzoulatos Affidavit which contain communications made during the mediation process.

15    This question falls to be determined by reference to simple rules as to admissibility governed by the law of evidence. I have decided to reject that material on the basis that the adduction of it into evidence is excluded under s 131(1) of the Evidence Act and s 53B of the FCA Act.

16    Although, given this view, it is unnecessary to deal with a further argument advanced by E&P on the voir dire that the material should be the subject of discretionary exclusion under s 135(a) of the Evidence Act (that is, on the ground that it is unfairly prejudicial to a party), I would have nonetheless exercised my discretion to exclude the material on that basis even if the barriers to admissibility under s 131(1) of the Evidence Act and s 53B of the FCA Act were somehow surmountable, which they are not.

17    This is because, as the balance of these reasons will show, there is no real need for me to receive the evidence on the application because it can be dealt with on the basis that there is a bona fide dispute between Watson and E&P as to the material provided by E&P in the mediation.

D    CONSIDERATION

18    On the material properly before the Court, a mediation has been conducted and stands suspended pending the resolution of the impasse concerning the provision of financial information by E&P. Watson contends that if the information is withheld by E&P, it will be unable to form a rational view about whether a settlement of this litigation (which provides for a large discount because of recoverability concerns) is in the interests of group members as a whole. It is on this basis that Watson seeks access to the material set out in prayers two and three of its interlocutory application.

19    As I indicated to Mr Armstrong KC at the hearing, it seemed to me that in the absence of any evidence to the contrary, the Court is entitled to proceed on the basis that any representations made as to the financial position of any respondent in a mediation referred to under s 53A of the FCA Act would be made accurately, and that there are a variety of means by which an applicant in the course of settlement discussions can satisfy itself as to the truth or otherwise of such representations.

20    For many years, it has been commonplace when issues of recoverability have arisen in inter partes litigation, for warranties to be sought and then given as to the true financial position of a respondent, and for the truth of those warranties to be verified on oath. If it subsequently emerged that a respondent had pulled the wool over an applicant’s eyes in the course of settlement discussions, then the settlement agreement would ordinarily contain an express provision allowing the applicant to rescind the agreement and return to the status quo ante.

21    It seems to me that a similar approach commends itself to mediations in more complex class actions. It is up to an applicant and his lawyers to satisfy themselves as to the adequacy of information provided by a respondent. This can be done in a variety of ways, including by requiring a respondent to provide some verification of financial information. As I have explained, a settlement deed can provide protections if this material was ultimately found to be false or misleading. Alternatively, if verification was not provided by a respondent and this was drawn to the attention of a Judge in the course of a settlement approval application under s 33V, then this would be regarded as somewhat of a red flag in assessing whether the Court can be satisfied that the proposed settlement (premised on a discount on the basis of recoverability concerns) is fair and reasonable and in the interests of group members.

22    There may be a range of measures a Court could take in such an application to explore the soundness of the proposed settlement. The high watermark of Watson’s submissions today was that if the Court, as part of its supervisory and protective role, is required to satisfy itself as to recoverability issues in settlements of this type, it is not clear why that examination should only occur in the context of an extant settlement approval application (with all the attendant process costs).

23    Although there is some superficial attraction to this argument, I do not think it withstands close scrutiny. I have often railed against unnecessary costs being expended on s 33V applications. If a proposed settlement is agreed on the basis of a substantial discount due to recoverability issues, then I have no doubt that such an application could be prepared and put before the Court economically. One does not need scores and scores of pages of confidential counsel opinions (which often, to borrow from Churchill, by their very length defend themselves against the risk of being read) concerning theoretical matters as to prospects if the primary motivation for seeking a substantial discount on settlement is because the respondent will be unable to meet a judgment.

24    If the Court is dissatisfied with the information that has been provided by the parties, such that it is vexed as to whether the settlement can be approved, then, as noted above, the Court has an armoury of powers by which further information can be obtained (for an example of where I approached a settlement approval application in this way, see Bywater v Appco Group Australia Pty Ltd [2020] FCA 1537).

25    Needless to say, if it turned out in a theoretical case that a respondent had misrepresented its financial position or had failed to provide sufficient information in order to allow an applicant to form a rational view as to a proposed settlement, such that issues as to good faith in the mediation process are called into question, consequences may arise following an unsuccessful s 33V application. Again, there is no reason to suspect that such a problem arises in the present case.

26    What, then, is the way forward?

27    Given that the mediation order made by Thawley J on 6 February 2023 is now spent, I propose to make an order referring the whole of the proceedings to mediation to be recommenced forthwith and to be concluded only when the mediator referred to in the order is satisfied that the mediation has no realistic prospect of success.

28    I am not persuaded, however, that it is appropriate at this point in time that I make an order requiring E&P to produce the documents sought by Watson. Upon any settlement approval application, it will be a matter for the Judge hearing the application to form a view as to what, if any, further enquiries should be made as to the financial position of E&P on the evidence adduced on the settlement application. In the event a settlement is struck and there are real issues going to recoverability, that will be an issue informing the Court’s determination of whether the settlement is fair and reasonable and in the interests of group members.

E    CONCLUSION AND COSTS

29    For the reasons given above, I dismiss the interlocutory application.

30    I do not propose to make a costs order in relation to this application. For all I know, in due course it may become necessary for the Court to be apprised of information that is presently confidential in order to make an appropriate costs order, which is an exception to the settlement privilege in s 131(1) of the Evidence Act. Moreover, as I have noted, it may be necessary on any settlement approval application for the Court to learn far more about issues concerning recoverability.

31    Accordingly, the appropriate course in all the circumstances is for the issue of costs to be reserved for any settlement approval application or, failing such an application, for it to be dealt with at the conclusion of the initial trial with all other costs issues.

Associate:

Dated:    21 August 2023

SCHEDULE OF PARTIES