"Learn from the mistakes of others. You can't live long enough to make them all yourself" - Elenor Roosevelt

It is rare that reported cases do not offer at least one ‘take-away lesson’ to the benefit of others.

The 2013 Federal Court's two recent interlocutory decisions in Moody Kiddell & Partners Pty Ltd v Arkell1 deal with an 'abuse of process' during the discovery stage of the proceedings and are a veritable 'treasure trove' of wisdom for both litigators and litigants.

Background

The first and second respondents (Messrs Arkell and Brooke) were former employees of the plaintiff-applicant, Moody Kiddell & Partners Pty Ltd (“MKP”), a specialist brokerage service for equipment finance. Arkell and Brooke both later resigned from MKP and began working under the third respondent, Broolend Pty Ltd trading as “Brooke Financial Solutions” (BFS), however, MKP alleges that in breach various obligations, Mr Brooke copied and retained a client list and other internal documents belonging to MKP; used the information to establish the BFS business in competition with MKP; solicited clients of MKP for the competing business including during his employment with MKP; and assisted Arkell to do the same.

Brooke denied the allegations and, not surprisingly, the discovery phase was expected to be very illuminating.

MKP commissioned Ferrier Hodgson to forensically examine the computers, servers and electronic storage devices used by Mr Brooke, and it was discovered, amongst other things, that Brooke’s computer had been used to download various documents, including a client list; and that file destruction software had been installed on his home and new business computers around the time of the Court orders for discovery. The forensic analysis also revealed Googlesearches enquiring about the consequences of non-compliance with a Federal Court order; while cross-examination of Brooke (on his 4 discovery affidavits) confirmed that documents, including emails, had been deleted by him (unbeknownst to his lawyers).

By interlocutory application, MKP sought an order that Brooke’s and BFS Amended Defences be struck out as an abuse of process of the Court – due to the alleged deliberate destruction of documents relevant to the issues in dispute and which otherwise ought to have been discovered by Brooke and BFS. Brooke and BFS had defended the interlocutory application, in effect, on all grounds – with no concessions to the effect that documents had been destroyed, deliberately or otherwise.

On 22 October 2013, Jagot J delivered judgment, effectively finding in favour of the applicant on all factual issues and concluding that the conduct of Brooke did constitute an abuse of the process of the Court, enlivening the Court’s power to strike out the Defence (the “Decision”). The Court found that the drawing of inferences adverse to Brooke would be insufficient to ensure a hearing fair to both parties and, therefore, ordered that paragraph 105 of the Amended Defence be struck-out (effectively meaning that it was admitted). The Court was not persuaded that the ‘draconian’ step of striking-out the entire Defence was warranted and confirmed that MKP retained the onus to prove the existence of the obligations to which Mr Brooke is alleged to be subject, and other elements of the claim not affected by the abuse.

On 12 November 2013, the Court delivered a further judgment in relation to an application by MKP that the costs related to the Decision be payable on an indemnity basis and payable forthwith (the “Costs Judgment”).  Jagot J accepted that the entire sequence of events relating to discovery had been forced upon the applicant, no doubt at great expense and inconvenience to it, by the continued delinquent behaviour of Brooke; and that the applicant should be fully compensated for what it had to do as a result. Further, the discovery process was accepted as being distinct enough from the main proceedings that, and in the absence of any substantive opposition from Brooke and BFS, those costs were also ordered to be payable forthwith

For the ears of the wise – acquirable knowledge:

  1. Digital Forensics

The forensic analysis available to examine digital records seems to be surging ahead exponentially. In both criminal and civil cases, well-funded investigators have been able to retrieve and lay bare many uncomfortable truths. This is an area no doubt increasingly the topic of advice from lawyers - both to clients considering engaging such specialist investigators (and the Court orders that may be required to obtain access to or preserve of the relevant hardware) and to other clients as a warning, for example, that succumbing to the temptation to destroy evidence may have a ‘judgment day’ much earlier than they may realise. This then leads to the next lesson – difficult discussions.

  1. Difficult Discussions

The extent to which Brooke may have been advised of his discovery obligations and the possible consequences of breaching those will likely remain between him and his legal team, protected by legal professional privilege; however, the Decision is a stark reminder of difficult discussions that ought to be had with clients about such matters.

Despite the unpleasant connotations that such a discussion may raise, it is to be expected that a fully informed client will be stronger in the face of temptation. Punishment as a deterrent can only work in the absence of ignorance.

While it may seem naïve to a small number of clients that they should ‘bare all’ to their legal advisors, it is obvious that their legal teams cannot advise them properly unless they have all the facts, and the Decision is a good demonstration of the consequences that can follow, an example that can be pointed to in the hope it will act as a deterrent. Litigation can sometimes be avoided completely, if not minimised in cost, when a client is fully frank about the situation they have found themselves in and allow their lawyers to provide advice and recommendations based on the true situation rather than a fiction they have created that, more often than not, will eventually come unstuck in a spectacular and costly fashion.

  1. Measuring the ‘Success’ of an Application

It is often argued that for an applicant to be entitled to the costs of an interlocutory application, such as a Notice of Motion, it needs to have been ‘substantially successful’, and quantitative discussions can then often follow about how many of the orders sought were ultimately granted.

The Costs Judgment, however, demonstrates that qualitative factors also need to be considered. Notwithstanding the quantitatively minor success of merely one part of the Defence being struck-out, in the face of an application seeking to strike out the entire Defence, the Court had no hesitation in ordering costs on an indemnity basis in favour of the applicant, due to the qualitative nature of the ‘success’ – a finding that the second respondent had destroyed evidence and was guilty of an abuse of process.

  1. The Relief Sought

The orders sought in the NOM appear to have been drafted in a “all or nothing” manner – seeking the striking out of the entire Defence. While there may have been strategic reasons for this, and it was not ultimately fatal to the application, the Court is often assisted by a tiered or alternate approach to the remedies sought, and the success of applications can sometimes rest on this, not to mention the potential benefit the process may have in resolving disputes early, when the parties consider middle ground that may be acceptable to all.