How do Australian courts deal with the duty of corporate record-keeping in practice? David McGrath finds that “it depends”, as two recent cases showed very different outcomes.

The first of those matters was the successful prosecution by the NSW Food Authority of Primo Smallgoods which resulted in fines of $A34,500 and headlines around the country. The failures of Primo’s record keeping systems were a key component of the regulator’s case against Primo.

The Primo group is the largest producer of smallgoods in Australia. Primo sources its meats both locally and from overseas.

Acting on an anonymous complaint that Primo was mislabelling imported meats in as “Product of Australia”, two officers from the Authority conducted an unannounced inspection of the plant.

They found that imported pig meat was being placed into packaging labelled either “Product of Australia”, “Meat Content 100% Australian” or “100% Australian Made” or a combination of these claims. When they raised this matter with Primo’s management, they were advised that it must be a mistake and that corrective action would be taken.

The investigators also conducted a tracing exercise to ascertain the origin of selected products. They selected packaged products (two from Primo’s production plant and three from a retail outlet) and asked Primo to supply documents that would identify the source meat used in their production. Primo was unable to do this.

Though it initially vowed to vigorously defend all charges, Primo ultimately pleaded guilty to all “misleading conduct” (i.e mislabeling of food products) and records management offences.

Although Primo had pleaded guilty to the charges, the court still had to decide on an appropriate penalty. Primo’s workflow and records management practices came under close scrutiny.

Primo did in fact maintain a system of documentation from receipt of pork meat through to dispatch of packaged product. Under that system, all meat received by Primo received a meat code. In the case of imported meat, this was an order code provided by the supplier. For local meat, it was a combination of supplier name abbreviation and delivery date information.

The meat code could be used to differentiate imported from locally sourced meat, and was reproduced on all documentation generated to track the meat through processing and packaging.

After the sides of pork are cooked, the meat is sliced and packed. During this process, imported and local meat is further distinguished by coloured labels or tags.

Following machine slicing, the meat moves onto a packing line for manual sorting and assembly into lots by weight and type.

The lots are then transferred to another machine for packing. Each pack contains a “use by” or “best by” date and barcode which is scanned before the product is dispatched.

Each packing line produces a daily Form 71 which records details of what was packed during the day. The Form 71 recorded meat codes of imported meats (although curiously it omitted this information for local meats).

Problem was, Primo could not provide this document to the Authority when it requested business records in relation to the tracing exercise. The court noted this was a key tracing document.

There was no suggestion here that Primo produced unsafe meat for consumption. In the judge’s view, however the purpose of the Food Act extended beyond ensuring that food was fit to eat. It required that purchaser’s be given accurate information about food purchased. He pointed out that mislabelling could compromise consumer safety, where it becomes known that meat from a source country is contaminated, but a purchaser was misled into thinking that the meat was local and therefore uncontaminated.

The mislabelling was compounded by the failure to keep adequate records. The judge noted that “the Act provides for a scheme whereby records are sufficient to institute a recall of products.”In the instances charged, Primo could produce no records that would enable a recall of the product where a problem arose with the source of the meat.”

The judge was satisfied that the offences were the result of systematic failure by Primo to properly implement quality control procedures. He noted that certain procedures made that failure more likely such as the “Form 71 provision that local meat be represented by omission and the apparently casual storage of the records”.

In sentencing, the judge noted Primo’s guilty plea and genuine remorse. He also took into account the significant overhaul that Primo instituted of its systems which included: expansion of the quality assurance (QA) team; updating procedures manuals particularly in regard to identification, traceability, document/records control and procedure, and the requirement for a meat code to be entered on Form 71 for all meat
Fines were imposed in relation to each count involving the failure to maintain records.

The Matrix

The sentencing of Primo for its failure to keep adequate records can be contrasted with the treatment by the Federal Court in July, 2010 of an allegation that a company had failed to retain hundreds of thousands of documents evidencing financial transactions.

The matter was Matrix Film Investment One Pty Limited & Ors v Alameda Films LLC. At stake in these proceedings was the payment of licence fees for the highly successful Warner Brother’s (Alameda) 1999 film, “The Matrix” which grossed $171M.

Alameda was the distributor of The Matrix. It acquired its distribution rights under a distribution agreement with the films owners, Matrix Film Investment One Pty Limited ("Matrix One"). For those rights, Alameda was obliged to pay Matrix One a licence fee calculated in accordance with a Licence Fee Formula in the agreement. Alameda was required to issue earnings statements to Matrix One. Those earnings statements were duly issued by Alameda between August 2001 and August 2005. Matrix One then had a time limit within which it could challenge figures provided by Alameda. Matrix One challenged the earnings statements and audited the defendant's books between 2003 and 2005. Following the audit, certain specific objections, concerning overstatement and understatement of certain revenues and expenses, were formally raised. These objections ultimately became the subject matter of the legal proceedings.

Extensive discovery and other pre-trial steps duly took their course and the matter was set down for hearing. That hearing was well underway in July, 2010 when Matrix One sought to add a fresh allegation to its case, namely that the Earnings Statements provide by Alameda “erroneously included deductible expenses for which no supporting documentation has been retained.”

Effectively, at the last minute, Matrix One demanded that Alameda justify all $100m of the expenses in their earnings statements by producing the original supporting documentation such as contracts, purchase orders, invoices, payment vouchers and receipts. The judge rejected the amendment, saying that it was ‘particularly prejudicial’ to Alameda because of the scope of the additional claim ($100M), the extent of the discovery obligations it raised and the fact that it had not been raised during discovery. If it had been, he could have more fairly balanced the interests of the parties by fashioning appropriate discovery orders whereby the defendant’s primary documents could have been sampled.

Different conclusions

In these two cases, allegations were made about failures to retain primary documents however the two outcomes were very different.

In the Primo case, by the time the matter came to court, the Food Authority had already proved its case in that the company was unable to produce its records. It was also able to show that the failures were systemic and that the breaches had the potential to jeopardise public health and safety.

In the Matrix case, the decision not to allow Matrix One to pursue its allegation that Alameda had failed to retain its primary documents that supported its financial systems, was classic example of the use of the court’s case management powers.

The authenticity and reliability of any reports, statements, or other output from a computer system, is of course subject to challenge by the other party. One way to validate the data is to inspect the primary documents from which the data was extracted.

Just because an issue can be raised, doesn’t mean that the court will entertain it. The overarching principle of the court in civil litigation is the just resolution of disputes according to law, as quickly, inexpensively and efficiently as possible.

In the words of the defendant in The Matrix case, “why would an allegation of this magnitude be permitted so late, when it so magnifies the issues and discovery burden, when the fault lies with the plaintiffs for the timing of its raising?” The court agreed.

Records managers should take some comfort from the words of the judge who summed up the court’s position in relation to this type of discovery application, in this way:
“Other than in exceptional circumstances (where, for example, document destruction or fraud is alleged), it would indeed be surprising for a court to impose or enforce discovery of such a vast number of historical documents, that in many cases are now difficult to retrieve, and all the more so when many business records in the form of general ledger print-outs and the like, have already been discovered”

Some may be tempted to call this a victory for common sense!

David McGrath is a Sydney-based solicitor with extensive ediscovery experience.