On 6 April 2016 I rejected the whole of an expert report sought to be relied on by the plaintiffs which was prepared by Mr Joseph Willis. At the time of rejecting the report I indicated that I would give my reasons for doing so later. These are those reasons.
Mr Willis is an accountant and in his report dated 25 August 2015 he expresses opinions on the earnings before interest, tax, depreciation and amortisation (EBITDA) "which should have been earned" by the following entities:
1.1.1 Expense Reduction Analysts Global Insurance Consulting Services, Inc. (ERAGICS USA) for the four years ended 30 December 2011.
1.1.2 Expense Reduction Analysts Insurance Services SAS (ERAIS Europe) for the three years to 31 December 2011.
1.1.3 ERA Insurance Services Pty Ltd (ERAIS) for the four years to 31 December 2011.
1.1.4 Expense Reduction Analysts Global Insurance Consulting Services Limited (ERAGICS) for the four years to 31 December 2011.
The Expense Reduction Analysts group (ERA) operates a global franchise business of providing advice to clients to assist them to reduce the costs of a range of operating overheads, including insurance. At the time of the events giving rise to these proceedings, the insurance business was conducted or was proposed to be conducted through the four entities whose EBITDA Mr Willis was asked to determine. Those entities earned income or were expected to earn income, from cost reduction projects for clients that were identified by franchisees with the assistance of the ERA companies.
The EBITDA of the four entities, and in particular the EBITDA of ERAGICS which is derived from the EBITDA of the other three entities, together with an assumption that ERAGICS would continue to earn at least the amount it earned in 2011, are used by another expert accountant engaged by the plaintiffs, Mr John Temple-Cole, to calculate the value of 35 percent of the shares of ERAGICS as at 25 February 2008 and, in the alternative, as at the date he prepared his fourth report (16 October 2015). The value of those shares as at those dates is said to represent the loss suffered by the third plaintiff, Mr Armstrong, as a result of certain conduct of the defendants (described in Mr Temple-Cole's reports as "the Deed conduct").
In an earlier report, Mr Temple-Cole had estimated the EBITDA of ERAGICS and calculated the value of the shares (as at 25 February 2008) on the basis of that estimate as falling within the range of $833,943 and $984,290 before court interest. Mr Temple-Cole used the revised assumptions obtained from Mr Willis's report to calculate the value of 35 percent of the shares in ERAGICS on a number of different bases. The details are not important for present purposes. Suffice it to say, Mr Temple-Cole concludes that the value of the shares in view of his revised calculations fall within the range of $5.233 million and $13.179 million.
According to Mr Stretch, the solicitor for the plaintiff, Mr Willis was engaged after the defendants produced additional records of ERAGICS USA. Mr Stretch says that he did not ask Mr Temple-Cole to reconsider his opinion in light of the additional information because Mr Stretch thought that that would be a large task and, having regard to Mr Temple-Cole's charge-out rate, beyond the financial capacity of the plaintiffs.
Before preparing his report, Mr Willis met with Mr Stretch and Mr Armstrong. Mr Willis said, when giving evidence on the voir dire, that the most relevant information to determining the EBITDA of the relevant entities was their financial statements. However, he was told at the meeting that they were not available. Instead, in relation to ERAGICS USA, Mr Willis was given a trial balance for that company for the nine months ended 30 September 2008. He was also given three databases of projects relating to the consulting business carried on by ERAGICS USA. The first (referred to BB-2 Document 1) contained details of projects covering multiple expenses including insurance. The second (referred to as BB-2, Document 2) contained details of projects only relating to the insurance expense. The third was a list of insurance projects worked on by Mr Barnes (who was employed by ERAGICS USA for a period of time) up until April 2012. Mr Willis was also given an excel template, which it appears was partially completed, that was designed to record each project, the status of the project, the total income expected to be earned from each project and ERAGICS USA's share of that income. He was also given a draft list of assumptions, which is not in evidence, together with a copy of Mr Temple-Cole's report.
Mr Willis reformatted and completed the template that he was given from information obtained from the documents that had been given to him. He also made comments on the draft assumptions that were given to him and suggested some additional assumptions he should be asked to make. In the case of some assumptions, he formed a view on whether the assumption was reasonable or not, but in the case of others he did not.
Shortly before completing his work, Mr Willis was given a letter of instructions which set out the assumptions that he was asked to make. The assumptions are lengthy. It is not necessary to set all of them out. However, Mr Willis was asked to assume that the information contained in DB-2 "is the most accurate", that the information contained in BB-2, Document 2 "is the next most accurate" and that the information contained in BB2,-Document 1 "is the third most accurate". Mr Willis was also asked to make a number of assumptions concerning how the databases were to be used. The following two give a flavour of what Mr Willis was asked to assume:
3.1.7 Projects recorded in the databases at Exhibit BB-2 as "Cancelled by ERA" or similar earned a revenue equivalent to the average percentage revenue extracted from the DB-2 reports applied to the Project Spend (Annual Premium) across 50% of the projects. This is to be achieved by applying 50% to the revenue from all projects in this category. As with other projects a corresponding amount is earned in the following year.
3.1.8 Projects recorded in the databases at Exhibit BB-2 as "No Savings" or similar earned a revenue equivalent to the average percentage revenue extracted from the DB-2 reports applied to the Project Spend (Annual Premium) across 50% of the projects. This is to be achieved by applying 50% to the revenue from all projects in this category. As with other projects a corresponding amount is earned in the following year.
Mr Willis also says that he assumed that the three databases that he was given "recorded the revenue that was earned for each of the projects", although nowhere in his report does he state that that was an assumption he had made or an opinion that he had formed.
In relation to expenses, Mr Willis was asked to make assumptions in relation to each type of expense incurred by ERAGICS USA. So, for example, he was asked to assume that accounting and auditing expenses would be $50,000 for the year to 31 December 2008, $75,000 in the year to 31 December 2009, $120,000 in the year to 31 December 2010 and $120,000 in the year to 31 December 2011.
In relation to ERAIS Europe, Mr Willis was asked to make the following assumptions:
4.1.1 The first full year of trading for ERAIS Europe is the year ended 31 December 2009 and that the results for this year were the same as ERAGICS USA for the preceding year i.e. the year to 31 December 2008.
4.1.2 The results for ERAIS Europe for the year to 31 December 2010 were the same as ERAGICS USA for the preceding year i.e. 31 December 2009.
4.1.3 The results for ERAIS Europe for the year to 31 December 2011 were the same as ERAGICS USA for the preceding year i.e. 31 December 2010.
In relation to ERAIS, Mr Willis was asked to assume that the EBITDA of that company corresponds to the amounts determined by Mr Temple‑Cole for the three years to 31 December 2010 and that the EBITDA for ERAIS for the year ending 31 December 2011 was the same as it was for the year ending 31 December 2010.
On the face of Mr Willis's report, it appears that his conclusions are dictated almost entirely by the assumptions he was asked to make (together with his unexpressed assumption that the databases recorded revenue earned) and all Mr Willis has done is to perform some relatively simple calculations on those assumptions to arrive at his conclusions. Mr Willis gives no indication in his report of the fact that he had considered whether some but not all of the assumptions he was asked to make were reasonable.
The defendants objected to Mr Willis's report on three bases:
1. at the time Mr Willis prepared his report he was not provided with, and he does not state in his report that he complied with, the Expert Code of Conduct set out in schedule 7 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR);
2. the report does not comply with the requirements of s 79(1) of the Evidence Act 1995 (NSW) and the principles stated by the High Court in Dasreef Pty Limited v Hawchar [2011] HCA 21; (2011) 243 CLR 588;
3. the report should be excluded under s 135 of the Evidence Act, which provides:
The court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might:
(a) be unfairly prejudicial to a party; or
(b) be misleading or confusing; or
(c) cause or result in undue waste of time.
The plaintiffs took issue with these contentions. They also pointed out that, by consent, the court made the following order on 23 February 2016:
Subject to order 9 below, the parties have leave to rely on all lay and expert evidence they have served after 22 June 2015.
The plaintiffs contended that as a result of that order the defendants are not able now to object to the report being received into evidence.
[2]
The Expert Code of Conduct
UCPR r 31.23 provides:
(1) An expert witness must comply with the code of conduct set out in Schedule 7.
(2) As soon as practicable after an expert witness is engaged or appointed:
(a) in the case of an expert witness engaged by one or more parties, the engaging parties, or one of them as they may agree, or
(b) in the case of an expert witness appointed by the court, such of the affected parties as the court may direct,
must provide the expert witness with a copy of the code of conduct.
(3) Unless the court otherwise orders, an expert's report may not be admitted in evidence unless the report contains an acknowledgment by the expert witness by whom it was prepared that he or she has read the code of conduct and agrees to be bound by it.
(4) Unless the court otherwise orders, oral evidence may not be received from an expert witness unless the court is satisfied that the expert witness has acknowledged, whether in an expert's report prepared in relation to the proceedings or otherwise in relation to the proceedings, that he or she has read the code of conduct and agrees to be bound by it.
Schedule 7 sets out a number of obligations placed on expert witnesses, including a duty to assist the court impartially, to comply with the court's directions, to cooperate with other expert witnesses and to prepare a report that, among other things, states that the expert has read the code of conduct and agrees to be bound by it and sets out the assumptions on which the witness relies, the reasons for each opinion expressed and any limitations on the report arising from lack of information or because particular matters fall outside the witness's expertise.
[3]
The Evidence Act
Section 76(1) of the Evidence Act provides:
Evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed.
That rule is defined as the "opinion rule". An exception to the opinion rule is created by s 79(1) in these terms:
If a person has specialised knowledge based on the person's training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge.
As the plurality in Dasreef pointed out (at [32]) in order to be admissible under s 79(1), the evidence that is tendered must satisfy two criteria:
The first is that the witness who gives the evidence "has specialised knowledge based on the person's training, study or experience"; the second is that the opinion expressed in evidence by the witness "is wholly or substantially based on that knowledge".
In applying these requirements, the plurality went on to explain (at [37]):
The admissibility of opinion evidence is to be determined by application of the requirements of the Evidence Act rather than by any attempt to parse and analyse particular statements in decided cases divorced from the context in which those statements were made. Accepting that to be so, it remains useful to record that it is ordinarily the case, as Heydon JA said in [Makita (Australia) Pty Ltd v Sprowles [2001] 52 NSWLR 705 at [85]] that "the expert's evidence must explain how the field of 'specialised knowledge' in which the witness is expert by reason of 'training, study or experience', and on which the opinion is 'wholly or substantially based', applies to the facts assumed or observed so as to produce the opinion propounded". The way in which s 79(1) is drafted necessarily makes the description of these requirements very long. But that is not to say that the requirements cannot be met in many, perhaps most, cases very quickly and easily. That a specialist medical practitioner expressing a diagnostic opinion in his or her relevant field of specialisation is applying "specialised knowledge" based on his or her "training, study or experience", being an opinion "wholly or substantially based" on that "specialised knowledge", will require little explicit articulation or amplification once the witness has described his or her qualifications and experience, and has identified the subject matter about which the opinion is proffered.
[4]
The order made on 23 February 2016
It is convenient to begin with the effect of the order made on 23 February 2016. The plaintiffs, relying on the decision of the Court of Appeal in Hodder Rook & Associates Pty Ltd v Genworth Financial Mortgage Insurance Pty Ltd [2011] NSWCA 279, submitted that the defendants are prevented by that order from objecting to the evidence of Mr Willis.
In Hodder, the appellant was sued by the respondent mortgage insurance company for allegedly preparing two negligent valuations on which the mortgagee and insurer relied. The appellant was represented by its sole director. It filed two expert valuation reports, neither of which complied with UCPR r 31.23 because neither contained a statement that the valuer had read the Code and agreed to be bound by it, although both valuers confirmed that they had read the Code subsequently and the Code did not cause them to change their opinions. The matter was set down for a hearing of four days on the basis that there would be a contest between the experts retained by the parties in relation to the valuations and the experts for the parties met and produced a joint report. However, when the appellant opened its case the respondent objected to its expert valuation evidence on the basis that neither expert valuer had read the Code of Conduct before giving his report. On that basis, the trial judge rejected the two reports.
That decision was overturned on appeal. One reason that was given was that the objection was raised too late. As Young JA (with whom Beazley JA and Handley JA agreed) said:
[49] The primary judge did not take into account when determining to refuse leave to adduce the expert evidence that, pursuant to directions, not only had the material been in the opponent's hands for 3 to 5 months, the reports had been the subject of comment by the respondent's own expert and, there had been joint conferences of experts.
[50] Pre-trial directions are not to be treated as a farce. When directions are made for evidence and evidence is produced and a trial is set down for four days (obviously on the basis that conflicting experts will all be cross-examined) it is no longer open for a party, at the first day of the hearing to take a technical objection to the opponent's evidence. If an objection is taken, the trial judge should normally disallow it or make such order as is appropriate for there to be a fair trial.
Two points should be made about the application of these principles to this case.
First, the order made on 23 February 2016 must be understood in context. The expert evidence served by the plaintiffs from Mr Willis was served out of time. The order made on 23 February 2016 was directed at that breach. It is to be interpreted as an order that the plaintiffs were entitled to rely on the evidence notwithstanding its late service. It should not be interpreted as an order that the whole of Mr Willis's report should be admitted into evidence irrespective of any other matter relevant to whether it was admissible or not.
Second, it is apparent from what Young JA said that whether leave should be given to rely on a report that fails to comply with UCPR r 31.23 depends on whether the interest of justice are best served by excluding the report because of the failure. That depends on a number of considerations including the following:
1. the instructions actually given to the expert and the expert's prior familiarity with the Code;
2. whether the expert was subsequently given a copy of the Code and agreed to comply with it;
3. the extent to which the expert's report apparently complies with the Code;
4. whether the proceedings have been conducted on the basis that some or all of the report will be admitted into evidence notwithstanding the failure to comply with the Code;
5. the prejudice that may be caused to the party who seeks to rely on the evidence.
As I said in Welker & Ors v Rinehart & Anor (No 6) [2012] NSWSC 160 at [35], it is for the party seeking to lead the evidence to satisfy the court that the non-compliance with UCPR r 31.23 has not affected the objectives of the rule, or that there are other reasons which justify a departure from it. The objectives of the rule include the provision of impartial expert evidence to the court that meets the requirements for the admissibility of opinion evidence.
I was not satisfied that the plaintiffs had discharged their onus in this case. Mr Willis says that he was familiar with the Code and in an affidavit sworn on 30 March 2016 he says that he was provided with a copy of the Code after he had prepared his report, that he agrees to be bound by it and having reviewed his report in conjunction with the Code he did not consider that his report requires amendment. However, it is not clear how he could have formed that view. Mr Willis states in his report that he was expressing an opinion on the EBITDA "which should have been earned" by the relevant entities. It is far from clear what is meant by the phrase "which should have been earned". But leaving that difficulty aside, it is apparent that Mr Willis thought that he was expressing an accounting opinion on EBITDA and not simply engaging in an arithmetic exercise. For that purpose, he considered whether some of the assumptions that he was asked to make were reasonable. Indeed, he identified some of the assumptions that he was subsequently asked to make for the purpose of preparing his report. None of that, however, is explained in the report. Moreover, Mr Willis appears to have made another critical assumption that the figures in the databases he was given represented actual income earned. However, nowhere is that assumption stated. These aspects of the report suggest that Mr Willis has misunderstood the nature of the task he was meant to undertake, and his subsequent affidavit does nothing to dispel that impression.
The orders the court made on 23 February 2016 do not alter the position. On 29 September 2015, Holding Redlich, the former solicitors for the first to ninth defendants, wrote to Mr Stretch stating that "we consider the report [of Mr Willis] to be wholly inadmissible and our clients intend to object to the tender of the report in its entirety". No reason was given. However, it was open to Mr Stretch to seeks reasons, but he did not do so. Consequently, the plaintiffs were on notice from 29 September 2015 that the defendants intended to object to Mr Willis's report; and it was open to them to take whatever steps they considered appropriate in light of that fact. In that respect, this case is distinguishable from Hodder.
In addition, prior to obtaining Mr Willis's report the plaintiffs obtained a report from Mr Temple-Cole dealing with the EBITDA of the relevant entities. No objection is taken to that report. It was open to the plaintiffs at the time they obtained that report to seek additional discovery from the defendants if they thought it was necessary to enable Mr Temple-Cole to complete his report. They did not do so. Mr Alstergren QC, who appears for the plaintiffs, submitted that the costs of bringing an application for further discovery would have been prohibitive. But there is no evidence to support that submission. Consequently, the plaintiffs will not be unfairly prejudiced if they are not able to rely on Mr Willis's report. It is true that that report is more favourable to their case than the report prepared by Mr Temple-Cole. But that alone does not establish that they have been unfairly prejudiced.
[5]
Admissibility of the report
Even if I am wrong in my conclusion that Mr Willis's report should be excluded because it does not comply with UCPR r 31.23, I concluded that it was inadmissible under s 79 of the Evidence Act and the principles stated in Dasreef. Alternatively, I concluded that it should be excluded under s 135 of the Evidence Act.
As to the first of these propositions, it is not disputed that Mr Willis has the relevant expertise to express an opinion on the EBITDA or projected EBITDA of ERAGICS. The question is whether the opinion he expresses is based wholly or substantially on his specialised knowledge and, to the extent that it is, he has adequately explained the reasons for his opinions.
In my opinion, Mr Willis's report failed to meet these requirements. On the face of it, the report simply consists of calculations based on the assumptions that Mr Willis was given. In that case, it cannot be said that the opinions expressed by Mr Willis are based wholly or substantially on his specialised knowledge. Rather, they are based wholly or substantially on the assumptions that he was asked to make. The actual calculations performed by Mr Willis could be performed by anyone with basic skills in arithmetic and manipulating excel spreadsheets. As part of determining the projected or hypothetical EBITDA of the entities with which Mr Willis was concerned, an accountant is likely to have specialised knowledge which would enable the accountant to express opinions on the reasonableness many of the assumptions Mr Willis was asked to make and on what adjustments, if any, need to be made to those assumptions to arrive at a reasonable estimate of the EBITDA of the relevant entities during the relevant years; and it is to be expected that an accountant who was asked to express opinions on the EBITDA of certain entities would undertake that task. It appears that, to some extent, Mr Willis actually did that. However, he does not say in his report that he undertook that task. Nor does he identify the assumptions that he thought were reasonable or give any reasons for the conclusions he reached on that question.
As to s 135 of the Evidence Act, I concluded that the probative value of the report was substantially outweighed by the danger that the evidence might be unfairly prejudicial to the defendants and might cause or result in an undue waste of time.
In my opinion, the report has little probative value. The conclusions of the report depend entirely on the assumptions that Mr Willis was asked to make. A critical if unstated assumption made by Mr Willis is that the figures derived from the databases provided to Mr Willis recorded revenue earned. However, the uncontested evidence of Mr Clucas, who was the group finance and administration director of ERA, is that the information contained in those databases is incomplete and inaccurate. It is incomplete because it does not take account of information contained in another database maintained by ERA using software known as Sage AccPac. It is inaccurate because the information was obtained from ERA's Knowledge Management System (the KMS). That system contains information in relation to projects engaged in by each franchisee. According to Mr Clucas's uncontested evidence, the main purpose of the KMS system was to identify which franchisee was responsible for which customer. The information in that system was maintained by the franchisees, who were not diligent in updating it. The report has no probative value except to the extent that the plaintiffs are able to establish that the assumptions made by Mr Willis were reasonable assumptions to make. It seems clear on the basis of Mr Clucas's evidence that the plaintiffs will not be able to establish at least one critical assumption.
On the other hand, admission of the report would cause the defendants considerable prejudice. In the normal course of events, the defendants could have expected Mr Willis's report to explain which assumptions he regarded as reasonable and to give at least brief reasons for those opinions. It would then have been open to the defendants to investigate whether they should take issue with the evidence given by Mr Willis and cross-examine him on those issues where they considered it appropriate to do so. However, as the report is written, they are put in a difficult position. They may wish to cross-examine Mr Willis about some of the assumptions he makes. But if they do, they will have no opportunity to investigate what he says about them and will be bound by any evidence he gives. It is unduly prejudicial to the defendants to require them to make that forensic choice.
I also concluded that admission of the report was likely to cause or result in an undue waste of time. As I have said, the report is of no probative value unless the assumptions on which it is based are made good. Consequently, it will be necessary to investigate the reasonableness of each of the assumptions for the report to have any value. On the other hand, it appears clear from the evidence of Mr Clucas that at least one critical assumption will not be made out. Ultimately, then, time spent on the other assumptions is likely to be wasted.
It was for these reasons that I concluded that Mr Willis's report should be rejected.
[6]
Amendments
12 April 2016 - First to tenth defendants counsel and solicitors amended on coversheet
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Decision last updated: 12 April 2016
Parties
Applicant/Plaintiff:
Armstrong Strategic Management and Marketing Pty Limited