Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation Number : [2002] WASC 286

Evidence - Expert evidence - Reliance by expert witness on hearsay evidence - Accountant gave evidence of projected profits to enable assessment of damages - Evidence based in part on accountant's knowledge of a comparable business where no evidence concerning that business was before the Court - Whether expert witness's conclusions were inadmissible because of reliance on hearsay evidence - Conclusions admissible because based primarily on admissible evidence - Turns on own facts

Damages - Assessment of damage - Whether adequate basis for accountant's evidence of projected profits - Whether trial Judge erred in preferring evidence of one accountant over another accountant - No error in trial Judge's reasons - Turns on own facts

English Exporters (London) Ltd v Eldonwall Ltd [1973] Ch 415

Holtman v Sampson [1985] 2 Qd R 472

Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705

McNeil v Commissioner of Taxation [2003] FCA 958; (2003) 202 ALR 35

National Justice Compania Naviera SA v Prudential Assurance Co Ltd (The Ikarian Reefer) [1993] 2 Lloyd's Rep 68

Pownall v Conlan Management Pty Ltd (1995) 12 WAR 370

R v Abadom [1983] 1 WLR 126

Steffen v Ruban [1966] 2 NSWR 622

HG v The Queen [1999] HCA 2; (1999) 197 CLR 414

Pollock v Wellington (1996) 15 WAR 1

1 MURRAY J: I agree with Steytler J that, for the reasons given by his Honour, this appeal should be dismissed.

2 STEYTLER J: The appellant, Automasters Australia Pty Ltd, and the first respondent, Bruness Pty Ltd, were parties to a franchise agreement. Pursuant to the terms of that agreement Bruness operated an automotive service business at Midland under the direction of the second respondent, Mr David Coombes. The franchise agreement gave to Bruness an exclusive licence to carry on the business, using the "Automasters" trading name and trademark. The agreement also made provision for a number of benefits to the franchisee, including quality assurance accreditation and administrative and marketing support. Bruness operated its business as a franchisee from 1 July 1997 until 15 March 1999, on which date the appellant purported to terminate the franchise agreement, contending that Bruness was in breach of it.

3 Bruness denied that it was in breach of the agreement and that the appellant had any right to terminate it. The ensuing dispute led to litigation. The appellant sued Bruness for damages for breach of the agreement and sought a number of ancillary orders, including one restraining Bruness from using the name "Automasters". Bruness counterclaimed. It sought a declaration that the franchise agreement had not been terminated, damages for breach of contract and damages arising from what it contended was unconscionable conduct on the part of the appellant in contravention of s 51AC(1) of the Trade Practices Act 1974 (Cth).

4 The trial Judge, after a hearing lasting some weeks, dismissed the appellant's claim and upheld the counterclaim. He ordered the appellant to pay to Bruness an amount of $93,184.67 by way of damages. That amount reflected the difference between Bruness' actual profit over the period following upon the purported termination of the franchise agreement on 15 March 1999, on the one hand, and the profit which the trial Judge found Bruness would have achieved had the appellant not breached the franchise agreement and had it not contravened s 51AC of the Act, on the other.

5 In calculating what would have been earned by Bruness, were it not for the appellant's unlawful conduct, the trial Judge relied upon expert evidence given by a certified practising accountant, Mr Graeme Lean. He preferred Mr Lean's evidence to that given by Mr Norman Mal Ashton, also a certified practising accountant, who was called on behalf of the appellant.

6 In this appeal, the appellant challenges the award of damages made by the trial Judge in favour of Bruness. Its sole ground of appeal (after the abandonment of other grounds) is to the effect that the trial Judge should not have relied upon Mr Lean's evidence.

7 Mr Lean became involved in the proceedings only during the trial itself, after it had become apparent to Bruness that expert evidence was required in order to establish its loss. Bruness approached Mr Lean less than two weeks before he gave evidence. However, during that period he was able to achieve a good deal. He visited Bruness' business premises on one occasion and, more importantly, he prepared financial statements for it in respect of the following trading periods:

(a) 1 July 1997 (when Bruness began trading under the franchise agreement) to 30 June 1998;

(b) 1 July 1998 to 15 March 1999 (the date of the purported termination of the franchise agreement);

(c) 16 March 1999 to 30 June 1999;

(d) 1 July 1999 to 30 June 2000;

(e) 1 July 2000 to 30 June 2001; and

(f) 1 July 2001 to 30 April 2002.

8 He also prepared projections of what would have been Bruness' income (derived from sales) and expenses (essentially purchases, wages, superannuation, advertising, franchise fee and fixed costs or overheads) for each of the trading periods after 15 March 1999 if the purported termination of the franchise agreement had not occurred. That, in turn, enabled Mr Lean to calculate a projected profit, upon that assumption, which might be compared with Bruness' actual profit over the trading periods in question, thereby enabling an assessment of damages to be made.

9 Two critical assumptions were made by Mr Lean in arriving at his projections. The first was that Bruness' income from sales would have increased, after the period which ended on 30 June 1999, by an average of $5000 per month during the period from 30 June 1999 to 30 June 2006. The second was that the cost of Bruness' purchases over that period would have equated to 35 per cent of its income from sales.

10 In the course of his evidence Mr Lean was asked how he had arrived at his "projected expense figures". He responded by saying that he had adopted a rate of 35 per cent of the projected sales income "because I've compared this with another business I have of a similar nature. Cars-R-Us ...". Counsel for the appellant immediately objected to that evidence. Before he could expand upon his objection, the trial Judge invited Mr Lean to enlarge upon his evidence and to explain what it was that he had done. He responded as follows:

"I need to strike a percentage of sales as purchases. I'm using my knowledge of other businesses, plus this business, plus the fact this particular store doesn't have to acquire much in the way of stock. A few minutes up the road in Midland it's got Coventrys, one of the largest warehouses of motor car parts in Australia. It's possible for this business to reduce its stockholding and to lower its purchases. The purchases average I got going across the page there [a page from a schedule prepared by him and tendered in evidence, in which he had set out percentages derived from periods of Bruness' actual trading between 1 July 1997 and 30 June 2002], 40 per cent, 37 per cent and so forth, it's coming out at about 37 per cent average. I believe the industry standard is just slightly lower than that, 35 per cent."

11 Then, after asking Mr Lean about an assumption made by him that the cost of wages would average 26 per cent of the amount received from monthly average sales, the trial Judge asked Mr Lean whether he had derived the percentages to which he had referred from knowledge of the business. Mr Lean answered, "Yes." His Honour then asked Mr Lean what other sources of knowledge he wished to draw upon. Mr Lean responded by mentioning "a mechanic business in Fremantle, well-known business, Cars-R-Us ...". Mr Lean had been the tax agent for that business.

12 Counsel for the appellant thereupon renewed his objection, limiting it to Mr Lean's reliance upon knowledge of the business Cars-R-Us. He contended, in effect, that there was no first-hand, and therefore admissible, evidence before the Court in respect of the nature of that business or in respect of its accounts.

13 The trial Judge overruled the objection. He referred, in the course of doing so, to the following extract from the judgment of Ipp J in Pownall v Conlan Management Pty Ltd (1995) 12 WAR 370 at 374 - 375:

"The principles relating to the extent to which an expert may rely upon hearsay evidence as a basis for his or her opinion were dealt with in detail by Megarry J in English Exporters (London) Ltd v Eldonwall Ltd [1973] 1 Ch 415. His Lordship said (at 420):

'As an expert witness, the valuer is entitled to express his opinion about matters within his field of competence. In building up his opinions about values, he will no doubt have learned from transactions in which he has himself been engaged, and of which he could give first-hand evidence. But he will also have learned much from many other sources, including much of which he could give no first-hand evidence. Textbooks, journals, reports of auctions and other dealings, and information obtained from his professional brethren and others, some related to particular transactions and some more general and indefinite will all have contributed their share.'

... In my opinion, however, by these remarks Megarry J was saying no more than that information obtained by a valuer from others, relating to particular transactions, forms part of his general experience, knowledge and expertise upon which he can draw 'to formulate his opinion and to express working truths': see Pattenden, 'Expert Opinion Evidence Based on Hearsay' [1982] Crim LR 85 at 95. Hearsay information of this kind may be used by a valuer, for example, to give a general exposition of the subject, to assess market trends, or to determine whether a particular transaction is aberrant or consistent with overall market conditions: see English Exporters (London) Ltd v Eldonwall Ltd (at 421).

Hearsay evidence of this character (termed 'non-specific hearsay' by Pattenden (at 93)) is to be contrasted with hearsay evidence of particular comparable transactions that are used to infer the value of the property that is directly in issue (termed 'specific hearsay' by Pattenden (at 93)). Hearsay information of the latter kind, which is not otherwise proved by direct evidence, cannot be used by the valuer, unless otherwise proved by direct evidence."

14 Having referred to this extract, the trial Judge said that, as he understood the evidence of Mr Lean, Mr Lean had been able to see, as a result of his own analysis of Bruness' accounts, what had been the pattern of expenditure as a percentage of turnover. His Honour went on to say:

"To my mind, on any view of the matter it is clear that that is the essential touchstone of the projections which he proposes to speak to and that is very visibly evident from the written projections which have not yet been admitted in evidence which are before us. They are primarily referable to the trading pattern of Bruness itself.

In the course of going on to say something about the percentages that he has drawn upon, Mr Lean has referred to matters and other experience which to my mind bring the case within the former of the two categories I have touched on in Pownall; that he is drawing upon his general experience but that general experience necessarily, he being an accountant, brings in to play some recent experience with other customers, clients or businesses."

15 His Honour consequently ruled that the evidence was admissible.

16 Mr Lean thereupon continued his evidence. He was asked other questions about the projected expenses. One of these was how it was that he had arrived at "an average of 35 per cent" in respect of "purchases". He replied that he had done so by looking, first, at actual percentages (cost of purchases expressed as a percentage of income from sales) derived from previous years of trading. These had been 40.16 per cent in the year which ended on 30 June 1998, 37.02 per cent in the period 1 July 1998 to 15 March 1999, 39 per cent in the period 15 March 1999 to 30 June 1999, 42.68 per cent in the period 1 July 1999 to 30 June 2000, 39.91 per cent in the period 1 July 2000 to 30 June 2001 and 33.39 per cent in the most recent period, being 1 July 2001 to 30 June 2002. He went on to say:

"I believe the organisation could reduce its stock from 10 or 7 thousand to lower, bearing in mind that Coventrys is nearby. I also believe when you start purchasing stock in the order of as per the projections of 210 [thousand] and heading up to 315 a year or 336 a year, one could demand discounts on volume and lower that cost to 35 per cent."

17 Mr Lean said that he had allowed, as a possible discount on volume, 11/2 per cent.

18 Mr Lean was cross-examined on a number of aspects bearing upon these projections but did not depart from the opinions which he had formed. He was also cross-examined as regards his assumption that, were it not for the purported termination of the franchise agreement, Bruness' monthly sales would have increased by an average of $5000 over the financial periods following 30 June 1999. It was put to him that this was "just a notional figure" for which there was no real foundation. He responded as follows:

"No. I know Midland. I spent the first 21 years of my life in Bassendean. I attended Governor Stirling High School. I know the pulling power of Midland from the hills, from Kalamunda, from Northam, from Stratton. I've supported the Swan Districts Football Club all my life. I know that there's a demand for cars in that area. There's a huge demand for cars. Everything runs on four wheels in that area."

19 Earlier in his evidence, Mr Lean had said that he also took into account, in making his projections of sales, Bruness' entire trading performance prior to the purported termination of the franchise agreement (he mentioned that, in the period from 1 July 1998 to 15 March 1999, sales had increased, as compared with the preceding period, by an average monthly amount of over $8000), the fact that the store was in a very good location and the fact that the store was of a good size and was very well appointed.

20 As will be apparent, Mr Lean's evidence conflicted with that which had been given by Mr Ashton. He, too, had performed projections of sales. However, his projections were based solely on the average results achieved by Bruness over the whole of the period 1 July 1997 to 15 March 1999, adjusting the average so obtained only to the extent of known movements in the Perth consumer price index for the years which ended on 30 June 2000 and 30 June 2001. He said that he was justified in adopting this approach, notwithstanding the significant increase in sales over the period from 1 July 1998 to 15 March 1999, because there was no information which explained "the exact reason why the sales have increased" or why overheads had decreased. That being so, he said, there was no basis for concluding that those trends would continue. He added that any other basis for projecting sales would be speculative. He said that a much longer period of time, at least five years, was needed in order to identify any trends. He stood by this evidence notwithstanding that it had the result that his projected sales were less than those which had been achieved by the business in its last eight and a half months of trading.

21 In considering what he described as the "crucial issue" of "what weight, if any, should be given to the evidence of Mr Lean", the trial Judge, after referring to the evidence which had been given by each of the experts, said (at [425] - [426]):

"When I endeavour to resolve the matters in issue between the two experts I incline to the view that Mr Lean had a more intimate knowledge of the subject business and the factors bearing upon its success or failure. I have to say also that I was not persuaded to Mr Ashton's view of the matter by the answers he gave in the course of cross-examination ... . It is true, as he pointed out, that there was inevitable [sic inevitably] an element of speculation in attempting to assess the first defendant's future performance against the background of a 20 month trading period. However, it seemed to me, that his approach of simply averaging sales figures over the 20 month trading period in order to produce a projection of likely performance was not realistic. There was evidence of increased sales and the averaging method did not make a sufficient allowance for this. At the end of the day, I was persuaded that Mr Lean's stance of adopting $45,000 per month as a starting point was appropriate bearing in mind that this figure was substantiated by actual sales figures in the period immediately preceding termination of the Franchise Agreement.

I recognise that Mr Lean's allowance of $5,000 per month by way of increased sales from year to year in the successive years of trading was open to challenge. However, to my mind, the challenge put up by Mr Ashton was not sufficient to rebut the claim. I am satisfied on the balance of probabilities that the figures contended for by Mr Lean were defensible and that the loss of profit of $93,184.67 contended for represents the operative measure of loss in respect of that head of the claim."

The ground of appeal and the notice of contention

22 That brings me to the sole extant ground of appeal. That ground (ground 3) reads as follows:

"3. The learned trial judge erred in law in awarding damages of $93,184.67 to the first respondent on its counterclaim.

Particulars

(i) the only evidence called by the first respondent in support of the first respondent's claim for damages was provided by Graham [sic] Trevor Lean, an accountant;

(ii) Lean's evidence was that the first respondent's business would have increased its average sales by $5,000 per month in subsequent years had the appellant not terminated the franchise agreement on 15 March 1999;

(iii) Lean provided no admissible evidence for his opinion as to the projected increase in the first respondent's monthly sales. The selection of the figure of $5,000 was entirely speculative;

(iv) furthermore, Lean purported to rely upon the operations of another business to support his projections notwithstanding that no evidence was put before the Court by the first respondent through Lean or anyone else as to the particulars of the other business, its trading history, its size, its previous financial statements, its increase or decrease in sales and its other relevant characteristics so as to enable a comparison to be made between that business and the first respondent. Over the appellant's objection the learned trial judge permitted Lean to refer to the other business and rely upon its undisclosed operations to support his conclusions;

(v) the learned trial judge ought to have concluded that there was no evidence before the Court to support the first respondent's claim for damages;

(vi) alternatively, even if Lean's reference to the other business was admissible, the learned trial judge should have given no weight to his opinion on the increase in monthly sales because of the matters referred to in (iv) above."

23 I should add that, although this does not feature as a separate particular of the ground of appeal, the appellant contends that it appears from the extract from his Honour's judgment last quoted, that his Honour reversed the onus in respect of the respondent's claim for damages.

24 The respondent has lodged a notice of contention putting forward an alternative basis for upholding the bulk of the damages awarded to Bruness, if the appeal should be successful. For reasons which will become apparent, it is unnecessary for me to consider that notice.

25 The appellant's contentions, as they appear from the particulars to the ground of appeal and as they were argued before us, essentially come down to two propositions. The first is that the evidence in respect of the financial performance of Cars-R-Us was inadmissible and, Mr Lean having relied upon that evidence in arriving at his conclusions, his conclusions were themselves consequently inadmissible. The second is that there was no adequate basis for Mr Lean's conclusions, regardless of whether or not the financial information in respect of Cars-R-Us was relied upon, with the consequence that it was not open to the trial Judge to rely upon those conclusions, leading to the further consequence that Bruness failed to satisfy its onus of proving any financial loss.

26 I will deal with each of these propositions in turn.

27 The first proposition requires some mention of the pertinent principles of the law as regards expert evidence.

28 It should, first, be said that an expert giving opinion evidence must provide the tribunal of fact with sufficient information to enable it to evaluate the validity of the expert's conclusions: Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 at 729 [59], per Heydon JA. That means that the expert should state the facts or assumptions upon which his or her opinion is based: Makita at 735ff; National Justice Compania Naviera SA v Prudential Assurance Co Ltd (The "Ikarian Reefer") [1993] 2 Lloyd's Rep 68 at 81 - 82 and Pownall v Conlan Management Pty Ltd at 389 - 390. That, of course, is because a tribunal of fact must, so far as is reasonably possible, examine and assess the substance of the opinion. It cannot merely rely upon the expertise of the expert. In Holtman v Sampson [1985] 2 Qd R 472 at 474 (in a passage quoted in Makita at 735), D M Campbell, Macrossan and Thomas JJ said:

"... it is a primary tribunal's duty to find ultimate facts, and, so far as it is reasonably possible to do so, to look not merely to the expertise of the expert witness, but to examine the substance of the opinion expressed. But that is not to say that a tribunal may not accept the opinion of an expert witness. In cases where the experts differ, the lay tribunal will apply logic and commonsense to the best of its ability in deciding which view is to be preferred or which parts of the evidence are to be accepted."

29 Where an expert relies upon the existence of some fact in support of an opinion, that fact must be proved by admissible evidence: R v Abadom [1983] 1 WLR 126 at 131; Pownall, at 375 - 376 and 389 - 390; English Exporters (London) Ltd v Eldonwall Ltd [1973] Ch 415 at 422 - 423; Makita at 731 - 732, 737 - 738 and 743 - 744; and McNeil v Commissioner of Taxation [2003] FCA 958; (2003) 202 ALR 35 at 52. Where an expert opinion is based entirely on inadmissible evidence, the opinion will itself be inadmissible: Pownall at 378. Similarly, where the inadmissible evidence is so intertwined with the admissible evidence that they cannot be separated, the whole body of evidence will be rejected: Pownall at 376 - 377; Steffen v Ruban [1966] 2 NSWR 622. However, where the inadmissible evidence can readily be ascertained and discarded, leaving admissible evidence in support of the opinion, the opinion should be admitted, subject to weight: Pownall at 378.

30 In my respectful opinion, Mr Lean's evidence in respect of the financial performance of Cars-R-Us was inadmissible. While he was the tax agent for that business, his evidence did not establish that he had any first-hand knowledge of it or even that it was he who had prepared its financial statements. In any event, those financial statements were never produced in evidence. The evidence in respect of the financial performance of Cars-R-Us could consequently only be relied upon if, as the trial Judge appears to have found, it could be categorised as "non-specific hearsay" in the sense in which that expression was adopted in Pownall. With due respect, I do not consider that it could be so categorised. Rather, it seems to me that it was evidence of a particular comparable business which, on the authority of such cases as English Exporters and Pownall (where Ipp J included within the category of "specific hearsay" evidence of particular comparable transactions used to infer the value of property that is directly in issue), was required to be proved by direct (and admissible) evidence.

31 However, it appears from Mr Lean's evidence that he relied upon the financial performance of Cars-R-Us only for the purpose of comparing his own assessment of what percentage of Bruness' sales income would be consumed by its cost of purchases with the like percentage which had been derived from the financial statements of Cars-R-Us. It is plain, from the extracts from his evidence to which I have earlier referred, that he relied primarily on other, admissible, evidence in order to arrive at his conclusion. He said that he had relied upon his knowledge of Bruness' business (in particular, its historical trading), his knowledge that, because a large warehouser of motor car parts was only "a few minutes up the road", the business could reduce its stockholding and lower its purchases, the fact that, with an increasing volume of sales, the business would be able to command a volume discount on purchases (of 11/2 per cent), his general knowledge of other businesses (he had prepared financial statements for probably "a couple of hundred companies") and his (unchallenged) belief that the industry standard was slightly lower than 35 per cent.

32 In these circumstances, it seems to me that the inadmissible material could readily be ascertained and discarded, leaving behind a substantial body of admissible evidence which undoubtedly supported the opinion at which Mr Lean had arrived. That being so, I am satisfied that Mr Lean's conclusions were admissible and that it was for the trial Judge to assess what weight should be given to them in all of the circumstances.

Was there an adequate basis for Mr Lean's conclusions?

33 That brings me to the second of the appellant's propositions, being that to the effect that there was no adequate basis for Mr Lean's conclusions. As will be apparent from the particulars to the grounds of appeal, the appellant's primary challenge in this respect is to Mr Lean's conclusion that average sales would increase by $5000 per month, although the appellant also challenges the assessment made by Mr Lean as to the business' likely costs, expressed as a percentage of income.

34 As to the second of those challenges, I have mentioned that there was a substantial body of evidence, after discarding that relating to Cars-R-Us, which supported Mr Lean's conclusion. I will not repeat what I have already said in that regard.

35 As to the projection of an average increase in sales of $5000 per month, it will be apparent from what I have said that this was based upon Mr Lean's knowledge of the business and upon his extensive knowledge of the area in which it traded. I have mentioned that Mr Lean took into account Bruness' historical performance (and, in particular, the fact that its sales had increased, in the period from 1 July 1998 to 15 March 1999, by an average monthly amount of over $8000), the store's very good location, its size and the fact that it was very well appointed. I can see no reason why all of this evidence should not have been found to provide an adequate basis for Mr Lean's conclusions.

36 That leaves the contention, which is at least implicit in the propositions advanced on behalf of the appellant, that it was not open to the trial Judge to prefer the evidence of Mr Lean to that of Mr Ashton or, to put it differently, that less weight should have been given to Mr Lean's opinions than to Mr Ashton's opinions.

37 In my opinion, it was open to the trial Judge to prefer Mr Lean's opinions to those of Mr Ashton. As the trial Judge said, Mr Lean had the more intimate knowledge of Bruness' business and of the factors bearing upon its success or failure. It was also open to his Honour to reject Mr Ashton's method of simply averaging sales figures over the 20-month trading period as being unrealistic, more particularly given the evidence of increased sales which had occurred in the last eight and a half months of trading. Importantly, Mr Lean's evidence in respect of Cars-R-Us appears to have played no part in the trial Judge's preference of his opinions over those of Mr Ashton. It does not figure, at all, in his ultimate reasoning and, as I have mentioned, his Honour said, when ruling on the objection to that evidence, that the essential touchstone of Mr Lean's evidence in respect of the figure of 35 per cent (I have said that the comparison with Cars-R-Us related only to expenses as a percentage of sales) was clearly his own analysis of Bruness' accounts.

38 That leaves only the question whether the trial Judge reversed the onus in respect of the respondent's claim for damages. The sole basis for this contention rests upon the comment, made by his Honour in the course of the extract from his judgment which I have earlier quoted, to the effect that the "challenge put up by Mr Ashton was not sufficient to rebut the claim". However, when that comment is read in its context it seems to me to be quite plain that his Honour was saying no more than that he was satisfied, on the balance of probabilities, that Mr Lean's assessment was reliable and that Mr Ashton's evidence had not caused him to doubt that assessment.

39 It follows that I would dismiss the appeal. It is consequently unnecessary for me to consider the notice of contention.

40 WHEELER J: I have had the advantage of reading in draft the reasons for decision of Steytler J. I agree with those reasons and have nothing to add.

• Mr Lean's evidence
• Mr Ashton's evidence
• The trial Judge's finding
• The ground of appeal and the notice of contention
• The appellant's two propositions
• Cars-R-Us
• Was there an adequate basis for Mr Lean's conclusions?
• Conclusion