Bone v Wallalong Investments

Judgment - Ex tempore (revised 23 february 2012) 1In this proceeding the plaintiff (Mr Bone) claims damages for breach of a contract for sale made between him as vendor and the first defendant (Wallalong) as purchaser. Mr Bone alleges that he terminated the contract on 12 March 2010, by reason of Wallalong's default in an essential respect, and that he is entitled, among other things, to damages for loss of his bargain. 2Mr Bone sues the second, third and fourth defendants (who are or were directors of Wallalong) on what he says are guarantees given by them of Wallalong's liabilities under the contract for sale. 3The sale price for the land in question was $10 million. Mr Bone asserts, relying on a valuation prepared by a Mr Todd Andrew Hadley, a qualified, registered and practising valuer, that the land was worth only $5.25 million at the date of breach. 4To prove that value, Mr Bone relies on one of a number of valuation reports prepared by Mr Hadley. Objection was taken to that report on two bases. The first basis is non-compliance with the Expert Witness Code of Conduct (UCPR Sch 7, referring back to r 31.23). Paragraph 5(1)(e) of the Code requires the expert to include in the report or in an annexure to it any literature or other materials utilised in support of the opinions expressed in the report. 5In this case, Mr Hadley refers to a number of documents, mostly of a public nature and relating to the planning and possible rezoning of the subject land, but does not include or annex them. 6If that were the only problem with the report, I would excuse non-compliance with the Code to the extent shown. I would do so because, as I have said, most of the documents (in fact, all but one) were of a public nature. The defendants have had the report for five months or so. They have made no request for the documents. 7Mr EA Walker of counsel, who appears for the second defendant, submitted that it was not incumbent upon a defendant to write to the plaintiff seeking to rectify deficiencies in an expert witness's report. I do not agree, at least where the deficiencies relate to a technical matter such as non-production of documents. In my view, the obligations cast on parties and their legal advisers by s 56 of the Civil Procedure Act 2005 (NSW), in effect to cooperate to identify and ensure the just, quick and cheap resolution of the real issues in dispute, have precisely the effect that, in the case of a formal matter of this kind, a party should take prompt action rather than lie in wait and raise the objection at the trial. 8It may be otherwise where the documents are of an arcane or difficult nature, or more importantly where it turns out that the expert has not relied upon them. But where the defect in the report (insofar as the application of the Code is concerned) is of a formal nature, and where by hypothesis it cannot bear on the real issues in dispute, but is at most ancillary in a minor way, I do not think that a party should be permitted to keep this technical objection in reserve and spring it on the other party at trial. 9The next, and far more substantial, objection taken is that in important respects the report does not disclose Mr Hadley's reasoning process. 10It is apparent that Mr Hadley purported to use the "direct comparison" method of valuation. He says so in terms in section 17 of the report. Earlier, in section 13, he had set out examples of what he called "market evidence" which he said "provided assistance in determining our valuation". There were some four examples given of what Mr Hadley called "residential englobo sales"; and four examples of what Mr Hadley called "sales with urban potential". In addition, Mr Hadley referred to what he said were asking prices for properties, apparently on the market, and apparently to be regarded in some way as comparable. 11As I understand it, the objective of the direct comparison method is to establish a sufficient degree of similarity between the land the subject of the sale or sales chosen as comparable and the land that is the subject of the valuation. If that can be demonstrated, and the disadvantages and advantages of the respective sites can be shown, and if it can be assumed that the sales relied upon are at arms' length, then, with appropriate adjustments, the comparable sales may provide an accurate guide, when filtered through the expert knowledge of a valuer, to the value of the subject property. 12The first group of sales - the residential englobo sales - show a range of prices. On a per hectare basis, they are $549,563, $694,873, $322,779 and, in respect of the fourth sale, a price that I cannot deduce per hectare without a calculator. 13The second group of sales - those with urban potential - show rates per hectare ranging from $203,488 through $258,993 to $236,820. 14In both groups, Mr Hadley makes comments to the effect that the sale "supports a lower hectare rate for the subject site" or "supports higher rates for the subject property" or similar observations. He gives no indication of what the lower or higher rate may be. Nor does he demonstrate how the differences between the comparable sale and the subject site enable any assessment of the upward or downward movement to be assessed. 15That is a matter of great significance, because in his "valuation rationale", Mr Hadley says simply that, relying on the direct comparison method, the value of the subject site's 35 hectares, unzoned, at $150,000 per hectare is $5.25 million. 16Mr Hadley carries out what I understand to be a check on that method by assuming that the subject site had been rezoned for residential purposes. On that basis, he values it at $400,00 per hectare or a total of $14 million. 17Mr Hadley had given detailed evidence of the rezoning process, and came to the conclusion that it was likely to take of the order of four years for the subject property to be rezoned. He thus recognised that his $14 million figure needed to be discounted back. He considered two different discounts rates: 30 per cent and 27.5 per cent. They produced amounts of, in round figures, $4.9 million and $5.3 million respectively. 18To my mind, Mr Hadley adequately explained the four year period of the discount. However, in relation to the rates, he said merely that they reflect the local council's "change in position in respect to" the area of which the subject land forms part, but still reflect "the uncertainty of achieving a rezone within four years". 19The reasoning process concludes with the following: "After consideration of these comments and the above calculations we have assessed the current market value of the subject property at $5,250,000, GST exclusive." 20Expert evidence may be exempt from the opinion rule set out in s 76 of the Evidence Act 1995 (NSW) if s 79 applies. The prerequisite for the operation of s 79 is that the witness have specialised knowledge based on the witness's training, study or experience. In those circumstances, the opinion rule: "Does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge". 21Thus, if s 79 is to apply, it must be shown that the opinion expressed by the person is wholly or substantially based on his or her specialised knowledge. Where s 79 applies then, subject to any other factors affecting admissibility, the opinion rule does not apply, The expert's evidence may be admitted to prove the existence of a fact (in this case of the value of the land at 11 March 2010) about the existence of which the opinion is expressed. 22The significance of the requirement set out in s 79(1) has been examined in several cases. Perhaps the most well known (until recently) was Makita (Australia) Pty Limited v Sprowles (2001) 52 NSWLR 705. 23In that case, Heydon JA looked closely at the requirements for admissibility of expert evidence, from [59] on. His Honour summarised his views at [85] by saying, among other things, that it must be established that the facts on which the opinion is based form a proper foundation for it, and that the intellectual basis of the conclusions should also be demonstrated. In his Honour's words: The expert 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" apply to the facts assumed or observed so as to produce the opinion propounded. 24If that did not happen, his Honour said: It is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge. 25His Honour returned to the question in Dasreef Pty Limited v Hawchar (2011) 277 ALR 611. His Honour was in dissent in the outcome of that case, but I do not think this detracts from the force of his Honour's exposition of the relevant principles relating to the admissibility of expert evidence. 26One of the matters considered by Heydon J in Dasreef what was his Honour called the "statement of reasoning rule". His Honour looked at that from [91] to [94] (as to the position at common law) and from [95] to [101] (in connection with s 79). I do not think that it is overstating his Honour's views to say that unless the reasoning of the expert can be deduced from the report, so as to enable satisfaction of the threshold test posed by s 79(1), then the report may not be admissible. 27In my view, the report is deficient in two crucial respects in relation to the "reasoning". (More accurately, the deficiency is one of want of reasoning.) 28First, there is no explanation as to how Mr Hadley moved from the market evidence to which he referred to the derivation of an unzoned value at $150,000 per hectare. It may be - I do not know - that if one added up all the "urban potential" sales rates per hectare and divided them by the number of sales, one might arrive at some such rate. But that is not my understanding of how the direct comparison method works. As I have said, I understand that method to require the application of specialised knowledge to the raw data to show how, from that raw data, a value may be deduced from the subject site. 29Equally, there is the same deficiency in relation to the assertion of a value of $400,000 per hectare for the "zoned" land. 30The second defect, in my view, applies to the discount rates which are used, as I understand it, in the check based on the zoned value. It is true, as I have noted, that Mr Hadley says that the discount rate reflects the council's changes in position, and the continuing uncertainty of a time frame for rezoning. But he does not explain how it does so. He does not say, why, for example, a rate of 30 per cent is appropriate rather than 40 per cent, or 27.5 per cent rather than 20 per cent. Thus, although the arithmetic accuracy of the calculation may be assumed, the intellectual basis for the choice of the underlying assumption is not explained. 31It is thus not practical for the defendants to make some assessment of the integrity of Mr Hadley's reasoning process, which, of course, is a necessary element of cross-examination of an expert. In general, cross-examination of an expert is directed towards the assumptions on which the opinion is based, or on the reasoning process that traces the link between the assumptions of fact to the opinions expressed, or both. Since the reasoning has not been exposed in the report, counsel are put in the entirely unsatisfactory position that they need to expose the reasoning in cross-examination before they can (if they can) attack it. 32In Arcus ShopFitters Pty Ltd v Western Australian Planning Commission [2002] WASC 174 Pullin J said at [78] that: It is not satisfactory...for a valuer who values land using the comparable sales method, to list a number of comparable sales, each one suggesting a different value for the subject land and each of which requires some adjustment, and then to simply state an opinion about the value of the subject land. 33I agree with his Honour's observation, and I do so for the reason that his Honour then gave: that the opinion: ...[W]ill only have any value if the valuer explains which is the most important of the comparable sales, why that is so, and what adjustments have been made to reach a conclusion about the value of the subject land. 34It is that process of reasoning which is entirely lacking from Mr Hadley's report, in relation to his use of the direct comparison method. 35Mr Hadley's views may be correct, for all I know. It may be that a fully reasoned report would come to the same conclusion. But I am not concerned with the hypothetical correctness of Mr Hadley's views, nor with a hypothetical fully reasoned report. I am confronted with the question of admissibility of the report that Mr Hadley has given. 36In my view, in what I regard as the crucial elements that I have tried to indicate, the report fails to demonstrate how the conclusions reached are wholly or substantially based on Mr Hadley's specialised knowledge, insofar as they attribute a value to the subject land. For those reasons, in my view, the report is not shown to come within s 79 of the Evidence Act and should not be admitted. 37If I were wrong in that conclusion, I would nonetheless exclude the report from evidence relying on the discretion contained in s 135 of the Evidence Act . I would do so because, in my view, it is wholly unfair to the defendants to expect them to elucidate Mr Hadley's reasoning process in the course of cross-examination and then to challenge that process without the opportunity to reflect on it. Although perhaps some time could have been given to allow this, I do not regard the just, quick and cheap resolution of the real issues in dispute as requiring a staged process of cross-examination of an expert witness. 38For those reasons, I reject the tender of Mr Hadley's valuation report as at the date 12 March 2010.