Q. And nothing in the course of that transaction as between Arrow and Bondlake entered your mind either way on the topic of validity?
A. No."
73 The clear inference from Mr Veron's evidence in cross-examination is that the topic of validity of the management agreement did not cross his mind after Arrow paid the sum of $190,000 to Walker. To the extent that the agreement was reviewed, it was, plainly enough, the outcome of that review on which Mr Veron relied, and not (as he would seek to suggest in paras 15 and 16 of his affidavit) some implied representation made by the Association.
74 In my view, this aspect of Mr Veron's affidavit evidence is another example of his willingness to give evidence by reference to considerations of expediency rather than veracity. A consideration of this aspect of his affidavit and oral evidence confirms the view that I have expressed above as to his credibility.
The expert evidence
75 The Association and the defendants called expert evidence, seeking to quantify the value of the services provided by Arrow or Bondlake (as the case may be) to the Association under the management agreement.
The Association's expert evidence
76 The Association called Messrs Nicholas Ferrara and Harn Goh of Rider Hunt Terotechnology (NSW and ACT) Pty Ltd. Messrs Ferrara and Goh prepared a joint report dated 11 April 2006, and Mr Ferrara prepared a report in reply dated 15 March 2007.
77 The methodology adopted by Messrs Ferrara and Goh was to build up a total "current market value" of the services by using a formula that divided the whole value into the caretaker's salary (38% of the total), overhead costs (21%) and profit margin (41%).
78 They sought to derive the first component by comparing the relative value of the caretaker's work under the site management agreement with that of a "facility manager". This rather unusual methodology involved comparing what they saw to be the "core competencies" of the caretaker under the management agreement with the core competencies of a "practitioner" facility manager, in six different areas.
79 By definition, the practitioner was assigned a total "effective competency factor" of 600 (100 points, for want of a better word, for each of the 6 core competencies). Messrs Ferrara and Goh concluded that a caretaker under the management agreement would score (if that is the right word) a total effective competency factor of 305.
80 Messrs Ferrara and Goh thus assessed the value of the caretaker's role under the management agreement as worth 305/600 of the services of a facility manager practitioner. For the year 2006, and by reference to what they said was a survey recognised in the discipline of facility management, they concluded that a facility manager practitioner's salary would be $107,980. (This involved taking a salary figure for the previous year from the survey and increasing it by what they said was an applicable percentage, 15%.) They thus concluded that, applying the proportion 305/600, the nominal value of the caretaker's services would be $54,890, which they rounded out to $55,000.
81 Messrs Ferrara and Goh considered the hours that they thought would be required to perform the caretaker's duties under the management agreement. They concluded that it would take 32.71 hours per week to do this. Apparently, they either did not appreciate, or ignored, the consistent requirement for the caretaker to work a 40 hour week, and the obligation to be "available or contactable outside [those] hours" (see para [48] above). Messrs Ferrara and Goh took the view that a facility manager practitioner would work a 40 hour week. Thus they prorated their derived value of $55,000 by 32.71/40.0 to arrive at an adjusted value of $44,976 for the caretaker services, which they rounded off to $45,000. They said that there could be variance of plus or minus 20%, giving a range of $36,000 to $54,000.
82 Messrs Ferrara and Goh sought to ascertain the allowance that should be made for overhead costs. They concluded that it was $24,415 per annum, which they rounded off to $25,000. This included an allowance for 25 square metres of office space at a rental of $300 per square metre per annum; and it included other obvious and proper overhead or on costs. It did not, however, include any allowance for the value of the residential apartment supplied rent free to the caretakers from time to time.
83 Messrs Ferrara and Goh then returned to their view that an appropriate profit would be 41%. They calculated the dollar amount of this not by taking 41% of what they said was the total for salary and overheads and adding it to that total to obtain a grand total. Instead (see para [77] above), they assumed that salary and overheads would amount to 59% of the total cost, divided the total for salary and overheads by 59 and multiplied it by 100. I have to say that I find this rather puzzling. If it were appropriate to use that methodology then I do not understand why it was not applied consistently. Given their view that salary would constitute 38% of the total "cost components", one would think that their methodology would require the derived salary figure to be divided by 38 and multiplied by 100, without the need to itemise and cost overheads. But they were not cross-examined on this, and I do no more than note the curiosity.
84 There are at least four major flaws in the methodology adopted by Messrs Ferrara and Goh. Three of those are practical and one is conceptual.
85 I have adverted to two of the practical flaws above. Their methodology does not take account of the requirement for the caretaker to work a 40 hour week, and to be on call outside those working hours. Nor does it take account of the value of the accommodation provided rent free to the caretaker (a benefit which is even more valuable to the caretaker than the dollar value of the rent free use, because it is a pre-tax benefit). Further, as to the first matter, if it were the case as the evidence suggests - see para [52] above - that Mr and Mrs Smith were required to work between them in excess of 40 hours per week, then the prorating exercise undertaken by Messrs Ferrara and Goh is even less sustainable.
86 The third practical flaw is that, although Messrs Ferrara and Goh purported to build up their assessment of the hours required having had the benefit of a view of Balmain Cove, they appear to have made their assessment of times on a theoretical or a priori basis, rather than undertaking it on a site specific basis. In other words, they did not assess the times taking into account whatever particular features there were of the Balmain Cove site that might have an impact on the time required for performance of the various tasks that they analysed.
87 The conceptual flaw in their methodology relates to the choice of a facility manager practitioner as the yardstick by which to measure the value of the caretaker's services. The evidence showed that facility manager status encompassed three, ascending, levels of skill: practitioner, manager and leader. Not surprisingly, the competency requirements increased as one ascended the ladder (a manager was required to have more competencies than a practitioner, and a leader to have more competencies than a manager). It is obvious that the level of responsibility would increase as one ascended the ladder. However, the methodology used by Messrs Ferrara and Goh had the necessary consequence that a leader who was employed in a role that demanded of him no more than the six core competencies of a practitioner would be paid the same as the practitioner, notwithstanding his greater seniority, competency and (presumably) experience. Further, the methodology led to the result that the practitioner, manager or leader would be paid at the same rate regardless of the size of complexity of the facility under management. Mr Goh was loath to accept that this was a defect; but Mr Ferrara (after some struggle) did so: see for example T 178.50, 179.45-180.55 and 183.15-184.30.
88 There are other problems too with the methodology of Messrs Ferrara and Goh. For example, the evidence showed that facility managers (at the practitioner level) were paid more in New South Wales than in other States. Messrs Ferrara and Goh however used the national average, notwithstanding that the services were to be performed in this State. Further, the evidence showed that the amount paid varied according to the kind of "site" that was managed. Again, however, Messrs Ferrara and Goh used the average.
89 Messrs Ferrara and Goh did not seem to think that it was appropriate to go into the marketplace and seek to ascertain what was being paid for services of the kind provided by Arrow or Bondlake (as the case may be) under the management agreement. It may be that it would have been difficult to obtain this evidence - or, at least, to obtain enough to lead to reliable conclusions. It may be that, as a result, building up a total cost by valuing the components is an appropriate methodology. But the flaws in their methodology are such that I do not accept their evidence.
90 Mr F C Corsaro SC, who appeared with Mr D B Studdy of counsel for the Association, submitted that the only relevant result of the flaws to which I have adverted was that Messrs Ferrara and Goh had overvalued the services. It may be that some of the flaws lead to that result - for example, use of the salary level of a facility manager practitioner as the appropriate yardstick. But other flaws do not - for example, disregard of the actual hours and site conditions, and of the value of the rent free accommodation.
91 In the result, although accepting (as I have said) that it may be appropriate to analyse the cost of the services by costing their individual components, and allowing a reasonable profit, I do not accept the evidence of Messrs Ferrara and Goh as to the value of those services. Nor do I accept that, regardless of the flaws in their methodology, I can be confident that the cost could be no more than that assessed by them.
The defendants' experts
92 The defendants called three experts: Mr Delwyn Linkhorn, Mr Terry Short and Mr Stamoulis (to whose evidence I have referred in para [54] above).
93 Messrs Linkhorn and Short sought to value the services provided by Arrow or Bondlake (as the case may be) under the management agreement. Mr Stamoulis sought to ascertain the rental value of the residential accommodation (apartment 5) and the office accommodation (lot 11). As I have said, Mr Stamoulis' evidence was unchallenged. I accept it, although it should be noted that his valuation of the office was of the whole area (65 square metres), and it was accepted by all the other experts after a conference that the actual area required for performance of the caretaker's duties was 25 square metres. Thus, in principle, it might be open to Bondlake (and might have been open to Arrow) to partition lot 11 in some way, and to turn the 40 square metres not required for performance of the caretaker's duties to account in some other way. This was not explored in the evidence, although Mr Linkhorn said that, having regard to the configuration of lot 11, he doubted that it would be practicable.
94 Mr Linkhorn sought to identify the various tasks that the caretaker would perform, and to cost them by deriving a time value for their performance. Mr Short sought to identify the overhead and on costs that a site manager such as Arrow or Bondlake would incur relating to performance of the site manager's duties under the management agreement. However, Mr Short went further and "broadly checked Mr Linkhorn's estimates" (T 286.40).
95 In principle, as I have indicated, the methodology of Messrs Linkhorn and Short may produce an appropriate indication of the value of the management services. However, there are flaws in their approach: more specifically, flaws in Mr Linkhorn's approach.
96 Mr Linkhorn listed out what he said were the duties that a caretaker would be required to perform under the management agreement, and estimated the time that in his opinion would be taken for their performance. He concluded that performance of those duties would require a "total site manager's weekly minimum weekly labour content" of 70.526 hours. He then selected what he thought was an appropriate yardstick, namely the Real Estate Industry (Clerical and Administrative) State Award, decided that a Grade 5 employee under that award would provide an appropriate yardstick, and thereby fixed on a full time salary of $700.50 per week as the starting point for his calculations. He deduced an hourly rate of $17.31 from this, and applied that to his total calculation of hours to produce a labour cost, for the duties required under the management agreement, of $89,978.19 in the 2005/2006 financial year. (To enable this to be related to the amounts actually paid to Messrs Claridge and Warren and Mr and Mrs Smith: the equivalent figure deduced by Mr Linkhorn for the 1998-1999 year was $73,081.64, increasing by approximately $2,000 to $3,000 per year thereafter.)
97 To this figure, Messrs Linkhorn and Short then added what they said was an appropriate amount for "operating costs that would be required to carry out the duties as per the Site Management Agreement for Balmain Cove". Those amounts included the rental value of the residential apartment and the office, and other obvious and appropriate allowances. They then assigned alternative profit margins of 25% and 40% of the total cost thus derived (this being their opinion of the likely range of profit margins) to derive a total value for the services.
98 The outcome of their conclusions demonstrated that, with a 25% profit margin, the amount actually payable under the management agreement always exceeded the valuation. If however one took a profit margin of 40%, the amount payable was less than their valuation for the first three years, but a little more for the fourth year, with the margin (of actual over estimated) increasing steadily thereafter: a reflection of the power of annual compounding. In this context, I note that Messrs Ferrara, Linkhorn and Short agreed, after conferring, that 41% was an appropriate allowance for profit.
99 I have three principal concerns with this methodology. The first two relate to Mr Linkhorn's quantification of the number of hours of labour required. In essence, he was valuing the caretaker's duties. There was no evidence that the caretakers could not perform their duties broadly within the allotted hours under their agreements. (I recognise that there is some latent ambiguity in this proposition, in the case of Mr and Mrs Smith, if it is proper to regard them as having been required to perform a combined total of 65 to 70 hours per week. However, there was no evidence that this is in fact what the notation to which I have referred in para [52] above meant. Nor is there any indication of the separate duties (if any) to be performed by Mrs Smith.)
100 The second matter, also connected with the subject of hours required, relates to Mr Linkhorn's understanding of the extent of the duties required under the management agreement. It would appear that Mr Linkhorn assumed that duties (for example, in relation to "Recreational Facilities") related to the whole of the Balmain Cove site. However, on a proper construction of the relevant provisions of the management agreement and the community management statement, those duties relate only to such facilities as are located on "Lot 1". At least in terms of area, lot 1 is a relatively small part of the overall site; and there was evidence that there were "Recreational Facilities" located on the Balmain Cove site other than on lot 1. Thus, I think, Mr Linkhorn's estimate of hours may involve some over-allowance, because the components include matters outside the caretaker's responsibility.
101 The third matter relates to the yardstick. When pressed, Mr Linkhorn was unable to offer any logical justification for the choice of the award to which he referred. Nor was he able to explain why a figure derived from that award might be appropriate when the evidence showed that a number of people had agreed to perform the caretaker's duties for the figures to which I have already referred, and had apparently done so freely and voluntarily. (The value of the rent free accommodation can be disregarded, because that is a matter expressly taken into account, and incorporated into the total cost of services, in Mr Short's part of the calculations.) In particular, Mr Linkhorn was unable to explain why he used the award that he did rather than an award that specifically included caretakers: the Miscellaneous Workers' General Services (State) Award. As to the award selected by Mr Linkhorn: he could not indicate why, in his view, the duties that might be performed by a person under the award relied on by him could be equated to the duties performed by a caretaker under the management agreement. As to the latter award: Mr Linkhorn said that his researches had not uncovered the award.
102 Thus, whilst in principle I accept Mr Linkhorn's (and Mr Short's) methodology, I do not accept the outcome. It might be noted that if Mr Linkhorn has wrongly estimated the cost of the labour content, then that error will flow on to so much of Mr Short's calculations as relate to on costs (superannuation, replacement caretaker during annual leave, payroll tax and other on costs).
103 Having said that, I think that the result of what I see as shortcomings in the exercise undertaken by Mr Linkhorn would lead to overstatement of the true value of the services. Whether this means that the total cost (including a 40% profit) would exceed the actual cost for the first three years, I cannot say. But I can accept the conclusion flowing from the figures provided by Messrs Linkhorn and Short, that, at least from year 4 on, the actual amount payable under the management agreement has exceeded the true value of the services performed under it, and that the margin between the two is likely to increase thereafter during the remaining life of the agreement (including, if the options are taken up, any further terms). The adjustment of the profit margin from 40% to the agreed figure of 41% does not affect the substance of this conclusion.
Other matters
104 Each of the experts (apart from Mr Stamoulis) sought to characterise the features of the management agreement, including its term (with options) and ratchet compounding remuneration in qualitative ways. To the extent that they sought to suggest that something was or was not "grossly" excessive, or "unfair", I rejected that evidence. I did however allow it as evidence to the effect that in their experience, they had not come across such terms.
Conclusion
105 Thus, I conclude, on the whole of the expert evidence, that: