Discount rate in calculation of "net present value of the outstanding rentals"
35 In order to understand this aspect of the appeal, it is necessary to have a broad understanding of the issue. It will be recalled that pursuant to cl 4(b), in the event of disposal of a vehicle following early termination, Esanda was entitled to retain one half of the amount by which the net proceeds of disposal exceeded the "net present value of the outstanding rentals", raising the question of the meaning of the expression "net present value of the outstanding rentals". Three definitions appearing in cl 1(b) of the Agreement are relevant. They are as follows:-
'Discount Consideration' [means] in respect of any Receivables, the amount calculated in accordance with cl 3(a).
'the Receivables' means all monies which a customer pursuant to a Lease of car from [EMCL], covenants to pay to [EMCL] pursuant to cl 2(a) of the Lease.
'Discount Rate' means the rate of interest per annum (expressed as a discount rate) from time to time notified to [EMCL] by [Esanda] in writing as the rate to be used in the calculation of the Discount Consideration on and after the date of the receipt of the notice by [EMCL].
36 Clause 3(a) provides:-
"The Discount Consideration payable by [Esanda] on assignment of the Receivables, in each case, shall be the net present value of the Receivables to be acquired, calculated on the basis of the discount rate advised to [EMCL] in writing on or before the date of the relevant written notice … ."
37 The reference to a "Lease" is to the various leases entered into by EMCL with its lessee customers. A standard form of lease was to be attached to the Agreement, but this was not done. In practice, an Esanda lease was subsequently adopted, although it was re-written in the name of EMCL. It appears at AB 886-892. Clause 6 of the lease relates to default and provides that if the lessor becomes entitled to repossess any goods from the lessee, then an amount (called the "recoverable amount") is payable by the lessee to the lessor, calculated by reference to a number of factors including "[t]he aggregate of the rent instalments not then accrued due rebated to reflect the present value, such value to be ascertained by applying the discount rate (as defined herein) to each rental instalment …".
38 Subsequently, "Discount Rate" is defined to mean:-
… "the rate which, when applied to a future instalment or payment or the residual value as aforesaid will ensure that the lessor shall receive the same rate of pre-tax return or profit after such discounting as the lessor would have received from the lease if all instalments and payments had been paid on their respective due dates and an amount equal to the Residual Value had been received on the date of expiration of the lease."
39 Although this definition relates to circumstances of default, cl 7(b) (which relates to early termination) also provides for the lessee to become liable to the lessor in an amount equal to the "recoverable amount (rebated and discounted as at the date of such return)". This is apparently a reference to the "recoverable amount" referred to in cl 6. Pursuant to cl 1(a) of the Agreement of 2 January 1990, "Expressions defined in the form of lease set out in Schedule 4 have the same meaning as in this Agreement." Although it is not entirely clear, it seems that one of EMCL's arguments is that in calculating the net present value of outstanding rentals for the purposes of cl 4(b), one should adopt the same process as is prescribed in cl 6, and adopted for the purposes of cl 7(b) of the lease. Inherent in this argument may be the further proposition that the expression "Discount Rate", where it is used in cl 6(h), is the same rate as that specified in the definition section of the Agreement of 2 January 1990. Clause 3(a) of that Agreement also prescribes a similar exercise for calculating the Discount Consideration, applying the Discount Rate to Receivables which are, by definition, the amounts due by way of rent. Of course, the rate might vary from lease to lease.
40 There are two other aspects to EMCL's argument. The first is that the Corporations Law required that Esanda use the interest rate in such leases in valuing them for internal accounting purposes. The second is that certain tax rulings and decisions dictated a similar approach for tax purposes. Although it is again not entirely clear, it seems that EMCL wishes to argue that such obligations also bound Esanda for present purposes. It is, of course, not possible to evaluate fully any of these arguments as they have not been properly ventilated.
41 EMCL raised this issue in its particulars at par 14B of the further amended statement of claim, referring to a letter dated 15 December 1997. A complete copy with annexures appears at AB 994 et seq. In particular, there is a document headed "Formula for Net Present Value" (AB 998) which refers to the "periodical interest rate to the customer". It seems that Esanda was aware of the argument. For example, in an affidavit by John Patrick Kent filed on its behalf and sworn on 9 November 1998, the deponent asserted that:-
"… Esanda will submit that, in any event, the court ought to reject any argument by EMCL that the net present value of future rentals and the residual value ought be calculated by reference to the interest rate used for calculating payments due under the lease."
42 The outline of EMCL's submissions on the issue of quantum, presumably for use on 17 November, appears at AB 1753. In par 5 (AB 1755) reference is made to the formula which is at AB 998. At par 11 (AB 1758), this passage appears:-
"… The applicants contend that the appropriate discount rate to be used for the calculation of net present value is the relevant interest rate used to calculate the amounts payable under the lease in question …".
43 Esanda was asserting that the "net present value of the outstanding rentals" for the purposes of cl 4(b) should be determined by expert evidence from actuaries and/or accountants. Such an argument assumed that the Agreement did not otherwise indicate the appropriate basis for the calculation. At the hearing on 18 December 1998 counsel for EMCL asserted a desire to advance the points to which we have referred. His Honour refused to allow him to do so, saying (AB 489):-
"I've heard what Mr Searle has to say on this point and I'm satisfied that on 17 November counsel agreed to be bound by such agreement as the experts should reach as to the interest rate to be used for calculation of the net present value and I don't propose to entertain any other rate."
44 The minutes of order made on 17 November appear at AB 1825-7. Paragraph 1 directs the experts "to meet and endeavour to reach agreement as to the amount due pursuant to cl 4(b) of the Master Discount Agreement referred to in the pleadings in this proceeding in respect of leases which have been pre-determined". Sub-paragraph 2(2) provides that they adopt an interest rate agreed by them or failing agreement, one of a number of specified alternatives, including the "internal implicit interest rate in the lease". Other parts of the evidence suggest that this is a reference to the Discount Rate mentioned in the Agreement and the leases or perhaps, to an interest rate to be calculated from, or used in calculating such Discount Rate. The order does not prescribe the effect to be given to any such agreement between the experts. One might assume that its effect would be to resolve any dispute in the evidence as to the appropriate discounting rate, to the extent that such rate was properly to be established by such evidence. That would not dispose of any argument, based on the proper construction of the Agreement and the leases, that the rate was prescribed by those documents.
45 The experts' combined report is at AB 1663-4. Relevantly, they report that they had reached agreement that:-
"The net present value of each pre-determined lease should be calculated by adopting an interest rate equivalent to Esanda's borrowing rate at the pay-out date for a period equivalent to the remaining term of the lease, plus the interest rate margin used by the respondent for that lease originally … ."
46 The experts also report that:-
"There may be grounds for the Court to conclude that the contract interest rate is appropriate for cl 4(b)… ."
47 Esanda asserted that the inclusion of this latter paragraph was as a result of EMCL's urgings. This was not disputed and demonstrates that during the period between the hearing on 17 November and that on 18 December, EMCL had continued to assert the appropriateness of an interest rate calculated by reference to the terms of the Agreement and the various leases, rather than one fixed by experts.
48 This difference between the parties' respective approaches is also evident from the transcript of proceedings on 17 November. At AB 441 counsel for Esanda raised three questions for consideration, the second being the discount rate. At AB 468 Mr Searle for EMCL clearly asserted that the appropriate interest rate for the purposes of calculating net present value was what he described as "the interest rate implicit in the lease". At AB 469 he indicated that he required the experts to do two sets of calculation. Again, at AB 470, it was made clear that EMCL required the calculations to include figures based upon both the applicant's and the respondent's "scenarios". At AB 471 counsel for Esanda said:-
"The only alternative I can suggest is that the experts endeavour to agree to matters in dispute and if they can't, that two sets of calculations are made and that when we come back, at least the calculations will have been made and we just have to determine the issues upon which they can't agree. Because it may well be that in two of the three issues in dispute they can agree and the figures can be prepared on two alternative bases, depending upon the answer to the outstanding question, I think. That's the only alternative I can suggest to your Honour deciding now these issues."
49 At AB 472 his Honour said:-
"In other words, one witness would say, 'Well, I think the implicit interest rate is appropriate because' - such and such a reason - and the report would include the actual figures based on that assumption and there would also be figures based on …"
50 At AB 473 his Honour said:-
"But as I understand the stage we have reached now, the actuaries will meet, they will prepare figures and agreeing, if possible. Where they disagree on matters and notably 2(2), the appropriate interest rate, they will endeavour to agree on what the figures are, given each of those two competing assumptions, and they will present a joint report and - well, the report will include each gentleman's contention as to the reasons that he thinks the given - whichever interest rate is appropriate. This will all be in by the 10th."
51 Although EMCL agreed to consultation between the experts, it is clear that it continued to urge that the appropriate interest rate was not to be determined by reference to expert evidence, but by reference to a rate discernible from the Agreement itself, although some formal extrinsic evidence may have been necessary to support some of its arguments.
52 The present question is whether Heerey J was correct in ruling that EMCL had agreed to be bound by any agreement reached between the expert witnesses, and the effect of any such agreement. We have read and re-read the transcript of proceedings on 17 November and are unable to conclude that counsel for EMCL agreed that the question of the appropriate discount interest rate should be so determined. At all times, counsel maintained his submission that the interest rate implicit in the lease should be used. We feel that misunderstanding has arisen because counsel for Esanda assumed that the argument being advanced by EMCL was based upon the same assumption as was his own argument, namely that the matter was to be determined by expert evidence rather than by construction or legal necessity. It is likely that he thought that EMCL was merely asserting factors which the experts should consider, including rates in the leases and accounting practices for other purposes. Although those matters may have been appropriately considered by the experts in their deliberations, that was not EMCL's primary point in raising them. Its argument was that as a matter of law and/or construction, the interest rate in each lease was to be adopted. This submission could not have been disposed of by agreement between the expert witnesses. Counsel for EMCL understood the argument advanced against him. If that argument were successful, the expert evidence would be relevant, and so agreement between the experts would be of value. Thus he agreed that they attempt to resolve their differences. That did not compromise EMCL's entitlement to advance its own point concerning the appropriate rate, which did not rely upon or involve such expert evidence.
53 We do not suggest that EMCL's arguments were necessarily strong, but they were worthy of consideration. In the circumstances, we consider that the question of the discount rate must be reconsidered. Given the history of this matter, we would very much like to dispose of it ourselves rather than refer it back for reconsideration by a Judge at first instance. However there appear to be limited factual matters which EMCL wishes to address with respect to its arguments arising out of the Corporations Law, the Income Tax Assessment Act 1997 (Cth) and associated rulings and decisions. Such evidentiary matters were not addressed previously because of the splitting of the trial on the issues of liability and quantum. It would be inconvenient to reconvene this Court to determine such factual matters as it is comprised of Judges from three different centres.
54 The appeal should be allowed to the extent necessary to permit the parties to ventilate the issue of whether the appropriate discount rate should be chosen having regard to the interest rates agreed by the experts and used in connection with the calculations which appear at AB 1663-4 or whether those calculations ought to have been done using discounting rates based upon an interest rate or interest rates to be derived from the Agreement and from the relevant leases entered into pursuant thereto. This question should be referred back for determination by a single Judge in the Melbourne registry. This is a discrete matter, separate from the balance of the case, and it is not particularly difficult. We see no reason why Heerey J should necessarily resolve this aspect. Any other Judge could just as conveniently do so. However it will probably be necessary that the Judge to whom the matter is assigned give directions with a view to crystallizing the issues prior to hearing.
Costs
55 The primary judge awarded Esanda two thirds of its costs, including reserved costs, up to and including the judgment on 17 September 1998. His reasons for this award were expressed as follows:
"This litigation was to some extent provoked by Esanda. It should have been able to provide timely information to EMCL. It not only did not do that, but wrongly asserted waiver and alleged agreements which denied the contractual right of EMCL to the 50 per cent under cl 4(b).
However, the litigation was commenced by EMCL and dominated by EMCL's construction claim which it asserted would result in $64 million being due to it. That claim, which failed, occupied most of the hearing."
56 His Honour said he would make some reduction for the factors he had mentioned. By this we understand him to have meant that but for Esanda's unsatisfactory conduct he would have awarded it more than two thirds of its costs. His Honour left the parties to bear their own costs from 17 September 1998 onwards. He did this because during that period they had been working out, with the aid of experts, what should be due.
57 EMCL claimed that it should have had its costs in accordance with the ordinary rule that costs follow the event. It was said that there were no exceptional circumstances sufficient to displace the ordinary rule. Costs are always in the discretion of the judge. EMCL had sued for a very large sum ($64 million), but recovered a comparatively small amount ($90,529.83) after deduction of the amount owing on the cross-claim. The court declared that Esanda was entitled to receive the residual value in respect of the lease of 2749 vehicles, and granted permanent injunctions enjoining EMCL from engaging in certain conduct in relation to those vehicles. In those circumstances it was in our view open to his Honour to have awarded Esanda most of its costs, because most of the hearing time was occupied with issues upon which EMCL failed. It was also open to his Honour to have adjusted the costs somewhat in EMCL's favour because of Esanda's conduct. The award of two-thirds of Esanda's costs was within the scope of his Honour's discretion, and we would not interfere with it.