Kirch Communications Pty Ltd v Gene Engineering Pty Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

1418/02 KIRCH COMMUNICATIONS PTY LTD v GENE ENGINEERING PTY LTD JUDGMENT - Ex Tempore (Revised 30 May 2002)

Admissibility of Mr Turco's Report and Paragraph 14 of his Affidavit 1 HIS HONOUR: I reserved ruling on the admissibility of paragraph 14 of the affidavit of Joseph Turco of 4 April 2002 and of a report dated 24 September 2001 referred to in that paragraph. I will deal with that question of admissibility first. 2 The present application is an application to set aside a Statutory Demand which the defendant has served on the plaintiff. In response to that application, the defendant, a company of which Mr Turco is a director, seeks to have the Court rewrite the Statutory Demand, under the provisions of section 459H of the Corporations Act 2001 (Cth). 3 The dispute between the plaintiff and the defendant relates, in broad terms, to the circumstances in which a winch was hired by the defendant to the plaintiff. That winch was stolen from the possession of the plaintiff. An insurance claim was made relating to its theft but, after the claim had been submitted, the winch was recovered, in a damaged condition. 4 The disputed paragraph of Mr Turco's affidavit is one where Mr Turco refers to a particular paragraph in the affidavit of the principal deponent for the plaintiff, and says: "Annexed and marked C is a true copy of a report prepared by me on 24 September 2001 at the request of the plaintiff's loss adjuster, which certifies that winch 3 was; (a) Unsafe for any person to operate; (b) Too expensive to repair; and (c) Unable to perform

at the time it was returned to the defendant." 5 The report itself is one which bears a date 7 December 2001, but there is reason to believe that the date might be one produced by an automatic updating facility on a word processor, and that the original of the report was prepared, as Mr Turco says, in the latter part of September 2001. 6 The report was produced by Mr Turco for the purpose of being sent to loss adjusters engaged by the insurers of the winch. It lists various deficiencies in the winch and says that the cost of replacement parts and the rework involved in restoring the winch to its original condition exceeds the cost of a new unit, and that the extent of damage and repairs required exceeds the value of a new replacement unit at $68,000. It annexes various photographs which show the differences between the winch in its damaged condition, and a new winch of the same model. 7 Objection is taken by the plaintiff to the admission of this paragraph of the affidavit, and this report. The plaintiff relies on the decision of Evans-Lombe J in Liverpool Roman Catholic Archdiocesan Trustees Inc v Goldberg (No 3) [2001], 1 WLR 2337.

In that case, the learned judge rejected evidence of an expert witness who was a long-standing friend of the defendant. He said [at 13]: "I accept that neither section 3 of the 1972 Act [the Civil Evidence Act 1972 ] nor the authorities under it expressly exclude the expert evidence of a friend of one of the parties. However, in my judgment, where it is demonstrated that there exists a relationship between the proposed expert and the party calling him, which a reasonable observer might think was capable of affecting the views of the expert so as to make them unduly favourable to that party, his evidence should not be admitted, however unbiased the conclusions of the expert might probably be." 8 That decision has been departed from by Pagone J in Fagenblat v Feingold Partners Pty Ltd [2001] VSC 454. Pagone J held that, at least at the stage at which his Honour needed to consider the question, it was not necessary for him to apply a similar principle to exclude evidence in that case. The decision of Pagone J related to valuation evidence produced by the brother-in-law of one of the parties. 9 His Honour said [at 7]: "An expert witness has a special and important role in judicial proceedings to assist the Court by provision of objective and unbiased opinions about matters that bear upon the determination which the Court is called upon to make. The exclusion of an expert's evidence should only occur when the Court is satisfied that the evidence to be led by the expert is unsound and cannot provide probative material of value to the court's task of determining the issues in the proceedings. The possibility of a witness having a bias in favour of a party (directly or indirectly) is undoubtedly a matter to be taken into account by a court when deciding what weight to give to the expert evidence, but it is not a ground for rejecting evidence that may be of assistance to the Court in reaching the correct result".

His Honour went on to say that, "While it is undoubtedly the task of the Court to do justice between the parties, and necessary for the court to be not only independent, but perceived to be independent, a biased witness does not impugn the independence of the decision-maker. Rather, any bias is a matter to be taken into account as a matter of weight in assessing the evidence, not as a matter of admissibility". 10 Under Part 36 Rule 13C of the Supreme Court Rules, there is a requirement, in certain cases, for the person engaging an expert witness to supply the witness with a copy of the Expert Witness Code of Conduct, and for the expert's report to acknowledge that he or she has read the Code and agrees to be bound by it. However, the definition of "expert witness" in Rule 13C is: "An expert engaged for the purposes of; (a) providing a report as to his or her opinion for use as evidence in proceedings, or proposed proceedings; or (b) giving opinion evidence in proceedings, or proposed proceedings". 11 It does not seem to me that that definition of "expert witness" is able to catch the situation involved here, where an officer of a party, not engaged for any particular purpose, has, at a time before court proceedings were contemplated, expressed an expert opinion in a report, and that report is tendered in later proceedings. 12 Thus, the failure of the report to comply with Part 36 Rule 13C is not a ground for rejecting it. 13 The report must, however, comply with the requirements of the Evidence Act 1995 for admissibility. Under the Evidence Act 1995 the basal proposition contained in section 56 is that evidence that is relevant in a proceeding is admissible, except as otherwise provided by the Act, while evidence that is not relevant is not admissible. Section 55 instructs that the evidence that is relevant in a proceeding is evidence that, if it were accepted, could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceedings. 14 In sections 76 to 80 of the Evidence Act 1995 there are rules relating to the reception by the Court of opinion evidence, of which expert evidence is a subspecies. There is no provision, in section 76 to section 80, for rejecting evidence on the basis on which the evidence was rejected in Liverpool Roman Catholic Archdiocesan Trustees Inc v Goldberg (No 3). It seems to me that the existence of any such basis for not receiving expert evidence would be inconsistent with the structure of the Evidence Act, unless the bias in the report was such as to make it not relevant. For the reasons which Pagone J gave in Fagenblat, even an expert opinion from someone with a connection with a party to the proceedings, is sometimes capable of assisting to resolve the issues. It was, presumably, because rules for admissibility of expert evidence contained in the Evidence Act did not go far enough towards having only unbiased considered and current opinions put before the court as expert evidence that Part 36 Rule 13C was inserted into the Supreme Court Rules in January 2000. In the present case, I am not persuaded that Mr Turco's report is incapable of affecting the assessment of the probability of a fact in issue in the proceedings. 15 A further ground on which opposition is taken to the admission of the report is that it does not comply with the requirements articulated by Heydon JA in Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA at 305 at [85], that expert opinion evidence must be such that, "... it must be established that the facts on which the opinion is based form a proper foundation for it; and the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached: That is, 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. If all these matters are not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge. If the Court cannot be sure of that, the evidence is strictly not admissible and as far as it is admissible, of diminished weight." 16 Mr Turco is an active working director of Gene Engineering Pty Ltd, a company that deals in goods like winch 3. Mr Turco gives his qualifications, in the report, as C.P.Eng, MIE Aust. I would regard that as a sufficient statement, for the purpose of admissibility of this report, of the qualifications of Mr Turco. I would also regard the nature of the subject matter with which the report deals as being sufficiently related to those qualifications for the report to be admissible. The photographs demonstrate that he has carefully examined the winch, and the opinions he expresses are the type of opinions a qualified person could express following a careful examination. In reaching the conclusion that the report is admissible, I take into account that the "fact in issue in the proceedings" to which Mr Turco's report is relevant is not whether the statements in the report are true, but whether there is a genuine dispute about the existence of the debt claimed in the Statutory Demand. 17 Mr Newlinds, counsel for the defendant, also supported the admission of the report on the ground that it was a business record. 18 It is true that it is a business record of the business of both the plaintiff and the defendant. I need not pause to consider, however, whether the other conditions for admissibility of it are satisfied. I admit the report of Mr Turco, and paragraph 14 of his affidavit. Setting Aside the Statutory Demand 19 I will now turn to the principal matter in contention. 20 This is an application brought by Kirch Communications Pty Ltd to set aside a Statutory Demand. The Statutory Demand is one which was served on it by Gene Engineering Pty Ltd on 18 January 2002. 21 Gene Engineering Pty Ltd carries on a business which includes the hiring of winches. Kirch Communications Pty Ltd had cause to acquire several winches from Gene. The particular winch that is relevant in these proceedings is a winch known as number 3. 22 Winch number 3 came to be in the possession of Kirch shortly before 4 June 2001, when it replaced another winch which had previously been on hire. Very soon after the winch came to be in the possession of Kirch, it was stolen, on 4 June 2001. The parties then set about making an insurance claim concerning it. There had been a hire agreement relating to the particular winch which winch 3 replaced, but no written hiring agreement concerning winch 3 itself. 23 On 9 July 2001, the parties executed a hire agreement for winch 3, to facilitate the making of a claim on the insurer. That hiring agreement included provisions as follows: "In the event plant is damaged the hirer shall pay for the damage incurred to bring the plant to its original condition.... In the event plant is stolen the hirer shall pay for its complete replacement [there followed a statement of how the value of the winch was made up, totalling an amount of $32,300] immediately, otherwise an accruing rental charge shall continue to accumulate plus legal expenses, disbursements and a daily interest rate of 13 per cent until settlement."

(It may be - the evidence does not make clear - that this figure of $32,300 was a mistake, as winch 3 had an attachment which winch 1 lacked, which increased its value above $32,300.) 24 On 17 July 2001, Mr Kirch made a statement, which he signed and submitted to the insurer. It says: "I, Michael Kirch, hereby acknowledge that a Gene winch model JE-005 (serial# 61 99 0008 - with Optical Fibre Mechanical Cut-Out System) was issued to me as an exchange rental winch because of mechanical problems with the current winch (model JE-0005, serial # 61 98 0001). This exchange occurred in June 2001 on Windsor Road, Kellyville, New South Wales. Photographs of this exchange are attached. The value of this unit is AUS$68,000, and rental conditions apply as per those for the existing rental arrangement. We understand that this replacement winch was reported stolen on 4th July 2001 - Police Report # E12206221 (contact: Annette, ph 131 444). We (Michael Kirch and Kirch Communications' employees) confirm that we have no knowledge of this unit's whereabouts at this time. I hereby confirm that all information given above is true and correct to the best of my knowledge." 25 Mr Turco witnessed Mr Kirch's signature on the document. On a copy of that document, Mr Turco also wrote in handwriting: "On behalf of the directors of Gene Engineering and it's shareholders, the difference between the Insured Value on the Insurance Policy and the Actual Value of the winch - Serial # 61 99 0008 will not be recovered from Kirch Communications Pty Ltd - specifically". 26 On 19 July 2001, a letter was written by Mr Turco to Mr Kirch, which stated that he understood that the winch had been stolen and asked for the cost of the unit to be reimbursed. He set out the way in which the cost was made up, totalling $68,000. 27 The letter made provision, by a "CC" notation at the bottom of it, for a copy of it to be sent to Mr Holloway, an insurance assessor working for W E Campbell & Co, who was dealing with the claim. It was another letter written to facilitate the making of the insurance claim. 28 On 20 August 2001, Mr Kirch made a declaration of loss for insurance purposes, which verified that the item had been stolen by persons unknown and made a claim of $49,000 in respect of it. The figure of $49,000 was arrived at by the limit of indemnity under the policy being $50,000, and there being a $1,000 excess. The claim stated that the property was owned by, "us at the date of occurrence and that no other party had an interest therein except Gene Engineering P/L". 29 A schedule to the claim had endorsed on it a statement signed by Mr Turco saying: "On behalf of Gene Engineering Pty Ltd I, Joe Turco, concur with the settlement of this claim by payment as shown herein". 30 At some time in late August 2001, the winch was recovered. Mr Kirch gives evidence as follows: "Upon recovering winch 3 in the presence of Bill Wayman, an employee of the plaintiff and two other persons, I started the motor of the winch and checked that it was operating correctly. The winch worked well for 15- 20 minutes, after which time I stopped it. I could not detect any physical damage to the motor, capstan, gearbox, or optical fibre device. However, part of the frame surrounding the machine was bent." 31 Mr Kirch says that he returned the winch to the defendant the day after it was recovered, that he contacted the insurer and informed the insurer that the winch had been recovered and returned to the defendant, and that he offered to return the insurance money of $49,000 to the insurer. 32 Mr Turco has given evidence of a type which I have earlier quoted, in the part of my judgment about the admissibility of a report which he prepared on 24 September 2001 at the request of the plaintiff's loss adjuster (see paragraph 4 above). That report, contrary to what Mr Turco says in his affidavit, does not state that the condition of the winch, which he describes in that report, is the condition that the winch had at the time that it was returned to the defendant. The report was prepared after the winch had been in the possession of the defendant for more than three weeks. 33 It appears it was in late September that the plaintiff received payment of $49,000 thousand from GIO in settlement of the insurance claim. 34 On 4 October 2002, the loss adjuster wrote to Mr Turco saying: "We refer to the above matter, and thank you for your correspondence of 26 September 2001, together with the report. As advised verbally, since the value of salvage is well below the cost of replacement item and as the insured claim was limited to the sum insured, we confirm that the salvage is abandoned to Kirch Communications Pty Ltd. However, by virtue of the agreement with your office, this in turn is, as we understand it, passed over to Gene Engineering Pty Ltd. We also attach for your records a copy of the form of release signed by yourself and Mr Kirch and understand that settlement moneys of the claim had been forwarded on to Kirch Communications on or about 24 September last. We thank you for your assistance in this matter and confirm that our file has now been closed." 35 On 6 November 2001, Mr Turco wrote to Mr Kirch saying: "Further to our telephone conversation 8 October 2001, you confirmed to me that you sent the moneys for the above winch back to GIO Insurance after the 'Declaration of Loss Form' was signed 20/8/2001 and to be reassigned to Gene Engineering Pty Ltd. (Copy attached from W E Campbell and Co, Loss Adjusters, 4 October 2001). On a gentlemen's agreement, the settlement liability to Gene Engineering Pty Ltd was limited to the insured value on the provision payment was three to four weeks from the signing of the declaration of loss dated 20/8/2001 (copy attached). GIO has confirmed your conversation on 8 October 2001 informing you of your obligation that the moneys was to be re-addressed to Gene Engineering Pty Ltd. As you have clearly broken the gentlemen's agreement we discussed and signed I demand full payment for the above, plus the accruing rental charge of $200 (plus GST) per day from 4 July 2001, interest charges 13 per cent and associated disbursements, including legal fees and services in line with the initial agreement. Copy of signed agreement attached. Witnesses aware of this agreement and damage to the above winch (including employees) have been contacted. A report on above damaged winch returned for assessment as instructed for W E Campbell and Co on behalf of GIO Insurance Limited concluded the value was beyond the value of the insured value and cheaper to replace than rebuild. On behalf of Gene Engineering Pty Ltd and pursuant to the lease agreement established for the above equipment is to be insured. The Gene winch model JE-0005 serial# 61 99 0008 is beyond repair and hereby ask the cost of the unit be reimbursed plus the accruing rental, interest, disbursements and associated legal costs". 36 There then followed a breakdown of the cost of the unit, totalling $68,000, plus claims, as per the agreement signed 17 July 2001, for rental from 4 July 2001 based on five day week, at $1000 per week, for 17 weeks, namely, $17,000, plus interest at a 13 percent value rate and accruing disbursements and legal fees accruing. 37 Mr Kirch replied on 12 November 2001, saying: "I am not surprised in your cause of action, which has always been to travel along the path, which you feel most comfortable. I also understand the need for you to build up a strong cast (sic) against me and to set things in motion. I would like to clarify a few items, which you might have forgotten to mention. 1. I have always made myself available on [telephone number] to organise a place and time to discuss the matter... 2. The winch was returned in working condition, which was independently witnessed. 3. Any agreement that we made had no time limits. Finally, I am willing to resolve all our outstanding issues so that we can continue to go forward and not waste any more time and money". 38 The Statutory Demand to which these proceedings relate was, as I have earlier said, served on 18 January 2002. It relates to a total claimed debt of $112,970, which the Schedule to the Statutory Demand identified as being made up as follows: Description Debt GST Total $ $ $ Replacement cost of Gene Winch Model JE 0005 Serial #61 99 000 8 $68,000.00 $6,800.00 $74,800.00 Rental from 4 July 2001 to 16 January 2002 $28,000.00 $2,800.00 $30,800.00 Repair charges $6,200.00 $620.00 $6,820.00 Rings purchase $500.00 $50.00 $550.00 Grand total $112,970.00

39 When the matter was called on for hearing today, for the plaintiff, Mr Stefano, outlined the claims to which the Statutory Demand related. The third item, "repair charges", relates to a claim made concerning winch 4. 40 Mr Newlinds, counsel for the defendant, immediately conceded that there were disputes concerning certain of the items (including the "repair charges" item), but said that there was, and could be, no dispute concerning the obligation of the plaintiff to pay $49,000 to the defendant in connection with winch 3. He submitted that, in these circumstances, it was appropriate for the Court, under section 459H(4), to rewrite the Statutory Demand, so that it related to $49,000. This $49,000 was the amount which the plaintiff had received from its insurer concerning winch 3. 41 Mr Stefano, counsel for the plaintiff, submitted that there was, indeed, a dispute about even the $49,000. He said that the winch has now been recovered, and that the agreement between the parties was that, while, if the winch was stolen, the plaintiff was obliged to pay for its replacement, in the present circumstances, where the winch had been first stolen and then recovered, the operative provision of the agreement between the parties was the provision where the cost of repair to bring the item to its original condition was the amount payable. 42 He submitted that, in the circumstances, where the unit was working satisfactorily when Mr Kirch last saw it, and was, virtually immediately, handed over to the defendant, there was a dispute about whether the unit was, at the time of being returned to the defendant, in the condition reported on by Mr Turco in the report which he prepared in the latter part of September for the purposes of the insurance claim. 43 Mr Newlinds submitted that the overwhelming evidence was that the cost to fix the machine exceeded the value, namely, $68,000, and that, in consequence, it was appropriate for the defendant to be paid the $49,000 insurance proceeds which had been received by the plaintiff. Mr Newlinds submitted that that $49,000 should be regarded as being held on trust. 44 Mr Turco's report, which I have admitted in the earlier part of this judgment, provides evidence that the cost of repairing the unit exceeded its value. However, that report is one which I would read as speaking as at the date it was made. Mr Turco's affidavit does not actually say that the winch was in that condition at the time it was returned by the plaintiff. 45 In the circumstances where there is evidence from Mr Kirch that the machine was working at the time it was recovered, I am not satisfied that there is no plausible contention requiring further investigation about the condition of the machine at the time it was actually returned to the defendant. That expression, "plausible contention requiring further investigation" is, of course, drawn from the decision of McLelland CJ in Equity, Eyota Pty Limited v Hanave Pty Limited (1994) 12 ACSR 785 at 787. Both parties accepted that this was the appropriate legal test for me to apply in deciding whether to set aside the Statutory Demand. 46 There is also, it seems to me, a plausible contention requiring further investigation about whether the $49,000 was received by the plaintiff on any kind of trust. The loss adjustor told Mr Turco on 4 October 2002 that "the salvage is abandoned to Kirch Communications Pty Ltd". I am not satisfied that it could not plausibly be contended that the $49,000 is not held on trust by the plaintiff for the defendant. 47 But establishing that there is a plausible contention requiring further investigation about the debt claimed in a Statutory Demand is not the end of the enquiry which the court must make on an application like the present. Under section 459H, there is provision as follows: "(1) This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following: (a) that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates; (b) that the company has an offsetting claim. ... (4) If the substantiated amount is at least as great as the statutory minimum, the Court may make an order: (a) varying the demand as specified in the order; and (b) declaring the demand to have had effect, as so varied, as from when the demand was served on the company". 48 Section 459H(2) requires the Court to calculate the "substantiated amount" of the demand in accordance with the formula, "Admitted total minus Offsetting total". 49 There is a definition of "admitted total" as meaning, "(a) the admitted amount of the debt; or (b) the total of the respective admitted amounts of the debts as the case requires, to which the demand relates." 50 The expression "admitted amount" is further defined in subsection 5. The amount which would be relevant in the present case, is that which arises under paragraph (b), namely: "If the Court is satisfied there is a genuine dispute between the company and the respondent about the amount of the debt - so much of that amount as the Court is satisfied is not the subject of such a dispute". 51 In other words, the "admitted amount" is not an amount which a party admits is owing, but an amount which the Court is satisfied is not the subject of a bona fide dispute. 52 The plaintiff accepts that part of the frame surrounding the winch was bent at the time it was recovered. It would presumably cost something to repair that damage. However, the evidence does not permit me to say what would be the cost of repairing the extent of damage which the plaintiff admits occurred. Thus, there is no particular number of dollars which I am satisfied is not the subject of a genuine dispute between the plaintiff and the defendant about the amount of the debt. Thus, there is no particular number of dollars which can be the "admitted total" for the purpose of section 459H(2). 53 Further, the Court does not have a completely free rein, to examine whatever sums of money might be owing by the plaintiff to the defendant, in deciding what is such an "admitted amount". The statutory definition requires the "admitted amount" to be "so much of" - ie part of - "the amount of the debt". This requires the Court to consider what is "the debt" which has been claimed to be owing in the demand. 54 I draw this from the wording of section 459H(1), where the section is said to apply when there is a genuine dispute between the company and the respondent, "about the existence or amount of a debt to which the demand relates" (emphasis added). It is only sums of money owing by the plaintiff to the defendant which are part of the debt claimed in the Statutory Demand which count towards the calculation of an "admitted amount". 55 This particular demand related to the four heads of claim which were set out in the schedule to the Notice of Demand. The claims concerning winch 3 were for the replacement cost, and ongoing rental. The amount which the plaintiff is required to pay to the defendant concerning winch 3 is the cost of repairing it. The cost of repairing the winch is not part of either the replacement cost of the winch, nor of its rental. Thus, even if I had been satisfied that some particular amount was the minimum owing to the defendant for the cost of repair I would, therefore, be of the view that it would not be open to the Court to rewrite the Statutory Demand to allow a different head of claim to be substituted. 56 I should also mention that there is a discretion under section 459(4) as to whether the Court should make an order modifying a Statutory Demand, in circumstances where the amount in relation to which there is no dispute is smaller than the amount claimed. 57 It is established that if an original demand was grossly inflated by the inclusion of matters which are clearly genuinely in dispute, the Court can decline to vary it (First State Computing Pty Ltd v Kyling (1995) 13 ACLC 939 at 951; Equus Corporation Pty Limited v Perpetual Trustees WA Limited (1997) 80 FCR 1296). 58 In the present case, the demand had been made for nearly $113,000, yet the only argument even advanced in support of it related to an amount of $49,000. 59 In view of the conclusion I have come to, however, it is not necessary for me to express any views about whether, had I come to a different conclusion, I would have exercised the discretion under section 459H(4). 60 I set aside the Statutory Demand served by the defendant on the plaintiff dated 18 January 2002. 61 I order the defendant to pay the plaintiff's costs. **********

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