Liberty Grove (Concord) Pty Ltd v Mirvac Projects Pty Ltd

Liberty Grove (Concord) Pty Ltd v Mirvac Projects Pty Ltd - [2008] NSWSC 113 - NSWSC 2008 case summary — Zoe

[28]

iv. Project profits are sensitive to changes in monthly cash flows because of the intra year effect of interest on each month's cash flow and interest on that interest during the year. Interest on interest is referred to as "compounding". Almost all forms of corporate debt are subject to intra year compounding and this compounding effect should be reflected in the actual project profits. The practice of discounting 12 The reasons include several references to 'discount rate' for 'discounting back to present value'. It is convenient early in these reasons to make clear that the term 'discounting', refers to the mathematical process of converting a future sum of money so that it is stated in present value terms [or for any selected prior period]. The difference in value is due to the time value of money principle, by which the value of a sum of money received today is more valuable than the value of the same sum of money received in the future, due to reasons which include inflation, interest (opportunity to invest) and risk. The discount rate used in the process of discounting takes into effect these factors [cf Appendix G to Mr Lonergan's first report]. The dispute as to Liberty's profit share 13 By letter dated 7 September 2005 [Ex PX 550-555] from Mirvac to Liberty, Mirvac contended that its profit on the development of the Site, based on an ungeared cashflow was $70,718,000 [see the enclosed consolidated cashflow at [Ex PX 555], and that the profit on the development at a 20% IRR based on an ungeared cashflow was $59,874,000, and that as such Liberty's profit share pursuant to clause 5(d) of the Agreement was $2,168,837 (being 20% of the Excess Profit of $10,844,000). This sum was paid by Mirvac to Liberty on 12 January 2006 following the issue by Liberty of a creditor's statutory demand for payment of debts upon Mirvac in this sum. The payment took place under cover of a letter [Ex PX 569-570] from Mirvac's solicitors to Liberty's solicitors, stating that Liberty should ensure that the funds were retained as it was possible that some or all of the moneys would have to be refunded to Mirvac if Liberty proceeded with the Supreme Court proceedings and if the Court found that the appropriate methodology resulted in a profit share due to Liberty less than the subject amount. Further detail of the circumstances may be gleaned from the interlocutory judgment dismissing an application pursued by Mirvac on the first day of the hearing for security for costs, which to the extent relevant, may be regarded as imported into this judgment: [2008] NSWSC 48. 14 In calculating Liberty's profit share, the basic methodology adopted by Mirvac was as follows:

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"The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used." 19 Santow JA at [23] continued: "To this I would add the observation of Lord Steyn, writing extra-judicially on "The Intractable Problem of the Interpretation of Legal Texts" (2003) SLR 1 at 7. After pointing to the shift from literal to purposive interpretation, he adds the caveat that it would be an oversimplification to say that there has been a homogenous shift towards a purposive interpretation of all legal texts. Nonetheless he says: "In a network of contracts governing a construction project, parties ought generally to be able to rely on the obvious meaning of the interlocking texts". 20 Hence I take it as axiomatic that: · the Court endeavours to give primacy to unambiguous words used in a written contract, this matter generally being approached in the manner outlined by McColl JA in Peppers Hotel Management, supra; · the proper approach seeks "the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably been available to the parties in the situation in which they were at the time of the contract" (Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188 citing Lord Hoffmann; Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912; [1998] 1 All ER 98 at 114; Peppers Hotel Management Pty Ltd, supra at [66] et seq; · commercial contracts should be construed so as to be given a sensible commercial operation: Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; Hide and Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-4; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 per Giles JA at [64]. The general test of objectivity and the agreed rulings to objections 21 Nothing in the above authorities suggest anything otherwise than that in dealing with the instant construction issue, the general test of objectivity remains pervasive: cf Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 549 per Gleeson CJ, citing Lord Diplock in Gissing v Gissing [1971] AC 886 and in Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441 at 502. 22 The fact is that there were only very few communications between the parties during the stage when the written Agreement was being negotiated. There was no claim that the Agreement was partly in writing and partly oral. Nor was there any claim to rectification made by either party. 23 Notwithstanding this situation, both parties in dealing with their respective objections to evidence pressed the Court to rule that the anterior negotiations be permitted 'subject to relevance'. To my mind as indicated to counsel at the time, such an approach would be likely antithetic to the principled approach where a written document was to be construed. 24 Nonetheless the Court was persuaded to rule as asked. The ruling was given relatively early and at a time when there were still veiled suggestions of the possibility of an amendment to plead that the Agreement was partly writing and partly oral. It was also true that some of the evidence which would come forward could conceivably go to the credit of one or other of the witnesses in relation to other matters that were separate to the construction question. 25 Ultimately the finding is that this evidence was of little or no assistance on the construction issue as it frequently descended into the realm of what the material witnesses had believed or thought was the intention of the other. 26 Of course the negotiations were admissible to the extent which they tended to establish objective background facts which were known to both parties and were the subject matter of the contract. But the negotiations otherwise, in consisting of statements and actions of the parties even if reflective of their actual intentions and expectations are not to my mind admissible on the construction issue. As Mason J points out in Codelfa, such statements and actions may reveal the terms of the contract which the parties intended or hoped to make - but are superceded by and merged in the contract itself. The soundness of this approach has a very respectable lineage including the following well-known and often followed observations:

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xxiii. On 12 January 2006, Mirvac paid $2,168,837 to Liberty Grove. Dealing with credit issues 35 There were precious few questions of credit ultimately pressed. Mr Alexander Boyarsky 36 Mr Alexander Boyarsky clearly had a very partisan interest in the result in the proceedings. He appeared to be reasonably well prepared for his cross-examination. His evidence is accepted as reliable where consistent with contemporary documents. From time to time he was faulted on his recollections. As the reasons make clear the Court has accepted as reliable Mr Broit's evidence that whether or not Mr Broit used the precise words "It will be done in accordance with Mirvac's usual accounting practices", the words which Mr Broit used conveyed that particular proposition. Likewise Mr Boyarsky's evidence that he did not know prior to April 2000 that Mr Levy was a director of Mirvac as at 14 April 2000 is rejected in favour of the evidence of Mr Levy: who had made plain that this fact was known by Mr Boyarsky at all times prior to the agreement, he having been a personal friend of Mr Boyarsky. Mr Levy's evidence was that "[he] knew and I told him". Mr Andrew Boyarsky 37 Here again Mr Andrew Boyarsky also clearly had a partisan interest in the result of the proceedings. He tended in the witness box to show his anger and frustration at what he clearly regarded as unfair dealing by Mirvac. In the result his evidence also requires to be very carefully monitored and tested against contemporaneous documents. The principal area in respect of which his credit requires to be adjudicated concerns the so-called variation issue already referred to. In this regard his evidence falls to be examined against that given by Ms Leanne Clifton. More is said in relation to this question in the reasons which follow. The evidence given by Ms Leanne Clifton 38 Ms Leanne Clifton presented as very cool and unflappable in the witness box. I gained the clear impression that she was extraordinarily well prepared for the cross-examination. I gained the very clear impression that she was very well acquainted with the central issues to which her cross-examination went. Unfortunately from time to time she tended to add to the detail otherwise given in her affidavit which makes the task of determining credit all the more difficult. Her evidence that Mr Andrew Boyarsky agreed in early September 2005 to the inclusion of forecasted costs in the cashflow in place of actual costs suffers from the changes to her affidavit evidence - the suggested 'full picture' not having been elicited save under cross-examination. Hence the finding that Mirvac did not on the balance of probabilities discharge its burden of proving the so-called 'variation'. Mr Broit 39 Mr Broit was obviously also well prepared for his cross-examination. He answered the questions put to him carefully. I was not able to discern his evidence is otherwise than generally reliable although the events in question did take place so many years ago. Other witnesses 40 No serious attack upon the credit of other witnesses was advanced by either party. As appropriate the reasons address particular matters, as for example the reliability of Mr Levy's evidence in terms of the initial pre-contract discussions. The proper construction of the Agreement 41 Counsel for Liberty contended that clearly the agreement had been stated briefly in the form of a letter and therefore did not set out in intimate detail all of the terms of the Agreement. Granted the brevity of the Agreement, it remains somewhat difficult to discern precisely what Liberty is able to gain from its brevity per se. There are only a limited number of routes available to the Court as aids to construing a written instrument signed as an Agreement. 42 I have already observed that there is no claim to rectification. One of the routes is of course by reference to terms which may be implied. Another is available where ambiguities are shown to exist. However, as the above described authorities have made clear, outside the Court's entitlement:

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v. A reasonable person in the position of the parties at the time would not regard accounting practices as including idiosyncratic notions such as the expression of an annual IRR as being the monthly compounding IRR multiplied by 12. Such a practice is not an accounting practice but rather simply a means of expression. It does not affect the accounts in any way. In the present case, the expression of an annual IRR as the monthly IRR multiplied by 12, was purely a management reporting practice. 46 In the result, properly construed [in the light of the commercial purpose of the contract considered against the background, the context, and the market in which the parties were operating], the agreement required Mirvac, once the development was completed, to calculate the actual effective IRR in relation to the completed development. I accept as correct Liberty's contention that, assuming this IRR was in excess of 20%, Mirvac was then required to calculate the profit in excess of a 20% IRR. This calculation could have been carried out in accordance with the net accumulated value approach set out by Mr Lonergan in his reports. This involved subjecting the opening monthly balance of the accumulated net monthly cash flows to a compounding rate of 1.5309% to September 2005. Alternatively, the methodology adopted by Mr Hall could have been used, but with a monthly rate of 1.5309% and not 1.67% as used by Mirvac (and assumed by Mr Hall). Both methods would have been compliant with the Agreement. The alleged errors in Mirvac's calculation of the Excess Profit Mirvac's approach to the calculation of the Excess Profit 47 I will proceed to set out under sub-headings the main aspects of Mirvac's approach to calculating the Excess Profit, the substance of each party's key contentions, the important evidence before the Court and the Court's ultimate findings. The basic methodology adopted by Mirvac in calculating the Excess Profit and Liberty's resulting profit share 48 Mirvac constructed a set of monthly cash flows by adjusting the actual monthly cash flows in respect of the Development, so that the adjusted cash flows produced an IRR of (approximately) 20%.

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[It should be noted that although the actual steps undertaken by Mirvac may have differed from what appears to have occurred, the end result is the same in that the Excess Profit calculation is substantially carried out on the above bases.] Whether the IRR referred to in the Agreement is a reference to an 'effective' rate or a 'nominal' rate? 52 In the process of calculating what they considered to be the Excess Profit, Mirvac in effect interpreted the Agreement's reference to a 20% IRR in clause 5(d) to mean a 'nominal' IRR and not an 'effective' IRR. 53 Mr Lonergan provided a detailed explanation of the concepts of nominal rates of return and effective rates of return. Nominal rates do not represent the actual underlying rate of return on a given project or investment. It is a rate of return that is quoted without reference to intra-year compounding, if any were to exist. The effective, or 'real' rate of return takes into account the important component of any intra-year compounding and as such provides an accurate underlying rate of return that is achieved. The effective rate of return can be derived from the nominal rate, if the nominal rate includes a qualifying reference as to the compounding period, eg 20% pa compounding monthly [see Mr Lonergan's first report [58] ff]. Further, the derivation of an annual effective rate of return for multiple projects is a common comparative base for all rates of return [Mr Lonergan's first report at [67]] and in this way, assists a firm or company to compare the economic return on projects. 54 The Agreement, specifically clause 5(d), did not clearly articulate whether the stipulated internal rate of return benchmark of 20% was in reference to an annual effective IRR of 20% or rather to an annual nominal IRR of 20%. In their calculations, Mirvac in effect purported to apply a nominal IRR of 20% [and even in doing so, as Mr Lonergan notes, inaccurately derived a nominal IRR of 20.16% pa, and not 20% pa, during its "adjusting of cash flows" process discussed below]. 55 Mr Lonergan's evidence [at [69]], which is accepted, was that in his experience it was standard practice [where the effect is material] for IRRs to be stated in annual effective terms. In the context of Liberty and Mirvac's agreement, Mirvac's budgeted [and actual] cash flows were accounted for on a monthly basis and were subject to periodic compounding [monthly], hence the use of an annual nominal rate of return would not have reflected the cash flow reality of the Project. This is, again, because the annual nominal rate of return assumes that periodic (intra-year) compounding does not occur, whilst the actual cash flows are indeed subject to periodic compounding. Mr Lonergan noted that in the context of the Agreement and proposed property development, the difference between the effective (real) and nominal underlying profitability as derived by the corresponding rates of return would have been material [at [73]]. The finding is that the background knowledge which would reasonably have been available to the parties in the situation in which they were in at the time of the contract, included the fact that on a development such as the one proposed at the Site, there would have been compounding from month to month (i.e. intra-year compounding) if a monthly IRR were calculated, month by month. 56 I proceed to set out below, as extracted from Mr Lonergan's first report at [104], the formulae by which to derive a monthly compounding (monthly) discount rate based on an annual effective IRR of 20% and a monthly discount rate based on an annual nominal IRR of 20%. Effective Nominal Annual effective rate = (1 + i ) n - 1 Annual nominal rate = i x n 20% = (1 + i ) 12 - 1 20% = i x 12 1 + 20% = ( 1 + i ) 12 0.20 = i 1.20 = ( 1 + i ) 12 0.20 / 12 = i = 1 + i 0.16667 or 1.6667% = i 1.015309 = 1+ i 1.015309 - 1 = i 0.015309 or 1.5309% = i

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ii. To use Feasibility as a project management monitoring system. Data is entered into the Feasibility showing the actual costs and revenue in relation to the project, rather than the assumed (or forecasted) costs and revenue. Month by month, the budgeted cash flows are replaced by accounting staff with entries reflecting actual cash flows for the life of the project. 63 At each month, the software can be utilised to present a running IRR calculation so that project managers can have the current IRR of the project for the purpose of project management decisions. At the end of the project, the software also provides a report on the completed project showing the final IRR. It is this final report on the Cabarita Development [subject to the use of budgeted cash flows for the August and September 2005 months] which was used to calculate the IRR on the Development and any resulting Excess Profit. The standard IRR formulas of a computer spreadsheet program versus Mirvac's annualised IRR 64 It is not in dispute that in calculating an IRR of 20%, Mirvac utilised a standard or default IRR formula of a computer spreadsheet program such as Lotus 123 or Microsoft Excel and then annualised the result of 1.67% by multiplying that percentage figure by 12. Put simply, the computer spreadsheet program automatically calculated the rate of return per time interval for the range of cash flows occurring at regular intervals [Ex P6] - that is, a periodic compounding rate that corresponds with the frequency of cash flows being analysed. Since the Development's range of cash flows were recorded monthly, the computer spreadsheet program's formula calculated the IRR as a monthly compounding rate. Mirvac then 'annualised' this monthly compounding IRR of 1.67% by multiplying it by 12 [which does not give the true effective annualised rate]. The result is a rate expressed on an annual nominal basis. I understand that the Feasibility calculates this Mirvac-specific annualised IRR automatically since the tailored formula has been set up within the Feasibility by Mirvac personnel [see Mr De Vries' affidavit of 7 August 2007 at [16]-[20]]. 65 Mirvac accepts that this annualisation process ignores the fundamental basis on which the IRR formula of the spreadsheet program works [i.e. Mirvac ignored the effect of monthly compounding, or assumed that it did not occur when in fact it is accepted that it did], but contends that Liberty is in error when it claims that clause 5(d) required Mirvac to calculate the IRR on an effective basis. Mirvac submits that it is entitled to use its approach of compounding on an annual basis because it is Mirvac's established practice in calculating IRR's in its Feasibility system, and is allowed for under clause 6 of the Agreement that stipulates that the IRR is to be calculated by Mirvac "in accordance with Mirvac's normal accounting practices." To my mind, the calculation of an IRR, even though established as normal practice for the various uses to which the Feasibility system is put by Mirvac, does not necessarily mean that it is to be accepted as a normal accounting practice. 66 Liberty's general construction of clauses 5(d) and 6 is accepted as correct in that clause 6 is referable inter alia to the manner and means in which costs would be allocated to the project. Clause 6 did not permit Mirvac to alter that which it was required to calculate, namely the actual real IRR achieved on the Development, which as Mr Lonergan explained, has a well accepted definition. The "internal rate of return" in clause 6 is not modified or qualified by any other part of clause 6.

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Adjusting certain of the cash flows by a 90% factor 72 Mirvac's approach of working out the hypothetical amount of profit achieved on the Development represented by an IRR of 20%, as carried out by Ms Clifton, was to adjust certain of the actual cash flows in relation to the Development so as to derive a purported 20% annual IRR. 73 Leaving to one side the issue dealt with above as to the appropriate monthly required rate of return to be applied, Liberty contends that the adjustment to the actual cash flows in the process of calculating the Excess Profit is fundamentally wrong. 74 Ms Clifton's evidence was that in her calculations of the benchmark profit [i.e. the profit at an IRR of 20%] the first 6 months of net cash flows on the Development (January 2000 to June 2000) were kept constant and were not adjusted by the 90% factor. Ms Clifton's explanation for not adjusting the first 6 months of net cash flows, but adjusting the balance of the net cash flows, was that the first 6 months involved costs [including the cost of acquiring the Site and associated transaction costs] that were known to both Liberty and Mirvac [presumably at the time the Agreement was entered into] and gave the 'fairest result to both parties' [T 242.40-53]. 75 Ms Clifton's evidence was that the remaining net cash flows were then adjusted by a percentage to produce an IRR of 20% at the end of the Development [T 241-242]. By working backwards to calculate an accumulated cash flow that would achieve a hypothetical 20% IRR on the Project, an constant adjustment factor of 90% [that is, the reduction of the net cash flows by 10% apart from those from the first 6 months] on the balance of the net cash flows was seen by Ms Clifton, in consultation with Mr Broit, to be a most fair and reasonable result [T 242.29 ff]. 76 With the adjusted net cash flows purportedly generating an IRR of 20% at the end of the Development, these net cash flows were added together to calculate the purported (hypothetical) profit figure at the target IRR of 20%. The actual profit was calculated by summing together the unadjusted net monthly cash flows of the Development. The difference between the actual profit achieved on the Development and the hypothetical profit was calculated to be the Excess Profit. Liberty then received 20% of this Excess Profit as its profit share. 77 Liberty contends that the Excess Profit figure was to be the profit actually earned by Mirvac and not based on hypothetical notions of profit. In particular, Liberty complains that actual cash flows were to be used by Liberty and not some hypothetical or adjusted cash flows [as per Mr Broit's letter to Mr Alex Boyarsky of 19 January 2001 [Ex PX 247]]. Clearly the 90% cash flow adjustments made by Ms Clifton in calculating the 'base' amount [that is, the hypothetical profit with an IRR of 20%] from which to calculate the Excess Profit, were purely arbitrary. 78 Mr Broit conceded that the adjustment of net cash flows was not mandated by the Agreement [T 277.17-36] as did Ms Clifton who admitted that the particular method, in her opinion, was not necessitated by the Agreement. It was simply an arithmetical way to adjust the cash flows which were calculated or contrived to derive a profit amount equivalent to a 20% IRR, which in her opinion was selected as a way of doing that which she thought was required for the purpose of the Agreement [T 244.9; see also Mr Broit's cross-examination at T 277.39]. 79 Mr Lonergan demonstrated in his report of 28 June 2007 at [79]-[80] that, in theory, there are an infinite number of cash flow combinations which would yield a 20% IRR [or nominal IRR of 20.16% as calculated by Mirvac]. The sum of each of those cash flow combinations would be different, and accordingly the process of adjusting actual net monthly cash flows could be fitted to yield a desired Excess Profit amount. 80 A further error in Mirvac's "adjust the cash flow" approach that Mr Lonergan identified [at [86]] was that it made no allowance for the time value of money on the early period cash flows that it wholly allocated to the Excess Profit figure. It was also conceded by Mr Hall that this approach involved only a "crude" application of the time value of money principles required to be applied [T 312.25; T 312.50; T 314.5]. 81 Mr Hall's evidence was similar to Mr Lonergan's evidence in that he did not see it as necessary for Mirvac to adjust the cash flows at all and did not adopt such a method [T 317.20; T 318.2]. In calculating the benchmark profit figure, Mr Hall used the actual cash flows from the Development and as instructed by Mirvac's solicitors, assumed the use of a monthly cash flow discount rate of 1.67%. In order to calculate the benchmark profit figure, Mr Hall discounted to 'present value' [as at the start of the Development] using a monthly discount rate of 1.67% [said to be equivalent to an annual nominal rate of 20%] the actual net cash flows of the Development and added these discounted cash flows to determine the net present value (NPV) of the Development cash flows. The NPV calculated in this way was said to equal the present value [as at the start of the Development] of those profits in excess of the profit figure equivalent to an IRR of 20% [that is, the 'excess profit' stated in terms of its value as at start of the project]. This Excess Profit figure then needed to be restated in terms of the present value as at the end of the Project by calculating the future value of that amount using the same discount rate over the intervening period. This resultant future value of the Excess Profit was then multiplied by 20% to achieve the profit share figure owing to Liberty. [See [25] of Mr Hall's report.] 82 Mr Hall and Mr Lonergan pointed out that the "discount back to the beginning then roll forward to the end" approach of Mr Hall and Mr Lonergan's "net accumulated value approach" were very similar and that, provided the inputs were the same, their respective approaches should yield exactly the same result [T 301.20-302.32 per Mr Lonergan; T 306.34-41 per Mr Hall]. Mr Lonergan's approach involved compounding ("rolling forward") the net cash flows to the end of the Development. The material difference was the monthly discount/compound rate used by Mr Hall (1.67%) and Mr Lonergan (1.5309%), and for reasons explained above, Mr Lonergan's use of 1.5309% as the monthly discount/compound rate was the appropriate rate.

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b) a bookkeeping entry. 89 As to the marketing costs incurred by the project for its marketing: these were removed from the Cost Transaction Report as they were not "costs" for the purposes of Mirvac's statutory reporting obligations. 90 The costs that comprise the bookkeeping entry were the costs that related to Stage 1B. These costs were not "written off" but rather were transferred to another job number so that they could be monitored individually for the purposes of a separate financing arrangement. This was an internal bookkeeping exercise only and does not indicate that the costs were not in fact included in the project. 91 Each of the costs which comprise the $7,210,000.00 were costs properly incurred in the project and therefore appropriately used in the calculation of the profit share pursuant to the Agreement. 92 Once Mr Lonergan's concerns were addressed by Mirvac's evidence he did not appear to continue to press this issue. In his report in reply he does not contest the explanation for this accounting treatment is wrong. Nor does Liberty appear to challenge the evidence of Ms Clifton that explains this accounting treatment. I accept the unchallenged evidence as to the treatment of these funds as explained by Ms Clifton. Rounding Errors 93 I accept that the calculations made by Mirvac lack mathematical precision. Given the size of the project, and in particular the large numbers involved, a lack of mathematical precision has a substantial impact on the outcome of the excess profit calculation under the Agreement. 94 It is not in dispute that the adjusted net monthly cash flows used by Ms Clifton produced, when annualised by her by multiplying the monthly-derived IRR by 12, a stated annual IRR of 20.16%. It also cannot be in dispute that the Agreement required the annual rate to be 20%, which must mean, if one was to use two decimal places, 20.00%. 95 To demonstrate the arbitrary effect of mathematical imprecision, Mirvac could have calculated the nominal IRR [using their exact methodology] such that the nominal IRR equalled, for example, 19.50001% [which rounds to 20%]. This would have derived an excess profit figure of some $14.00 million [as compared to Mirvac's calculated figure of $10.8 million]. The excess profit figure of some $14 million could then have been multiplied by 20.4999% [which rounds to 20%] in order to derive Liberty Grove's profit share of some $2.9 million [as compared to Mirvac's current figure of $2.1 million]. 96 Mr Lonergan has correctly calculated the excess profit figure on the basis that the annual IRR is 20.00%, and not 20.16%. Reconciling Mirvac's cost transaction report showing total costs at $195,343,192 with Mirvac's cashflow report recording total costs in the sum of $210,076,000 97 Ms Clifton explained that these amounts could not readily be reconciled because they were referring to different accounting concepts. No questions were asked of Mr De Vries or Ms Clifton in relation to this issue in cross-examination. Their evidence about the reconciliation is accepted. The issue as to Mirvac's timing in the recognition of costs 98 Liberty complains that Mirvac did not allocate all the costs in relation to the Development to the months in which those costs were paid by Mirvac, but rather allocated the timing of some costs to when they were posted or entered into their accounting system ("Posting Date"). The Posting Date of some costs were months prior to the months in which the costs were actually paid by Mirvac. Further, Mirvac is also shown to have part-paid certain invoices and paid the balance at a later date - yet recorded the entire payment as having been made at the earlier date of posting to Mirvac's accounting system. In effect, these approaches resulted in the recognition of cash outflows being earlier than when they were actually incurred, thus reducing the profit for the purposes of the Excess Profit calculations due to the time value of money. This I acknowledge was of benefit to Mirvac. 99 Liberty relies on clause 5(d) of the Agreement which it contends clearly required the IRR to be based on actual cash flow [i.e. when the money was actually received or paid out by Mirvac] and not on the Posting Date. The answer to this contention seems to be that clause 6 of the Agreement allows the IRR to be calculated by Mirvac in accordance with their normal accounting practices. The question then is: whether the date on which costs and revenues are recognised by Mirvac constitutes an "accounting practice"? I accept that timing issues in relation to the recognition of costs and revenues fall within the ambit of accounting practices. The question that follows is: whether the practice of using the Posting Date as the date on which costs are recognised is established by Mirvac to be one of their normal accounting practices? Mirvac's evidence [see Ms Scovazzi's affidavit of 2 August 2007 at [20] who was not required for cross-examination by Liberty] was that the method of recognising costs on the Posting Date [and revenue on the settlement date of property sales] was and remains the only practice of recording costs and revenue on a development since she has been employed by Mirvac in 1994.

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Mr Boyarsky: "You do what you've got to do so we can finalise this matter. Send it to us and we'll have a look at it." 107 On Ms Clifton's version of events, Mr Andrew Boyarsky agreed on 1 September 2005 to include forecasted costs in the cash flow in place of actual costs. 108 On Mr Andrew Boyarsky's version, all that he agreed to (on 7 September 2005) was that Liberty would consider the materials provided to Mr Boyarsky by Ms Clifton, and then get back to Mirvac. Deciding the issue 109 Both parties addressed careful submissions each contending that the witness called by the other gave unreliable evidence and should be disbelieved. The fact is that in particular ways and at various times during the course of giving evidence, each of Mr Andrew Boyarsky as well as Ms Clifton gave answers suggesting, at the least, that their recollections were from time to time in error. This is by no means an unusual circumstance where the events in question took place some considerable time ago. The experience of the Court is that witnesses tend, over time, to come to believe that events did occur or did not occur. Contemporaneous documents and other reliable evidence will often make quite plain that a witness' recollection was faulty. This is not to say that the witness intentionally lied on oath. The Court deals with questions of reliability on the balance of probabilities aided by contemporaneous documents. 110 In relation to the present controversy the matter stands as follows: i. There is something to be said in support of the proposition that clearly during the run-up to the September conversations and communications Liberty had been agitating for the matter to be brought to a close having been interested in finalisation over an extended period. Indeed an initiative for the profit share calculation to be finalised had come from Liberty in its letter to Mirvac of 9 November 2004. Mr Andrew Boyarsky was aware that if the project was not finalised in or about September 2005, Liberty may have to wait for any payment for months or possibly years. Hence it is Mirvac's case that the motivation in Liberty to have the Project finalised when there were still costs to be incurred and taken into account over an indefinite period was powerful. The submission is that unless Mirvac was prepared to agree to abandon taking into account project costs after 31 July 2005, if early finalisation were to be achieved, Mr Andrew Boyarsky needed to agree to some system which would permit using budgeted costs in the final Mirvac calculation. Absent the use of budgeted costs the project simply could not be finalised within the time frame desired by Liberty. The submission is that the objective indicators make it highly probable that some such arrangement must have been made. ii. On the other side of the equation the case pursued by Liberty is that: a) Ms Clifton initially swore to the conversation having occurred on 7 September 2005 and to Mr Boyarsky having not agreed to her proposal.

At a glance

Court

Decision date

Before

Source

Judgment (165 paragraphs)

Parties

Cases Cited (13)

Cited By (1)