In the briefest of terms, the plaintiff has sued the defendant for breach of a Master Franchise Agreement (MFA), but in particular for the refusal of the defendant to renew the agreement in accordance with an option exercised by the plaintiff.
If the MFA had been renewed it would have been for a term of 10 years, commencing on 1 July 2024 and ending on 30 June 2034. If the renewal had proceeded the plaintiff would have continued to derive monies arising from the implementation of the MFA, in particular, through building work carried out by sub-franchisees.
The plaintiff, as an alternative to the breach of agreement case, says that the defendant acted unconscionably, in contravention of the Australian Consumer Law. The defendant denies any breach of the MFA and rejects the notion that it acted unconscionably. These two issues are issues of liability.
If the plaintiff succeeds on liability, it has proposed two methods of approaching damages. One of these methods is to estimate the royalties it would have received, derived from the work of the sub-franchisees (the builders) during the above ten-year period. This is essentially a loss of chance approach.
In order to assess the value of the lost chance the plaintiff relies on a report of a forensic accountant, Mr Potter. Mr Potter's primary report is dated 3 May 2024. There is a report from a Mr Ross, dated 3 July 2024, which responds to Mr Potter's report, and then a report in reply from Mr Potter dated 17 July 2024.
The defendant has objected to the admissibility of Mr Potter's reports. The starting point for the objection was by reference to the decision of the New South Wales Court of Appeal, and in particular the judgment of Heydon JA, in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305, at [85]:
"In short, if evidence tendered as expert opinion evidence is to be admissible, it must be agreed or demonstrated that there is a field of "specialised knowledge"; there must be an identified aspect of that field in which the witness demonstrates that by reason of specified training, study or experience, the witness has become an expert; the opinion proffered must be "wholly or substantially based on the witness's expert knowledge"; so far as the opinion is based on facts "observed" by the expert, they must be identified and admissibly proved by the expert, and so far as the opinion is based on "assumed" or "accepted" facts, they must be identified and proved in some other way; 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 speaking not admissible, and, so far as it is admissible, of diminished weight. And an attempt to make the basis of the opinion explicit may reveal that it is not based on specialised expert knowledge, but, to use Gleeson CJ's characterisation of the evidence in HG v R (1999) 197 CLR 414, on "a combination of speculation, inference, personal and second-hand views as to the credibility of the complainant, and a process of reasoning which went well beyond the field of expertise".
In addition, I was referred to the decision of the Court of Appeal in Western Australia in Automasters Pty Ltd v Bruness Pty Ltd & Anor [2004] WASCA 229, at [29]:
"Where an expert relies upon the existence of some fact in support of an opinion, that fact must be proved by admissible evidence: R v Abadom [1983] 1 WLR 126 at 131; Pownall, at 375-376 and 389-390; English Exporters (London) Ltd v Eldonwall Ltd [1973] Ch 415 at 422-423; Makita at 731-732, 737-738 and 743-744; and McNeil v Commissioner of Taxation [2003] FCA 958; (2003) 202 ALR 35 at 52. Where an expert opinion is based entirely on inadmissible evidence, the opinion will itself be inadmissible: Pownall at 378. Similarly, where the inadmissible evidence is so intertwined with the admissible evidence that they cannot be separated, the whole body of evidence will be rejected: Pownall at 376 - 377; Steffen v Ruban [1966] 2 NSWR 622. However, where the inadmissible evidence can readily be ascertained and discarded, leaving admissible evidence in support of the opinion, the opinion should be admitted, subject to weight: Pownall at 378."
Relying on the principles set out in the above authorities, the defendant submitted that:
1. Mr Potter was a forensic accountant. He has no experience in the home building industry;
2. Mr Potter, at [55] of his report sets out the sources from which he has derived his calculations. They are an IBIS World Report, Master Builders Australia (MBA) reports, Housing Industry Association (HIA) reports and Australian Bureau of Statistics (ABS) data. The IBIS report is ultimately discarded so it is not relevant to the current argument;
3. the reliance by Mr Potter on the MBA, HIA and ABS material offends the principles in Makita because there is no evidence that says that this material is reliable;
4. Mr Potter's approach to the period from 2025 to 2029, derived from the HIA figures is applicable to New South Wales as a whole, whereas it should be based on the individual figures for each sub-franchisee. These figures have been available to the plaintiff since at least last week; and
5. in respect of 2030 to 2034 Mr Potter, instead of continuing the HIA forecasts which go up to 2029, used 2024 figures as the basis to estimate the loss in this period.
The plaintiff, in response, categorised the objections in a different way, suggesting that it was more concerned with relevance than admissibility. In addition, the plaintiff submitted that I could draw an inference, pursuant to s 183 of the Evidence Act 1995 (NSW), that the industry figures were reliable. I think the categorisation of admissibility, at least as far as the reliability question is concerned, is the correct approach. I also agree with the defendant that s 183 has no part to play in the argument.
Turning now to the question of reliability of the MBA, HIA and ABS material. There is no doubt that the MBA and HIA reports are well-known in the building industry. I think I can take judicial notice of that fact. Mr Ross does not say the figures are unreliable, although he does have a number of arguments arising from their applicability.
In addition, it is very apparent that the MBA and HIA figures were not only well-known to the defendant but also utilised by it. Mr Wallace said he relied on HIA data from time to time to gauge the progression of the business. Mr Trent Gardner sent an email congratulating the Australian network on having done very well in the HIA results. And Mr Trent Gardner also uses the HIA material in his response to the alternative damages claim put forward by the plaintiff. This is apparent from [23] of his affidavit of 5 August 2024. Mr Thornton, in the COO report refers to the ABS data.
As pointed out by the plaintiff, Mr Potter's use of the material is not the product of a random Google search producing possibly unsubstantiated figures. It is true that there is no independent evidence put forward by the plaintiff to say that the HIA, MBA and ABS material has been independently scrutinised and found to be reliable. I do not think such evidence is necessary. To require such evidence, I think would be an unnecessary waste of time and costs.
In my view the established use of these sources, including by the defendant itself, is enough to enable the plaintiff to rely upon them and to treat them as assumptions from which calculations might be made.
Once Mr Potter was able to use the figures, then I agree with Mr Ross, although he said it in a different context, that the calculations were mechanical. Mr Potter's experience as a forensic accountant well qualifies him for the mechanical exercise he has undertaken.
I think there is a good deal of weight in the point made by the defendant concerning the use of 2024 figures to establish the loss from 2030 to 2034. However, I think this point is one to be made through the cross-examination of Mr Potter.
In relation to the averaging point, namely the use of New South Wales figures generally and not figures derived from each sub-franchisees, again the point is well made, but I think one for exploration in cross-examination.
Accordingly, I will allow the admission of Mr Potter's reports into evidence.
[2]
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Decision last updated: 09 December 2024