RESERVE CAPITAL -v- SEASCAPES SUPERMARKET WA PTY LTD [2022] WASC 56 (24 February 2022)

3 The reports filed by the plaintiff which are the subject of the objections are:

(a) two reports authored by business broker, Haydn Baker, the first of which is dated 13 May 2021 and the second of which is dated 6 August 2021; and

(b) two reports and an executive summary, authored by an accountant, Keith Lewis, the first of which is undated but was lodged on 12 May 2021, and the second report and the executive summary are dated 6 August 2021.

4 The action is yet to be listed for trial and there are some interlocutory steps yet to be taken in preparation for trial, including decisions to be made by the defendants as to whether they will seek to adduce expert evidence in reply to the proposed evidence of Mr Baker and Mr Lewis. As a result, the defendants only seek rulings at this point in time in respect of their global objections. This is appropriate because some of the objections go to matters such as weight and relevance and may necessarily require a consideration and evaluation of evidence either at the commencement of trial when all relevant evidence has been exchanged, or at the conclusion of a trial when all of the evidence can be considered in context.

5 In March 2016, the plaintiff and the first defendant entered into an agreement for the sale of Seascapes IGA in Halls Head.

6 In these proceedings, the plaintiff alleges in its Re-Amended Substituted Statement of Claim, dated 17 August 2021, that the defendants made three misleading representations in relation to the performance of the Seascapes Supermarket business as it operated in 2015. These are pleaded as the Management Representation, Profit Representation and Wages Representation.

7 The Management Representation pleaded by the plaintiff is that Seascapes IGA operated under management with minimal hands on input being required by any proprietor/purchaser.

8 The Profit Representation is that in the 2015 financial year, Seascapes IGA had returned a gross profit of $1,288,840, and a gross profit margin of 34.9%.

9 The Wages Representation is that in the 2015 financial year, Seascapes IGA's expenditure on wages was $312,292.

10 The main issues in dispute in the proceedings concern whether:

(a) the representations also conveyed representations as to the future performance of the business; and

(b) the representations were misleading.

11 The Re-Amended Substituted Statement of Claim pleads the ways in which the Seascapes IGA financial statements are said to be misleading as follows:

(a) the Profit Representation was misleading or deceptive or likely to mislead or deceive because:

(i) the 2015 financial statements for Seascapes IGA inflated the value of sales and understated the true cost of sales;[1] and

(ii) the 2015 financial statements for Seascapes IGA recorded sales that were made to a single customer, which was not in the usual course of trade for a retail supermarket;[2] and

(b) the Wages Representation was misleading or deceptive or was likely to mislead or deceive because the 2015 financial statements for Seascapes IGA understated the wages costs by $79,939.[3]

12 The plaintiff claims loss and damage as follows:

(a) the difference between the true value of the Seascapes IGA as at the date of the purchase and the price paid by the plaintiff under the contract;

(b) all consequential costs and expenses incurred as a result of the plaintiff entering into the contract;

(c) all losses incurred in operating the Seascapes IGA since settling on the contract to the date of judgment; and

(d) the loss of the opportunity to have invested in an alternative investment and earned a return on the funds invested and engaged in the operation of the Seascapes IGA.

13 It is notable that the plaintiff pleads its loss and damage is the difference between the true value of the Seascapes IGA as at the date of purchase and the price paid by it under the contract. True value is sometimes referred to as fair value, fair or real value, intrinsic value, or actual value.[4]

14 The plaintiff does not plead its loss and damage on the basis of market value.

15 Market value is usually defined as the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm's-length.[5] True value and market value are not assessed in the same way. When assessing true value events after the date of the acquisition, the valuation date may be taken into account, together with any independent, extrinsic, supervening or any other cause of loss post contract.[6]

3.0 Relevant principles - expert opinion evidence

16 The learned author of Cross on Evidence summarises the following conditions for the admissibility of expert opinion evidence.[7] These are, first, it must be demonstrated that there is a field of specialised knowledge. Second, 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. Third, it must be demonstrated that the opinion proffered is wholly or substantially based on the witness' expert knowledge. Fourth, the expert must identify the assumptions of primary fact on which the opinion is offered (assumption identification rule). Fifth, the opinion is not admissible unless evidence has been, or will be, admitted, whether from an expert or from some other source, which is capable of supporting findings of primary fact (basis rule). Sixth, there must be a demonstration that the facts on which the opinion is based form a proper foundation for it (proof of assumption rule). Seventh, the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached (statement of reasoning rule).

17 As to the first, second and third conditions of admissibility, the Court of Appeal in Liyanage v The State of Western Australia summarised the circumstances in which expert opinion evidence will be admissible in a criminal trial:[8]

An affirmative answer must be given to at least the following four questions before 'expert' opinion evidence on a scientific subject matter will be admissible:

1. Is the opinion relevant; ie could the evidence rationally affect, directly or indirectly, the assessment of the probability of the existence of a fact in issue in the proceedings?

2. Is a person of ordinary experience unable to form a sound judgment on the subject matter without the assistance of an 'expert' witness with special knowledge or experience in the area?

3. Is the subject matter part of a body of knowledge or experience that is sufficiently organised or recognised to be accepted as a reliable body of knowledge or experience?

4. Has the witness acquired, by study or experience, sufficient knowledge of the subject to render her opinion of value in resolving the issues before the court?

18 The principles in Liyanage v The State of Western Australia also apply to the admissibility of expert opinion evidence in civil proceedings.

19 In respect of the second and third points referred to in Liyanage v The State of Western Australia, before opinion evidence can be accepted by a court as an expert opinion, the court must be satisfied that the witness had acquired, by study, or experience, sufficient knowledge of the subject to render his or her opinion of value in resolving the issues before the court. However, a person cannot give opinion evidence on matters which can be understood by ordinary persons exercising sound judgment. In Osland v The Queen, Gauldron and Gummow JJ said:[9]

Expert evidence is admissible with respect to a relevant matter about which ordinary persons are '[not] able to form a sound judgment ... without the assistance of [those] possessing special knowledge or experience in the area' and which is the subject 'of a body of knowledge or experience which is sufficiently organised or recognised to be accepted as a reliable body of knowledge or experience'.

20 In Dasreef Pty Ltd v Hawchar, Heydon J outlined the function of the assumption identification rule (the fourth condition identified in Cross on Evidence) as follows:[10]

The rule facilitates the operation of the proof of assumption rule and other rules of admissibility. It helps to distinguish between what the expert has observed and what the expert has been told; to ensure that the expert is basing the opinion only on relevant facts; to ensure that experts do not pick and choose for themselves what aspects of the primary evidence they reject, what they accept, how they interpret it and what the court should find; and to ascertain whether there is substantial correspondence between the facts assumed and the evidence admitted to establish them.

21 The function of the proof of assumption rule was explained by Heydon J in Dasreef Pty Ltd v Hawchar as follows:[11]

The function of the proof of assumption rule is to highlight the irrelevance of expert opinion evidence resting on assumptions not backed by primary evidence. It is irrelevant because it stands in a void, unconnected with the issues thrown up by the evidence and the reasoning processes which the trier of fact may employ to resolve them. If the expert's conclusion does not have some rational relationship with the facts proved, it is irrelevant. That is because in not tending to establish the conclusion asserted, it lacks probative capacity. Opinion evidence is a bridge between data in the form of primary evidence and a conclusion which cannot be reached without the application of expertise. The bridge cannot stand if the primary evidence end of it does not exist. The expert opinion is then only a misleading jumble, uselessly cluttering up the evidentiary scene.

22 One of the most important rules for admissibility is that the admission of expert evidence is conditional upon proof of the assumed basal facts. That is, the factual basis of the opinion must be established by the evidence (the fifth rule identified in Cross on Evidence).[12]

23 In Automasters Australia Pty Ltd v Bruness Pty Ltd, Steytler J set out the consequences that will follow if the basal facts of an opinion are not proved by admissible evidence as follows:[13]

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.

24 The requirement that an expert must state their reasoning by which an opinion is given (statement of reasoning rule and the seventh condition identified in Cross on Evidence) was explained by Heydon J in Dasreef Pty Ltd v Hawchar as follows:[14]

At common law there is no doubt that an expert opinion is inadmissible unless the expert states in chief the reasoning by which the expert conclusion arrived at flows from the facts proved or assumed by the expert so as to reveal that the opinion is based on the expert's expertise. The court does not have to be satisfied that the reasoning is correct: 'the giving of correct expert evidence cannot be treated as a qualification necessary for giving expert evidence'. But the reasoning must be stated. The opposing party is not to be left to find out about the expert's thinking for the first time in cross-examination.

25 The primary facts relied upon by an expert must be proved before an expert's opinion can be admitted into evidence. For an expert opinion to be of any value, it must be comprehensible, and reach conclusions rationally based on verifiable facts or assumptions.[15]

26 The process of reasoning that leads to an expert's conclusions must be stated or revealed in a way that enables those conclusions to be tested in a judgment made about the reliability of them. This must be done in chief, and not left for the cross examiner to discover.[16]

27 Experts cannot testify on areas which are not part of a formal sphere of knowledge. That is, the subject matter of the opinion must fall within the class of subjects upon which expert testimony is permissible, and not stray into areas outside their sphere.

28 The defendants object to the plaintiff adducing evidence from Mr Baker as to the valuation of the plaintiff's business on grounds that he has no expertise or demonstrated expertise as a valuer or as an accountant.

29 Mr Baker is a business broker and has been since 1989. Since 23 June 1998, he has held a triannual certificate issued under the Real Estate and Business Agents Act 1978 (WA), having earlier been registered as a sales representative of a licence business agent, and having established his own business as a business broker in 1994.

30 Mr Baker does not appear to possess relevant formal qualifications. His reports do not refer to any course of study or any tertiary or other formal qualification in accounting, economics, finance or commerce. As the first, second and fourth defendants point out, if Mr Baker has no relevant formal qualifications, his expertise must be established with evidence of experience in valuing business. While his reports describe considerable experience in selling supermarkets, they do not refer to any experience in valuation.

31 In his first report, Mr Baker states that during three decades as a business broker, he has sold most, if not all, of the independent supermarkets (those not owned by Coles, Woolworths, or similar supermarkets) in the Perth metropolitan area and its surrounding regions, and some of those he has sold on multiple different occasions.

32 In Mr Baker's reports, he analyses the value of the Seascapes IGA based on financial reports for the plaintiff's business post March 2016, by reviewing the post March 2016 Grocery Manager department sales reports and the gross rent paid by the plaintiff for the 2016, 2017 and 2018 financial years (being source materials that largely postdate the sale of the business to the plaintiff). He also analyses that financial information with what he contends are industry norms or benchmarks. He attaches to his second report copies of profit and loss statements of five independent IGA supermarket businesses (having redacted any identifying text) which he had brokered their sale, in respect of which he considers to be comparable to Seascapes IGA, and for which their respective gross profit margin was 26.16%, 24.33%, 17.48%, 25.03% and 24.34%, with an average of 23.47%. In his second report, he analyses financial information contained in the business profile provided by the first defendant to the plaintiff prior to the plaintiff's purchase of Seascapes IGA.

33 In his first report, Mr Baker opines that the financial records for the plaintiff's business from 1 May 2016 to 6 May 2018 show:[17]

5.1 Seascapes IGA had a gross profit margin of about 24% to 26% as shown by the Metcash data in Departmental Sales Reports.

5.2 The rent and outgoings of more than $200,000 were very high for the turnover of less than $3.5 million.

5.3 Seascapes IGA had not been making money since its purchase in 2016.

5.4 Seascapes IGA is a loss-making business. Even after adding back depreciation and interest payable, for valuation purposes, the business would struggle to show reasonable profit.

5.5 Seascapes IGA was worthless.

6. In my opinion the business is incapable of making anything but a loss until its rent is reduced to a reasonable level relative to its turnover.

7. On the basis that Seascapes IGA operated under similar financial conditions prior to its purchase in March 2016 then in my opinion its value when purchased would, for the same reasons, have been similarly worthless.

34 In his first report, he also provides an assessment of the plaintiff's lost opportunity cost of alternative investment as follows:[18]

8. An approximate measure of the lost opportunity cost of having invested the purchase price, of $875,000 plus stock, in the purchase of Seascapes IGA rather than in purchasing an alternative business, can in my opinion be calculated on the basis of the benchmark sale price of a business (inclusive of stock), which in my opinion has since 2015 been about 4 times net profit, being a standard rate of return on capital of 25% earnings before interest, depreciation, taxes and amortization.

9. Hence, on the basis that the purchase price of Seascapes IGA was $875,000 plus $258,454.60 for stock, being a total of $1,133,454.60, and on the assumption that this same amount had instead been invested on 21 March 2016 in an alternative business valued at that benchmark price on the basis of that same annualized standard rate of return on investment, then net earnings before interest, depreciation, taxes and amortization of about $283,363.65 per annum would probably have been earned during the intervening period, being a total of $1,416,818.20 until 20 March 2021 in both capital and income return.

35 In his second and supplementary report, Mr Baker explains each of his opinions by referring to what he states are industry norms or benchmarks. He relies upon his experience of sales to opine that businesses are purchased for their income‑producing capacity and theoretically supermarkets sell for three times their net profit, with the addition of the price of stock at cost, but that he prefers to speak of a 25% return on investment. In support of this opinion, in his second report he refers to an extract from the Productivity Commission's 2011 inquiry report on the Economic Structure and Performance of the Australian Retail Industry, which shows that, by 2010, the return on capital for the general retail trade was about 24%.[19] A 25% return on investment, he says, is 4 times the net profit of a business. His opinion on this point appears to be an assessment of value based upon 'market value' as distinct from real value, the latter being the basis of loss and damage pleaded by the plaintiff in par 20.4.1(2)(a) of the Re‑Amended Substituted Statement of Claim.

36 The analysis undertaken by Mr Baker is objected to on the basis that he has no apparent experience as an independent valuer, and much of his analysis is, in any event, in the field of expert accounting.

37 As the plaintiff properly points out in its written submissions, although a land valuer must be licensed, as required by the Land Valuers Licensing Act 1978 (WA), there is no statutory prescribed licensing regime in respect of the valuation of commercial businesses.

38 However, there is a recognised area of expertise of persons who are experienced in providing professional business valuations. These persons are usually qualified professional accountants who have in‑depth expertise in accounting, finance, taxation, business law and business in general. Members of professional accounting bodies, who are members of CPA Australia, Chartered Accountants Australia and New Zealand and the Institute of Public Accountants are required to follow the mandatory requirements of professional and ethical standards, APES 225 Valuation Services (APES 225), issued by the Accounting Professional & Ethical Standards Board when they provide valuation services.

39 In relation to APES 225, learned authors point out that:[20]

APES 225 defines a valuation to be the act or process of determining an estimate of value of a business, business ownership interest, security or intangible asset by applying valuation approaches, valuation methods and valuation procedures. APES 225 stipulates certain professional and ethical standards for valuers. However, it does not contain any technical standards on how value should be assessed.

40 APES 225 requires a valuer (who is bound as a member of a professional accounting body) to include particular prescribed minimum content in a written valuation report.[21]

41 It is generally accepted that real estate agents are not usually qualified to provide valuation evidence. In Ballato v Pezzano, Walsh J rejected an objection taken by the defendants and third parties to the admission of evidence given by business broker who was a licensed real estate agent as to the value of stock, plant and equipment of a business.[22] The business broker in that matter was qualified as an accountant, was a member of the Australian Society of Accountants, and had studied and passed to units in valuation to qualify him for a real estate licence and become a business broker. At the time he gave evidence, he had been carrying on business in real estate, accounting and business broking for over 10 years, in a combination of all three areas of work.[23]

42 The issue for Walsh J in Ballato v Pezzano to decide was whether the witness demonstrated specialised knowledge, skill or training which would enable him to supply information and base an opinion on the question of value of the stock plant and equipment. His Honour found that the witness' evidence 'had fallen over the line' of demonstrating specialised knowledge, skill or training, and accepted his evidence in relation to the value of the plant and equipment in situ on the premises. In making this finding, his Honour made the following relevant observations about qualifications professionally obtained and those obtained in the workforce by way of experience:[24]

There have been conflicting authorities in Australia between qualifications professionally obtained and those obtained in the workforce by way of experience.

In this case I would have thought that there is a combination of both ‑ firstly, through the witness's training in the two valuation subjects, plus in accounting qualifications generally; and, in particular, in dealing in stock and plant, both for accounting purposes and for valuing generally in relation to business broking which he has undertaken extensively over recent years.

I emphasise that the expertise need not have been acquired by professional academic studies, but it is sufficient if it has been acquired through experience in the particular field in which the expert evidence is sought. I must also emphasise, however, that the question of weight to be given to the evidence of such a witness, if it be admitted, must necessarily depend upon the particular experience that he has had as to relevant sales and valuations in relation to the equipment in which he seeks to give expert evidence: see Waterhouse v The Valuer-General (1927) 8 LGR NSW 137.

Although Mr Westlake does not have any particular licence, if that be the right expression, to practise as an expert valuer, that however in itself does not preclude him being regarded by this Court as someone competent to give evidence in this area: see The Minister for Lands v Spellman [1964] NSWR 1160.

In Dixon v The City of Glenorchy (1968) 15 LGRA 407 Chambers J overruled an objection to the admission of evidence by a witness who, whilst recognised as a valuer, admitted that he had not passed valuers' examinations and had not previously carried out valuations in the subject area. Chambers J specifically stated at 409:

'On the basis that he was sufficiently qualified, with the objections going to the weight of his evidence.'

43 It should be noted that in Dixon v The City of Glenorchy, the expert witness was employed as an approved valuer for the State Land Tax Department, a security valuer for a bank and was a member of two professional organisations of valuers.[25] In The Minister for Lands v Spellman, Else-Mitchell J found that evidence as to the value of grazing land could only be given by persons who are qualified as expert valuers, who either had a licence or some academic qualification evidenced by a certificate or otherwise.[26] His Honour also found that a witness, whose only relevant experience was that of having been a stock and station agent for little over a year, was not qualified to give expert evidence of the value of pastoral land.

44 The facts in respect of the qualifications of the business agent in Ballato v Pezzano may be distinguished from this matter on grounds that Mr Baker is not an accountant and does not have any qualifications or experience working as a valuer which would qualify him to give expert valuation evidence.

45 Although there is strictly no prohibition on persons other than accountants from providing independent expert business valuation evidence, for such person to be accepted as an expert in the field they must necessarily have had experience as a valuer of businesses.

46 There is no evidence that Mr Baker has had any such experience. He is experienced in the sale of independent supermarkets, in particular, IGA supermarkets.

47 Although Mr Baker has not been called upon to value the land leased to the plaintiff for the business by the fourth defendant, his report relies upon principles of accounting and his experience gained through the sale of supermarkets for which he has earned a commission. Insofar as he relies upon principles of accounting, he is not qualified as an accountant, and accordingly is not qualified to give expert evidence in this field of expertise.

48 Nor has he provided any demonstrated experience as a valuer of independent supermarkets. All of the experience that he has gained in the prices of sale of independent supermarkets appears to be as an agent who has acted for parties in the sale and purchase of supermarkets.

49 For these reasons, I am not satisfied that Mr Baker is qualified to give business valuation evidence. For these reasons, the opinions he expresses in each of his reports are inadmissible.

5.0 Mr Lewis' opinion evidence 5.1 Experience and qualifications

50 Mr Lewis is a chartered accountant, having been admitted to membership of the Chartered Accountants in England & Wales in 1989 and to the membership of Chartered Accountants Australia and New Zealand in 2000. However, it appears that Mr Lewis is not presently registered as a member of any organisation of chartered accountants.[27] His resume,[28] and par 1 of his report filed 12 May 2021, discloses that he has 37 years' experience in various accounting, finance and administrative roles.

51 He has specific experience in the financial aspects of the business of independent supermarkets in Western Australia.

52 From April 1995 to July 2002, he was the group management accountant for Foodland Associated Ltd. In this position, he was responsible for all accounting functions for a West Australian group of companies covering grocery wholesaling, supermarket retailing and property ownership activities, including supervision of 28 accounting staff.

53 From July 2002 to May 2003, he was self‑employed as a contract accountant, providing services to supermarkets.

54 From May 2003 to March 2006, he was a state finance manager for a logistics company.

55 From March 2006 to October 2007, he was employed as a business analyst for Metcash Ltd. Metcash is a supplier of goods to IGA supermarkets in Western Australia. When Mr Lewis was employed as a business analyst for Metcash, he was responsible for financial aspects of the fresh food warehousing division with facilities in Western Australia and Queensland.

56 From November 2007 to May 2015, Mr Lewis was the chief financial officer/company secretary for Progressive Supa IGA, which owns 10 large format IGA supermarkets. Part of his role was to review potential store acquisitions and submit proposals to the board of the company for approval.

57 Since May 2015, Mr Lewis has been engaged in his own business as a consultant to independent supermarkets in the IGA, Foodworks and Farmer Jacks networks, which stores range in size from small convenience stores to large format service stores with large fresh departments. This has included assisting stores to improve profitability through increasing sales and margins, reducing costs of business, cash flow management, systems and process improvement, budgeting and forecasting, strategic planning, feasibility studies and management reporting.

58 At the forefront, it is important to note that if any of the opinions challenged by the defendants of Mr Lewis' have no basis in fact, then it will necessarily follow that his evidence in respect of that opinion would be irrelevant or if based entirely on inadmissible evidence his opinion would be inadmissible.

59 In his first report filed 12 May 2021, Mr Lewis provides an opinion as to the accuracy of the pleaded Profit Representation (being a gross profit margin of 34.9% in the financial statements for the financial year ending on 30 June 2015), the Management Representation (being that Seascapes IGA operated under management with minimal hands on input being required by the proprietor/purchaser) and the Wages Representation (that wages in the 2015 financial year were $312,292).

60 In his supplementary report dated 6 August 2021, he provides additional information in respect of particular paragraphs of his report filed 12 May 2021. In his executive summary dated 6 August 2021, he provides a summary of the key findings made in his first and supplementary report in respect of the Profit Representation.

61 In pars 5 to 10 of his first report, Mr Lewis explains how the Grocery Manager Point of Sales software is used in the independent supermarket sector. In particular, he explains how the Grocery Manager system records the sale of products to customers, and the types of reports it generates, including how it records current purchase costs via the Metcash weekly Host file. It appears to be common ground that the Metcash weekly Host file records the price of the goods supplied by Metcash as at the date the customer purchases the particular goods, but not the price a retailer may have paid on the date when they purchased those goods from Metcash.

62 Mr Lewis also explains how the Grocery Manager system calculates the expected gross profit for each sale scanned as sold at a checkout. The defendants raise no objection to pars 5 to 10 of Mr Lewis' first report.

5.3 The defendants' objections to Mr Lewis' opinion evidence

63 Prior to the sale of Seascapes IGA to the plaintiff, the defendants caused to have prepared a business profile which was prepared from financial statements for the 2015 financial year and MYOB records and not from data in the Seascapes IGA's Grocery Manager software.

64 The defendants plead in their defence that the first defendant did not use the Grocery Manager software to record the costs of goods sold, or as a comprehensive inventory management system, and did not comprehensively update that software with that information.[29]

65 In pars 13 to 38 of Mr Lewis' first report, as expanded upon in his supplementary report and summarised in the executive summary, he opines that:

(a) it is not reasonably possible for Seascapes IGA supermarket to have generated a reported gross profit before rebates and freight of 34.35% in the financial year to 30 June 2015; and

(b) there is no special feature or attribute of Seascapes IGA to support the processing of bulk keyed sales of $462,020 outside the Grocery Manager inventory system as legitimate transactions.

66 What appears to be at the heart of Mr Lewis' analysis is that it is his opinion that the Grocery Manager system records and reports for Seascapes IGA for the 2015 financial year are an accurate and reliable record from which the gross profit of Seascapes IGA can be ascertained.

67 The defendants submit that Mr Lewis examines factual information from the point of sale records of the Seascapes IGA in the Grocery Manager system, which information is imported from Metcash that supplies between 60% and 70% of the goods sold by IGA supermarkets, to opine that based on his experience the Grocery Manager system records and reports are the more reliable record than the defendants financial statements and MYOB records (which the defendants claim comprise the accurate records of the costs of sales in the 2015 financial year).

68 The defendants point out that the Grocery Manager system records notional data, in that it does not record the actual price paid by a supermarket for any particular goods. In addition, they plead in their Amended Defence that the Grocery Manager system did not record all of the purchases and sales made by Seascapes IGA in the 2015 financial year.

69 The defendants object to Mr Lewis' evidence in pars 13 to 38 on three grounds. First, Mr Lewis opines on matters that are not recognised as an identified area of field of specialised knowledge. Second, what Mr Lewis considers to be normal or usual in purchasing and sales in the independent supermarket sector, in the absence of actual factual evidence, is not a permissible area for expert evidence. Third, his evidence in respect of what are the usual or normal outcomes in respect of gross profit in independent supermarkets in Western Australia appears to be tendency evidence sought to be adduced to cast doubt upon the defendants financial statements and MYOB records.

70 The defendants contend that the plaintiff must prove that the financial statements and the MYOB records were inaccurate, and this is a factual enquiry, not a matter for expert evidence.

71 As to the first point raised by the defendants, I am not persuaded that it can be found on the material before the court that Mr Lewis does not have some specialised knowledge of the operation of independent supermarkets in Western Australia which equips him to make an assessment of how the Grocery Manager system operates in IGA supermarkets in Western Australia, and to assess the financial performance of the Seascapes IGA in the 2015 financial year based upon relevant and admissible evidence. Whether his evidence is reliable or should be given any weight is not a matter that goes to admissibility, but is a matter to be considered at trial on all of the evidence properly considered in its context.

72 Insofar as Mr Lewis' opinions are founded in established methods of accounting, he is qualified to provide expert evidence as to the financial performance of the Seascapes IGA in the 2015 financial year.

73 In respect of the second point raised by the defendants, insofar as Mr Lewis gives evidence about the content of industry practices in the industry of independent supermarkets in this State, it is permissible for an expert who is qualified by having specialised knowledge of an industry to give evidence of the content of industry practices.[30] However, to give factual evidence concerning practices or procedures in an industry, the expert has to do so (or another witness or by documentary means) in an admissible way.[31]

74 Whether it is appropriate to apply average performance industry standards to reach a proper assessment of the true value of the business of Seascapes IGA in the 2015 financial year will require consideration of admissible evidence of whether particular business practices and systems relating to the sale and purchase of goods are usually or uniformly applied in the independent supermarket industry, and whether those practices and systems were in place and in operation of the Seascapes IGA in the 2015 financial year. Such an assessment may not be able to be made in this matter in respect of this issue until all of the evidence is in at trial.

75 As to the third point raised by the defendants, similar fact evidence is receivable in civil cases. Ultimately, whether such evidence should be received must necessarily turn on relevance, and whether the business of Seascapes IGA in 2015 was run and organised in the same way under the same or similar conditions as other typical IGA supermarkets in Western Australia.

76 In pars 13 to 14 and 17 to 19, Mr Lewis states that the level of actual gross profit being achieved within the Western Australian independent supermarket sector will depend upon several factors. In par 17 of his supplementary report, he states that his opinion in pars 17 and 18 of his first report is supported by his extensive experience in providing assistance to many retailers on how to make improvements to margins. In pars 13 to 14 and 17 to 19, he sets out the factors that he says have an effect or impact on gross profit in the independent supermarket sector, which include controlling shrinkage, theft, pricing policy, proportional promotional sales and product mix. I accept that these are factors that he has gained knowledge of during his longstanding experience in preparing and reviewing the performance of independent supermarkets in Western Australia, and as such is a proper matter for the expression of expert opinion by Mr Lewis.

77 The difficulty with the remaining paragraphs in Mr Lewis' first report (being pars 15 to 16 and 20 to 38), as explained in his supplementary report and executive summary, is that there is no admissible evidence provided by him of the underlying facts he relies upon. Mr Lewis analyses the financial performance of the Seascapes IGA in the 2015 financial year by regard to how the Grocery Manager system typically operates, and makes assertions of fact in relation to typical attributes or conditions in other independent retail supermarkets, and states conclusions as to what kind of accounting figures and financial performance is normal or achievable in other independent retail supermarkets. In this analysis, Mr Lewis does not reveal the specific source of the information which he regards as typical attributes or conditions that applied to the operation of other comparable independent supermarkets.

78 As the defendants point out, it is not clear from the reports of Mr Lewis whether he relies upon his knowledge of the operation of IGA supermarkets in general, over many years, which would include a wide variety of different types of supermarkets, some of which may be operated differently to the Seascapes IGA.

79 Mr Lewis indicates he has considerable experience in the operation of large format IGA supermarkets, whereas the Seascapes IGA is a very small supermarket. As the defendants point out, Mr Lewis makes no disclosure of which IGA supermarkets he regards as being similar and the relevant factors upon which he regards that the operation of particular supermarkets can be regarded as comparable or typical.

80 In par 15 of his first report, Mr Lewis offers an opinion that if a store can achieve an actual gross profit of no more than 1% below the Scanning GP, after allowing for recorded shrinkage (wastage), they are operating a fairly efficient store. In his supplementary report, he states that his advice in par 15 of his first report is supported by a review of the sample of 12 IGA stores that he had dealings with over the past six years, which showed 10 of those stores recording negative variances between Actual and Scanning GPs of between negative 0.20% and 2.62% and two stores recording positive variances of 0.40% and 0.75%.

81 In par 16 of his supplementary report, he refers to par 16 of his first report, and estimates that the percentage of scans of keyed sales (manual sales entered at the checkout) would generally be for a small store, such as Seascapes IGA, in the range of 0.05% to 0.9%, and this was supported by a review of six small grocery supermarkets that he had had dealings with in the past six years.

82 The information about the stores he refers to in par 15 and par 16 is contained in Annexure KLD 14 to his supplementary report. Annexure KLD 14 contains very scant information and comprises a list of stores by the allocation of a number only and percentages. It also contains a statement that the information is confidential, and is taken from real data from a variety of independent supermarkets in Western Australia.

83 The difficulty with the list of stores by number only and percentages in Annexure KLD 14 in its form is that it is a secondary document which appears to be a summary of undisclosed source information created by Mr Lewis. Consequently, Mr Lewis' opinions in pars 15 and 16 of his reports fail to satisfy the condition of admissibility for expert evidence that where an opinion rests on facts observed by an expert they must be proved. Thus, the basis rule and the assumption identification rule for admissibility have not been met.

84 The distinction between the assumption identification rule and the proof of assumption rule is that the former requires the assumptions on which the opinion is depends to be stated by the expert, and the latter requires the assumptions to be proved or at least for there to be evidence sufficiently similar to the assumptions to render the opinion of value.[32]

85 The basis rule requires that evidence be admitted, whether from the expert or from some other source, which is capable of supporting findings of primary fact that are sufficiently like the factual assumptions on which the opinion is based to render the opinion of value. In the absence of any admissible information about relevant matters which could include the location of each store, the size of each store, the format and proportions of types of goods sold, and any other relevant factors which relate to the performance of any of the IGA stores referred to in Annexure KLD 14 compared to Seascapes IGA in 2015, the factual basis of Mr Lewis' opinion cannot be established.

86 In pars 20 and 21 of his first report, Mr Lewis goes on to state that the majority of IGA stores that he has been involved with report actual gross profits in the range of 20 to 25%. He does not disclose any identifying information about these stores. He also states that he has had experience with several IGA stores that have achieved actual gross profits of up to 32%, but again does not disclose which stores, and when was this information reported to him. Not only do these paragraphs offend the basis rule and the assumption identification rule, but it is not clear whether he has considered recent or current information provided to him, and the source of the information. In particular, whether this information was provided to him by others or whether he himself analysed the source of the data he refers to. Consequently, the conditions for admissibility of the opinions in pars 20 and 21 of his first report are not met.

87 In his supplementary report, he states in respect of these paragraphs in his first report his opinion and his personal observations as to gross profits usually achieved by IGA supermarkets in Western Australia is supported by:

(a) Australian Taxation Office Grocery Retailing & Convenience Store Performance benchmarks for Cost of Goods Sold of 75% from 2015/16 to 2018/19 (COGS of 75% = Gross Profit of 25%); and

(b) WA Independent Grocers Association's submission to the Productivity Commission dated 23 April 2014, that states that Costs of Goods Sold by their members averages 76% (COGS of 76% = Gross Profit of 24%).

88 Reference to these documents cannot be excluded on grounds of inadmissibility.[33] Whether the documents are relevant to the issues to be determined in the action, and whether the matters stated in the documents do in fact support his Mr Lewis' opinions in pars 20 and 21 and whether these opinions should be given any weight, or negligible weight, would be a matter to be determined at trial. Even if they are to be given weight, the ATO benchmarks and the submission to the Productivity Commission do not render pars 20 and 21 admissible, because the underlying facts referred to in those paragraphs are not identified.

89 In respect of Mr Lewis' opinions stated in pars 22 to 33 of his first report, it is apparent from the matters stated by him that in expressing the opinions in each of those paragraphs, insofar as he provides opinions which are based upon his expertise as an accountant, and his personal knowledge of how the Grocery Manager system operates, these opinions are admissible. However, as to the calculations that he makes which rely upon the tables in pars 22 and 33, the source of information for these calculations are not sufficiently identified. It is not clear from the tables what figures are derived from Grocery Manager data and or reports, MYOB records or the financial statements.

90 The defendants object to the analysis of pre-sale information in the table in par 22 and the table in par 33, on the basis that the source of information stated in the tables is not sufficiently disclosed. I agree this objection is properly made. The tables appear to contain a mixture of information taken from Grocery Manager and MYOB records. This is particularly so in respect of the table in par 22. It is difficult to ascertain from this table what figures are said to derived from the Grocery Manager system and what figures are said to derived from the financial statements and the MYOB records. When counsel for the plaintiff was asked on a number of occasions to explain the source of particular items, such as items under the heading Cost of Sales in the table in par 22, he gave inconsistent explanations as to the source of the data, and how the calculations were made. I note, however, the objection on this ground is capable of being corrected by appropriate amendments to the report.

91 Consequently, the opinions of Mr Lewis in pars 23 to 33 are inadmissible because the sources of information relied upon for the calculated amounts referred to in the tables are not sufficiently disclosed. In making this finding, I have left aside the reliance by Mr Lewis on Coles Group Ltd's reported gross margins for it supermarkets division of 25% in both the financial years for 2019 and 2020. Insofar as his opinion in par 24 relies upon this document, and whether it should be given any weight or negligible weight, would be a matter to be determined when all of the evidence is in.

92 In pars 34 to 38 of his first report, Mr Lewis provides his opinion on the profit representation. While Mr Lewis does identify some other grounds for his reasoning in pars 34 to 38 of his supplementary report, the opinion and reasoning expressed in pars 34 to 38 largely rely upon sources of information I have already deemed insufficient, or otherwise rely on previous paragraphs that I have determined are inadmissible. As a result, pars 34 to 38 are rendered inadmissible.

93 For these reasons, I am of the opinion that pars 15 to 16 and 20 to 38 of Mr Lewis' first report and the corresponding paragraphs in his supplementary report, as summarised in his executive summary, are inadmissible.

94 Paragraph 14 of the Re-Amended Statement of Claim alleges that the Wages Representation was misleading or deceptive, or was likely to mislead or deceive, in that the wages costs for the business were not $312,292 as represented, but a significantly higher figure.

95 As the first, second and fourth defendants point out, this allegation also focuses on a purely factual inquiry such that a role for expert opinion is difficult to discern.

96 Paragraphs 39 to 46 of Mr Lewis' first report contain statements of what is typical in supermarket businesses (pars 40, 41 and 42) and in par 41 he states that the generally accepted industry benchmark for wages in the independent supermarket sector is 10% to sales, with some exceptions which he outlines. In his supplementary report, he states that this benchmark is a reference to the WA Independent Grocers Association submission to the Productivity Commission dated 23 April 2014, which states that wage and labour on costs by their members ranges from 10% to 11.5%. He also states that the percentages and figures to which he refers are based upon his extensive knowledge gained over 27 years dealing with supermarkets of all sizes. The defendants argue that this proposed evidence is neither relevant nor are these statements and opinions made on the basis of a recognised field of expertise. For the reasons that I outline above, I do not accept that Mr Lewis is not qualified to give evidence about industry standards in the independent supermarket sector. However, the evidence on this point raises the proof of assumption rule, in respect of which there is a difficulty to rule upon this evidence prior to trial because to do so will require consideration of the evaluation of all of the evidence of the trial in its context, to ascertain whether the actual operation of the Seascapes IGA in the financial year of 2015 was in fact operated in a manner upon which it could be found that the independent supermarket benchmark for wages had any application, or were otherwise relevant to the way in which the business was organised and run. Further, whether this evidence should be given any weight, and what weight, if any, is a matter to be determined when the evidence is in.

97 In making the assumptions in pars 39 to 42 and the opinion expressed in par 46, Mr Lewis also relies upon a comparison of the 2015 financial year wages figures and the wages figures from 28 December 2015 to 20 March 2016. The defendants contend that this is an irrelevant exercise because it is only the accuracy of the 2015 financial wages figures that is in issue and that either the 2015 financial wages figures were accurate or they were not. This is said to be a question of fact that the court may determine without expert assistance. Whilst this submission has some force, the opinion expressed by Mr Lewis in par 46 must be considered in its context, during the period from December 2015 to March 2016 the first defendant was still running the business of Seascapes IGA. In the absence of hearing all of the relevant evidence in its context at a trial, a determination as to whether this evidence is relevant cannot be made. Consequently is not appropriate to rule on the admissibility of this proposed evidence prior to trial.

98 For these reasons, the defendants objections to the admissibility of pars 39 to 46 should be reserved for determination at trial.

99 In pars 47 to 49 of his first report, Mr Lewis expresses an opinion that the conclusions (that he has reached) with respect to the Profit, Management and Wages representations, have a direct impact on the fair value attributable to the business at the time of sale. He calculates that when adjustments are made to the gross profit and wages a fair value range representing earnings before income tax and depreciation (EBITA) and applying a multiple of 1.67, the fair value of the business of seascapes IGA at the time of sale was either negligible at the low end of the range or it had a value of $34,587.

100 In par 42 of his supplementary report, Mr Lewis states the basis on which he claims to be qualified or sufficiently experienced in order to assess the fair value of the business of Seascapes IGA:[34]

[I]nvolvement in the acquisition and sale of a large number of supermarkets over my many years in the industry, including the acquisition of 40 supermarkets in a single transaction in 2001, the acquisition of 10 supermarkets in a single transaction in 2007 in the sale of eight supermarkets in individual transactions between 2008 in 2018; In the past six years I am aware of the details of several sales and acquisitions of individual supermarkets, although I was not necessarily directly involved in the transaction.

101 Mr Lewis also states in his supplementary report that he applied a multiple of 1.67 by reason that the plaintiff and the first defendant were content to use this multiple on the assumption that the financial information that had been provided was accurate.

102 The defendants object to Mr Lewis' evidence in relation to the value of the Seascapes IGA business because Mr Lewis is not an expert valuer. Although Mr Lewis is a chartered accountant, Mr Lewis does not purport to provide this opinion evidence on the basis of his expertise as an accountant experienced in the valuation of businesses. He, like Mr Baker, appears to rely upon his knowledge acquired in the acquisition of a number of supermarkets, some of which must have been large format IGA stores.

103 I am of the opinion that pars 47 to 49 of Mr Lewis' first report and the corresponding paragraphs in his supplementary report, are inadmissible because Mr Lewis has not demonstrated that he has specialised knowledge, skill or training as a valuer of supermarkets.

(a) the reports authored by, business broker, Haydn Baker dated 13 May 2021 and 6 August 2021 are inadmissible on grounds that the author has not demonstrated he has any specialised knowledge, skill or training to provide expert business valuation evidence;

(b) pars 15 to 16, and 20 to 38 of Mr Lewis' first report lodged on 12 May 2021, the corresponding paragraphs in his supplementary report, and as those paragraphs are summarised in his executive summary dated 6 August 2021, do not meet the preconditions for admissibility of expert opinion evidence on grounds that the assumptions of primary facts which the opinions are based have not been identified, and because they have not been identified, there is no demonstration that the facts on which the opinions are based form a proper foundation for each opinion;

(c) a ruling on the admissibility pars 39 to 46 of Mr Lewis' first report and his supplementary report should be reserved; and

(d) pars 47 to 49 of Mr Lewis' first report and his supplementary report are inadmissible on grounds that the author has not demonstrated he has any specialised knowledge, skill or training to provide expert business valuation evidence.

105 I will hear the parties further as to the orders that should be made to reflect these reasons for decision, including orders as to costs.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

[1] Re-Amended Substituted Statement of Claim dated 17 August 2021, pars 13.1 and 13.2.1.

[2] Re-Amended Substituted Statement of Claim dated 17 August 2021, par 13.2.2.

[3] Re-Amended Substituted Statement of Claim dated 17 August 2021, par 14.

[4] HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 [36].

[5] Freckelton I & Selby H, Expert Evidence (2016) Vol 7 [122.210]; Spencer v The Commonwealth (1907) 5 CLR 418.

[6] HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 [35] ‑ [40].

[7] Heydon J D, Cross on Evidence (13th ed, 2021) [29045].

[8] Liyanage v The State of Western Australia [2017] WASCA 112; (2017) 51 WAR 359 [122] (footnotes omitted); see also McKay v Commissioner of Main Roads [No 3] [2010] WASC 232 [3] ‑ [7].

[9] Osland v The Queen [1998] HCA 75; (1998) 197 CLR 316, 336; applying R v Bonython (1984) 38 SASR 45, 46 ‑ 47 (King CJ); Clark v Ryan [1960] HCA 42; (1960) 103 CLR 486, 491 (Dixon CJ); Murphy v The Queen [1989] HCA 28; (1989) 167 CLR 94, 111 (Mason CJ & Toohey J), 130 (Dawson J); Farrell v The Queen [1998] HCA 50; (1998) 194 CLR 286, 293 (Gaudron J); adopted in Mallard v The Queen [2003] WASCA 296; (2003) 28 WAR 1 [253]; applied in Saunders v Public Trustee [2015] WASCA 203 [145] (Mitchell J) (Buss JA & Beech J agreed); Hemstra v the State of Western Australia [2021] WASCA 96 [72].

[10] Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588 [65] (footnotes omitted).

[11] Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588 [90] (footnotes omitted).

[12] Rhoden v Wingate [2002] NSWCA 165 [60] (Heydon JA); Automasters Australia Pty Ltd v Bruness Pty Ltd [2004] WASCA 229 [29] (Steytler J, Murray & Wheeler JJ agreeing); see also Pollock v Wellington (1996) 15 WAR 1, 3 (Anderson J); Makita (Aust) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 [85] (Heydon JA); Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588 [32], [37], [66], [100].

[13] Automasters Australia Pty Ltd v Bruness Pty Ltd [2004] WASCA 229 [29] (Murray & Wheeler JJ agreed).

[14] Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588 [91].

[15] Pownall v Conlan Management Pty Ltd [1995] WASC 117; (1995) 12 WAR 370, 388 ‑ 389 (Anderson J).

[16] Coal Hub Pty Ltd v NSL Consolidated Ltd [No 2] [2016] WASC 257 [56] (Beech J) citing Pownall v Conlan Management Pty Ltd [1995] WASC 117; (1995) 12 WAR 370 and Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588 [91] and [93].

[17] Report of Haydn Baker on valuation of business dated 13 May 2021, 2 ‑ 3.

[18] Report of Haydn Baker on valuation of business dated 13 May 2021, 3 ‑ 4.

[19] Supplementary report of Haydn Baker dated 6 August 2021, par 8.3, Annexure HB ‑ 15; is to be noted, however, that the reported return on capital of 24% for retail trade was the average of all categories of retail trade, including service industries.

[20] Freckelton I & Selby H, Expert Evidence (2016) Vol 7 [122.40].

[21] Freckelton I & Selby H, Expert Evidence (2016) Vol 7 [122.90].

[22] Ballato v Pezzano (Unreported, WASC, Library No 930474, 26 August 1993).

[23] Ballato v Pezzano (Unreported, WASC, Library No 930474, 26 August 1993, 3).

[24] Ballato v Pezzano (Unreported, WASC, Library No 930474, 26 August 1993, 6 ‑ 7).

[25] Dixon v The City of Glenorchy (1968) 15 LGRA 407.

[26] The Minister for Lands v Spellman [1964] NSWR 1160; (1963) 9 LGRA 387; applied in Spyropoulos v Commissioner of Highways [2018] SASC 195; (2018) 234 LGERA 467 [56] (Parker J).

[28] Supplementary report as to expert opinion of Keith Lewis dated 6 August 2021, Annexure KLD 16.

[29] Amended Defence dated 20 August 2020 par 13.2.2(a).

[30] ASIC v Vines [2003] NSWSC 1095; (2003) 48 ACSR 291 [20] (Austin J); applied in Sanrus Pty Ltd v Monto Coal 2 Pty Ltd (No 5) [2019] QSC 210 [54(c)] (Bond J).

[31] Sanrus Pty Ltd v Monto Coal 2 Pty Ltd (No 5) [2019] QSC 210 [51], [54(c)] and [57] ‑ [58] (Bond J).

[32] Sanrus Pty Ltd v Monto Coal 2 Pty Ltd (No 5) [2019] QSC 210 [50] (Bond J).

[33] Wollongong City Council v Papadopoulos [2019] NSWCA 178 [63] ‑ [75] (Leeming JA) (Basten JA and McCallum JA agreed).

[34] Supplementary Report as to the expert opinion of Keith Lewis dated 6 August 2021.