United Rural Enterprises Pty Ltd v Lopmand Pty Ltd & Ors

Supreme Court of NSW|2003-09-19|Before: Campbell J

CITATION : United Rural Enterprises Pty Ltd v Lopmand Pty Ltd & Ors [2003] NSWSC 870 HEARING DATE(S) : 19 September 2003 JUDGMENT DATE : 19 September 2003 JURISDICTION: Equity JUDGMENT OF : Campbell J DECISION : Evidence allowed

CATCHWORDS : EVIDENCE - witnesses - expert witness - witness not provided with Expert Witness Code of Conduct prior to embarking on task of opinion formation - expert provided with Code before report completed, and report states that it complies with Code and witness undertakes to be bound by Code - whether evidence to be rejected under Part 36, rule 13C Supreme Court Rules - whether evidence to be rejected under Section 135 Evidence Act 1995 LEGISLATION CITED : Evidence Act 1995 Supreme Court Rules CASES CITED : Commonwealth Development Bank of Australia Pty Ltd v Cassegrain [2002] NSWSC 980 United Rural Enterprises Pty Ltd - First Plaintiff/First Cross-Defendant Lopmand Pty Ltd - First Defendant/First Cross-Claimant PARTIES : Tracey John Lake - Second Defendant/Second Cross-Claimant Gregory Hamilton Willoughby Lindsay-Owen - Second Cross-Defendant Lindsay-Owen Holdings Pty Limited - Third Cross-Defendant Alyson Rosemary Lake - Third Defendant FILE NUMBER(S) : SC 4039/99 COUNSEL : M Cashion SC; J White - Plaintiff/Cross-Defendants B DeBuse - Defendants/Cross-Claimants SOLICITORS : Kemp Strang - Plaintiff/Cross-Defendants McCooe Raves & Poole - Defendants/Cross-Claimants

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

4039/99 UNITED RURAL ENTERPRISES PTY LTD v LOPMAND PTY LTD & ORS JUDGMENT - Ex Tempore (As to admissibility of the affidavit of Mr Brigden) revised 22 September 2003 1 HIS HONOUR: In this matter objection is taken to the admissibility as a whole of an affidavit of Mr Brigden which contains the substance of an expert's accounting report.

2 The litigation in which this report is tendered is litigation in which I have already held that there has been oppression in the conduct of the affairs of a company. The question of whether any remedy should be granted and if so what has been stood over to today. One remedy contended for is an order for compulsory acquisition of a share. It is for the purpose of putting before the Court evidence of the value of the shares in the company that the report in question has been prepared.

3 There are some matters which are uncontentious about the company. It is a company in which there are only three shares. The activities of the company involve acting as landlord of a single piece of industrial real estate, which is leased to a single tenant. 4 Evidence was taken on the voir dire from Mr Brigden. It disclosed that he began his preparatory work for preparation of this report when he inspected the books of the company on 16 April this year. The affidavit had come to be in very close to final form by 14 August 2003. The form which was ultimately filed, and is now sought to be read, is an affidavit sworn on 5 September 2003. Both the draft, and the affidavit ultimately sworn, have as the final paragraph: "Prior to swearing this affidavit I have read the Supreme Court of New South Wales Expert Witness Code of Conduct. My report complies with this code and I undertake to be bound by the code."

5 Mr Brigden was not supplied with a copy of the Code before he embarked on his assignment. He was provided with it only shortly before he actually swore the affidavit. He had not, from his previous professional activities, come across the Code.

6 He gave evidence today that when he was confronted with the need to swear an affidavit which said that his report complied with the Code, he took the view that nothing led him to believe he could not comply with the Code. He gave evidence today that he believes he had complied with Schedule K, and that he understood, when he embarked on the task of valuing the shares, that his obligations were to the Court. The accuracy of that evidence was not disputed. 7 Part 36 rule 13C Supreme Court rules says: "13C(1) For the purposes of this rule and rule 13CA: "expert witness" means an expert engaged for the purpose of: (a) providing a report as to his or her opinion for use as evidence in proceedings or proposed proceedings; or (b) giving opinion evidence in proceedings or proposed proceedings; "the code" means the expert witness code of conduct in Schedule K. (2) Unless the Court otherwise orders: (a) at or as soon as practicable after the engagement of an expert as a witness, whether to give oral evidence or to provide a report for use as evidence, the person engaging the expert shall provide the expert with a copy of the code; (b) unless an expert witness's report contains an acknowledgment by the expert witness that he or she has read the code and agrees to be bound by it: (i) service of the report by the party who engaged the expert witness shall not be valid service for the purposes of the rules or of any order or practice note; and (ii) the report shall not be admitted into evidence; (c) oral evidence shall not be received from an expert witness unless: (i) he or she has acknowledged in writing, whether in a report relating to the proposed evidence or otherwise in relation to the proceedings, that he or she has read the code and agrees to be bound by it; and (ii) a copy of the acknowledgment has been served on all parties affected by the evidence. (3) If an expert witness furnishes to the engaging party a supplementary report, including any report indicating that the expert witness has changed his or her opinion on a material matter expressed in an earlier report by the expert witness: (a) the engaging party must forthwith serve the supplementary report on all parties on whom the engaging party has served the earlier report; and (b) the earlier report must not be used in the proceedings by the engaging party, or by any party in the same interest as the engaging party on the question to which the earlier report relates, unless paragraph (a) is complied with. (4) This rule shall not apply to an expert engaged before this rule commences." 8 The Expert Witness Code of Conduct in Schedule K of the Supreme Court Rules says: "Application of code 1. This code of conduct applies to any expert engaged to: (a) provide a report as to his or her opinion for use as evidence in proceedings or proposed proceedings; or (b) give opinion evidence in proceedings or proposed proceedings. General Duty to the Court 2. An expert witness has an overriding duty to assist the Court impartially on matters relevant to the expert's area of expertise. 3. An expert witness's paramount duty is to the Court and not to the person retaining the expert. 4. An expert witness is not an advocate for a party. The Form of Expert Reports 5. A report by an expert witness must (in the body of the report or in an annexure) specify: (a) the person's qualifications as an expert; (b) the facts, matters and assumptions on which the opinions in the report are based (a letter of instructions may be annexed); (c) reasons for each opinion expressed; (d) if applicable - that a particular question or issue falls outside his or her field of expertise; (e) any literature or other materials utilised in support of the opinions; and (f) any examinations, tests or other investigations on which he or she has relied and identify, and give details of the qualifications of, the person who carried them out. 6. If an expert witness who prepares a report believes that it may be incomplete or inaccurate without some qualification, that qualification must be stated in the report. 7. If an expert witness considers that his or her opinion is not a concluded opinion because of insufficient research or insufficient data or for any other reason, this must be stated when the opinion is expressed. 8. An expert witness who, after communicating an opinion to the party engaging him or her (or that party's legal representative), changes his or her opinion on a material matter shall forthwith provide the engaging party (or that party's legal representative) with a supplementary report to that effect which shall contain such of the information referred to in 5(b), (c), (d), (e) and (f) as is appropriate. 9. Where an expert witness is appointed by the Court, the preceding paragraph applies as if the Court were the engaging party. Experts' Conference 10. An expert witness must abide by any direction of the Court to: (a) confer with any other expert witness; (b) endeavour to reach agreement on material matters for expert opinion; and (c) provide the Court with a joint report specifying matters agreed and matters not agreed and the reasons for any non agreement. 11. An expert witness must exercise his or her independent, professional judgment in relation to such a conference and joint report, and must not act on any instruction or request to withhold or avoid agreement." 9 The provisions of Part 36 rule 13C were introduced into the Court's Rules at the beginning of 2000. They should by now be very well known to the profession. It is only as the result of extraordinary incompetence that the situation has arisen where I am asked to make the decision which I now need to make. Any solicitor practicing in this Court ought know that if an expert is to be engaged, that expert must be given a copy of the Code of Conduct. 10 The importance of the Code has been stated in earlier decisions of the Court. For example, In Commonwealth Development Bank of Australia Pty Ltd v Cassegrain [2002] NSWSC 980 Einstein J dealt with a situation where an expert had not seen the Code of Conduct prior to the day he gave evidence. Necessarily, his report contained no reference to it. His Honour declined to allow the report to be received into evidence. In the course of his judgment he said: "To my mind, considerable significance attaches to enforcing strict compliance in the expert witness provisions now found in part 36 rule 13C. Questions of the significance of the opinions of experts have been mooted over a very extended period of time and the schedule K and part 36 rule 13 C (1) Expert Witness Code Of Conduct was promulgated with the clear intent that only reports by experts who have proceeded in accordance with the stated norms of conduct, should be relied upon and may be admitted into evidence. The significance of the Code Of Conduct emerges clearly from the whole of the Code as well as from the 'general duty to the court' section of schedule K as well as from the stipulations as to the form of expert's reports." 11 The party against whom the report is tendered says that the report ought not be received under Part 36 rule 13C, because of failure to comply with subrule 2. The party tendering the report points out that while subrule 2 paragraph (a) imposes an obligation on the person engaging the expert to provide the expert with a copy of the Code, the sanction of the report not being admitted into evidence (unless the Court otherwise orders) is one which arises under paragraph (b). The condition for that sanction is triggered by the form of the expert's report itself. Here, the form of the expert's report contains the acknowledgment which paragraph (b) requires. It is only paragraph (a) which has not been complied with. 12 I accept the submission that the mandatory rejection of the report under paragraph 2 is not required, because the report itself does contain the required acknowledgment. Thus the need for the Court to consider whether or not it should "otherwise order" under Part 36, rule 13C, does not arise.

13 As an alternative submission, counsel opposing reception of the report says that the report should not be received under section 135 Evidence Act 1995. That section provides: "The court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might: (a) be unfairly prejudicial to a party, or (b) be misleading or confusing, or (c) cause or result in undue waste of time." 14 There is a significant problem which needs to be addressed about whether the report should be rejected under section 135.

15 The policy which underlies the existence of Part 36 rule 13C is one which I should take into account in deciding whether the affidavit should be rejected under section 135. That policy recognises that an expert witness can form a view in circumstances where he or she does not realise that his role is one of the kind set out in the Code, and once that view has been formed will find it difficult to retreat from it. This can happen as a matter of ordinary human psychology, without any dishonesty on the part of the expert concerned. Therefore, one needs to be very much on guard as to whether there is any real possibility that this sort of process of opinion formation may have influenced the ultimate report which is presented to the Court, with the result that the Court cannot safely act on it. In the present case the evidence which Mr Brigden gave, summarized at paragraph [6] above, does not deal with each topic as set out in the Code. It does not by itself give me confidence that the report might not be misleading to the Court, or unfairly prejudicial to the party against whom it is tendered, in consequence of Mr Brigden having possibly not appreciated the full extent of his obligations as an expert throughout the whole time of preparation of the report.

16 For the purpose of deciding whether there is any such risk in the present case I have been taken in some detail to the scope of the report which Mr Brigden presents. There has also been tendered the report of an expert instructed by the other side, Mr Potter. From a comparison of those reports it is possible to identify what are the areas of difference of opinion between them. Both experts accept that the appropriate method of valuation of the share in question is a net assets basis. Both of them accept that it is appropriate to adjust the accounts of the company (which show the real estate in question at historical cost) so as to reflect the actual present value of the premises. They have differed in what they take as being the actual value of the premises, but the reason for that difference is because each has relied on different real estate valuers, who will themselves give evidence. There is a difference between them in that Mr Potter says that selling expenses connected with the real estate should be taken into account, and taxation payable upon a sale of the real estate while Mr Brigden has not made allowance for any selling expenses or taxation of that kind.

17 There is also a difference concerning whether there should be an adjustment to the accounts so far as management charges made in the accounts are concerned. Both experts agree that the actual management charges which were made are excessive. Mr Brigden proceeds on the basis that the appropriate management charge to make is the sort of charge which a real estate agent acting as a managing agent of property would charge. He says that that is in the range of five to seven per cent of the gross rental income, and that he thinks that in the circumstances of a long lease with a stable tenant where rent is paid into a bank account (as is the case here) the lower end of that range is appropriate. Mr Potter's views on the management fee question are somewhat more complex. He accepts that allowing a fee equivalent to that which would be charged by a real estate managing agent is appropriate. Further, he accepts that five per cent of gross rental income is the appropriate rate for such fee. However, Mr Potter takes the view that there are some additional heads of expense which would be appropriate to allow for in connection with the management fee.

18 There is also a difference between them about the appropriateness of adding back a superannuation charge which has been made, and some dividends which have been paid, and an interest expense.

19 In the particular circumstances of this case, I do not think that there is a risk that the fact that Mr Brigden formed his opinions without having Schedule K at the forefront of his mind will result in a real possibility that the Court might be misled, or the opposite party unfairly prejudiced, because he might be expressing an opinion to the Court which is infected by failure to understand his responsibilities as an expert. I have come to this conclusion because the differences between the experts are quite clear, and furthermore are of a type which will not be resolved by the Court simply saying that it accepts one expert or the other. The differences between them will be resolved, assuming for the moment that they ever need to be resolved, by an application of legal principle rather than of accounting expertise. Further, if there is to be an order for compulsory purchase of a share as a remedy for oppression, the price that is fixed is not necessarily a market value of the share - it is a price fixed by the court in exercise of a discretion in which market value is only one part. What the two reports have done is to call on the expertise of the two witnesses to identify those areas where there is legitimate scope for argument about what adjustments if any should be made to the accounts to arrive at a value for the share. When that is the role which they will ultimately be playing, and the differences between them will be resolved as a matter of legal principle, it is not appropriate to reject the evidence of Mr Brigden under section 135. **********

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