Wenco Industrial Pty Ltd v W W Industries Pty Ltd & Anor [2009] VSCA 191

PRACTICE and procedure - Adoption of Referee's report - Parties bound by the answers of Referee - Order adopting Referee's report an interlocutory judgment - Need for leave to appeal - Leave refused.

1 Wenco Industrial Pty Ltd, the applicant, was in partnership with W W Industrial Pty Ltd, the first respondent, during the period January 2000 to 15 April 2004. The partnership was conducted under the name W W Industrial - Wenco Industrial. The second respondent is and was at all relevant times the sole director and the secretary of the first respondent. In its initial pleading, the first respondent disputed that there was a partnership but its existence was eventually conceded. Teague J made declarations as to the existence of the partnership in the above terms on 16 August 2006. On the same day, his Honour made an order pursuant to r 50.01 of the Supreme Court (General Civil Procedure) Rules 2005 referring specified questions to Mr Gregory Pollard Meredith of Ferrier Hodgson as Special Referee for the referee to give his opinion with respect thereto.

2 On 20 November 2006, the referee delivered his report. By summons filed 5 June 2007, the respondents applied pursuant to r 50.04 for the report to be adopted. That application was opposed by the applicant. The respondents' application was made returnable before a judge in the trial division, no judge having yet been selected to hear the trial. The application was heard by Smith J on 13 and 14 September 2007.

3 Rule 50.04 provides:

The Court may as the interests of justice require adopt the report of a special referee or decline to adopt the report in whole or in part, and make such order or give such judgment as it thinks fit.

4 On 26 September 2007, his Honour delivered reasons concluding that it was in the interests of justice that the referee's report should be adopted with one exception, which exception is not relevant for the purposes of this application. Formal orders giving effect to his Honour's reasons for judgment were made on 28 September 2007.

5 The applicant's complaint before this Court concerns the adoption by Smith J of the referee's answers to four of the questions referred to him (questions 1, 2, 6 and 7). The applicant initially filed a notice of appeal from the decision of Smith J, without seeking leave to do so. The respondents contended that the applicant needed leave on the basis that Smith J's orders were orders in an interlocutory application within the meaning of s 17A(4)(b) of the Supreme Court Act 1986. On 16 July 2008, the applicant applied to this Court out of time, for leave to appeal (if leave was necessary). Neave JA and Pagone AJA heard the application and adjourned it to be heard at the same time as the appeal.[1] Accordingly extensive written submissions were filed as to whether leave was necessary which were supplemented by oral argument.

6 For the reasons given below, we are of the view that the applicant requires leave to appeal and that leave should be refused. Further, if the applicant did not require leave, then, again for the reasons given below we have concluded that the appeal should be dismissed.

The orders appointing the referee and the relevant questions

7 Teague J made orders appointing the referee and giving directions for the conduct of the reference pursuant to r 50.01 and 50.02. The relevant orders were:

4. Pursuant to Order 50.01 of the Supreme Court (General Civil Procedure) Rules 2005 the questions referred to in the Schedule be referred to Gregory Pollard Meredith of Ferrier Hodgson, 600 Bourke Street, Melbourne as Special Referee for the referee to give his opinion with respect to the questions hereafter ordered.

5. Subject to the requirements of the rules of natural justice and the following directions and any further directions which may be given by the Court, the Special Referee may conduct the reference in such manner as he thinks fit.

6. The Special Referee is not bound by the rules of evidence.

7. On or before 23 August 2006 the Special Referee must conduct a preliminary conference with the parties to determine the manner of conducting the reference.

8. The Special Referee, may, where he considers it appropriate to do so in respect of specific questions, but subject always to paragraph 5:

(a) conduct the reference in the absence of a party who has indicated that it is not interested in that question;

(b) conduct the reference in an investigative rather than an adversarial manner;

(c) consider any documents, submissions or thing and apply his professional expertise to the consideration thereof;

(d) direct that there be no opening or final addresses by a party or that it be limited in subject or in time.

If the Special Referee exercises any of these powers he must record this fact and the circumstances in his report.

9. The Special Referee may for the purposes of the reference investigate any matter or call for any document or explanation he considers appropriate and generally may make such enquiry and inspection of any document or thing or access to premises and any inspection he considers necessary and use such personal knowledge and expertise as is necessary for the purpose of the reference.

10. The Special Referee has the same authority with respect to discovery and production of documents as the Court.

11. The attendance of witnesses and the production of documents may be compelled by subpoena.

12. Each party must comply with any lawful direction of the Special Referee which he considers necessary for the reference.

13. Each of the parties may be represented by an accountant and/or by a legal practitioner.

14. The Special Referee must make a report in writing to the Court stating his opinion (with reasons) upon all the questions hereby referred and giving reasons for the opinion. The report together with a copy for each party must be delivered to the Prothonotary not later than 13 October 2006 or by such later date as the Court may direct.

The orders went on to make provision for the remuneration of the referee and other matters.

8 Attached to the orders was a schedule of questions. The relevant questions were:

1. What is the correct closing stock figure for the stock of the W W Industries - Wenco Industries Partnership ('the Partnership') as at each of the following dates:

30 June 2000

30 June 2001

30 June 2002

30 June 2003

15 April 2004

('the accounting dates').

2. What was the gross profit of the Partnership as at each of the accounting dates?

3. ...

4. ...

5. ...

6. What amounts properly stand to the credit or debit of the capital accounts and/or loan accounts of the partners:

(a) upon each of the accounting dates;

(b) upon the dissolution of the partnership on 15 April 2004?

In considering and determining this question the Special Referee shall consider two different scenarios -

Scenario 1

Having regard to the answers to questions 1, 2, 3, 4 and 5 above, and 7.

Scenario 2

Having regard to the answer to questions 1, 2 and 3 above and excluding:

(a) any amount calculated in accordance with questions 4 and 5;

(b) the First Defendant's entitlement in the sum of $150,000 and $225,000 for the years ending 30 June 2002 and 30 June 2003 respectively.

9 As was stated by Smith J,[2] the plain object of appointing the referee was to have an expert assess the quantum of the matters in issue between the parties prior to having various liability issues determined. In Border Auto Wreckers (Wodonga) Pty Ltd v Strathdee,[3] this Court concluded that the words 'judgment or order in an interlocutory application' in s 17A(4)(b) of the Supreme Court Act 1986 were to be given the same effect as the words 'an interlocutory judgment' in s 14(4) of the Supreme Court Act 1958. A recent challenge to the validity of that decision was rejected by this Court in Dura (Australia) Constructions Pty Ltd v Victorian Managed Insurance Authority.[4] It follows that when considering the issue of leave in this case, it is necessary to determine whether Smith J's judgment was an interlocutory judgment.

10 Numerous authorities have stated that the test to determine whether an order is final or interlocutory is whether or not the order, as made, finally disposes of the rights of the parties.[5] However, the application of this test has not always been free from difficulty. In Tampion v Anderson,[6] the Privy Council endorsed as possibly the most helpful advice in some cases, the dicta of Lord Denning MR in Salter Rex & Co v Ghosh[7] that '[t]his question of "final" or "interlocutory" is so uncertain that the only thing for practitioners to do is to look up the practice books and see what has been decided on the point'.[8] In cases where there is a trial of a preliminary question,[9] it has been held that orders made upon the determination of the preliminary question are interlocutory unless any judgment entered pursuant to such an order finally disposes of the rights of the parties.[10]

11 The orders of Smith J adopting the referee's report were interlocutory. There was no final disposition of the rights of the parties. The referee's answers in response to the reference and the Court's unqualified adoption of them were not decisive of the applicant's proceedings. The report quantified certain matters prior to the determination of liability issues by the Court. Yet the parties were bound by the answers. They could not subsequently advance argument or adduce further evidence designed to demonstrate that the answers were wrongly determined.[11] The only remedy the parties have is by way of appeal from the interlocutory order made.

12 Accordingly, the applicant requires leave to appeal from the orders of Smith J.

13 The central issue in this case concerns the correctness of Smith J's adoption of the referee's answer to question 1. As was submitted below (and to this Court) by the applicant, the answers to questions 2, 6 and 7 given by the referee turned on the answer to question 1. If the applicant is correct in its submission that the answer to question 1 should not have been adopted, then it follows that, for the same reasons, the answers to questions 2, 6 and 7 should not have been adopted.

14 The applicant's contentions may be summarised as follows:[12]

(a) The question of the adoption of the referee's report should have been a matter for determination by the trial judge at trial and this was particularly so because the credit of the respondents and their witnesses would be challenged at trial concerning their earlier denial of a partnership and their claim that the partnership agreement was 'notional' and a fraud and had been drawn in order to assist Mrs He,[13] a Director of the applicant, to obtain a visa to enter Australia, their claim that the $250,000 investment by Wenco had been a loan by Wenco to the first respondent, and because of the alteration of the partnership books of account after the dissolution of the partnership by increasing the purported expenses of the partnership by amounts totalling approximately $1.8 million. During the course of oral argument the applicant contended that it was inevitable that the referee would have to rely to some extent upon the credibility of the respondent's witnesses in answering the questions;

(b) The referee had been highly critical of the stock inventory calculation of Mr Maric (the partnership accountant and respondents' expert[14]) used in compiling the accounts, finding that those methods did not conform with acceptable accounting standards;

(c) the referee had been unable to answer question 1 and had:

(i) completed the terms of the reference to him of that question when he stated that he was unable to answer the question;

(ii) exceeded the terms of the reference by conducting the analysis referred to in paragraph 49[15] of his report and by adopting the stock inventory valuations and gross profit figures contained in the tax returns and partnership accounts.

(d) The analysis referred to in paragraph 49 of the referee's report was uncertain in its result and was based on uncertain, unexplained and contradictory data.

(e) The referee had failed to take into consideration a matter which he should have taken into consideration, namely, the analysis by the accountant, Mr Ron Gowland, based on an analysis of approximately 1400 source documents pursuant to which he found that the partnership profits were approximately $1,227,048 greater than shown in the accounts and tax returns drawn by Mr Maric and which accounts had not been approved by Mr and Mrs He, the directors and members of Wenco.

(f) The answers to questions 2, 6 and 7 which were referred to the referee turned on the answer to question 1.

(g) Because the referee had been unable to answer question 1 and/or exceeded his terms of reference, it was not in the interests of justice that the referee's answers to questions 1, 2, 6 and 7 be adopted.

(h) Alternatively to (g), it was generally not in the interests of justice that the referee's answers to questions 1, 2, 6 and 7 be adopted.

(i) The answers to the questions should have been left to the trial judge

15 The last of these submissions was in the alternative to the submission that the question of the adoption of the referee's report was a matter for determination by the trial judge.

16 The applicant's primary contention was that when the referee's report is considered in its entirety, it shows the referee had concluded that it was not possible to provide a 'correct closing stock figure' in answer to question 1 - but that he nonetheless adopted the closing stock figures from the partnership's financial statements in answering question 1. The applicant contends that if the referee had properly understood his task, he would have answered question 1 'Unable to say'. The referee then would have answered questions 2, 6 and 7 similarly. The applicant also placed particular emphasis on the alleged failure by the referee to take into account the analysis performed by the applicant's accountant, Mr Ron Gowland, of the 1400 source documents.[16]

Adopting the report: the principles to be applied

17 The approach to be taken in considering whether to adopt the report of a referee, has been the subject of extensive consideration by courts in different jurisdictions. Although the underlying rules are not always the same,[17] the following propositions can be extracted from the cases. They provide a general guide as to how the question of the adoption of a referee's report should be approached:

(a) First, in exercising the power conferred by r 50.04 to adopt the report of a special referee, the Court has a wide power which is to be exercised 'as the interests of justice require'. This broad mandate should not be the subject of restrictions laid down in advance of judges exercising it.[18] Subject to what follows, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised.

(b) Secondly, the purpose of rules 50.01 and 50.04 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation. Further, that purpose would be frustrated if the reference were to be treated as 'some kind of warm-up for the real contest'.[19]

(c) Thirdly, insofar as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh.[20]

(d) Fourthly, where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for inquiry and report.[21]

(e) Fifthly, if the referee's report reveals some error of principle, absence or excess of jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than 'unsafe and unsatisfactory'.[22]

(f) Sixthly, generally, the referee's findings of fact should not be re-agitated in the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence.[23]

(g) Seventhly, the purpose of r 50.01 and r 50.04 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based.[24]

(h) Eighthly, the Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire.[25]

(i) Ninthly, even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not ordinarily be (in the absence of any of the matters referred to in sub para (e) above) a proper exercise of the discretion conferred by r 50.04 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report.[26]

18 Much of the applicant's submission focussed upon whether the referee had fallen into error in the discharge of his reference. But what was called for in the Court below was the exercise of a discretion. The application for leave (and any appeal therefrom) falls to be considered on that basis. Thus, this Court is limited to the correction of error exhibited by the approach of the primary judge constrained by principles of the kind expressed in House v R.[27] The ultimate question in this Court is not whether the referee was in error, but whether the judge erred in the exercise of his discretion to adopt the report.[28] With that in mind we turn to consider the performance of the reference and the reasoning of the referee which led to the referee's answer to question 1.

19 Following the making of the orders by Teague J on 16 August 2006, the referee held a preliminary conference on 23 August 2006. At the preliminary conference, the referee gave directions for a timetable, setting dates for:

(a) the provision of the Court Book to the referee;

(b) the provision of financial statements and taxation returns for the period 1 July 2003[29] to 15 April 2004 to the referee;

(d) the provision of submissions from both parties (including both parties' expert accountants' material); and

(e) a proposed meeting of the accounting experts with the referee - but without legal representation.[30]

20 Subsequently, the referee was provided with information including:

(b) the applicant's written submissions (including material from their accounting expert, Mr Gowland);

(c) the respondents' written submissions (including material from their accounting expert, Mr Maric); and

(d) general ledgers, stock reports, valuation and other relevant reports, statutory declarations, payroll reports, a sales and gross profits spread sheet, bank statements and other documents considered to be relevant by one or more of the parties.[31]

21 During the performance of the reference, the referee met with Mr Whitehead and Mr Maric (for the respondents) and Mr Gowland and Mr Peter Cash[32] (for the applicant) on 26 September 2006. During this meeting, Mr Whitehead showed the referee each of the partnership's business premises in Warragul, including the inventory, and gave an explanation about the nature of the business. Subsequently, the referee conferred with Mr Maric and Mr Gowland at the partnership's premises on 6 October 2006. At that time, the referee reviewed 'a substantial amount of financial records compiled by Mr Maric'.[33]

The reasoning of the referee in relation to question 1

22 Having identified the various documents that the referee relied upon, the referee stated:[34]

On the basis of the records and documentation I have received and reviewed as well as the inquiries I have made, I am unable to determine an accurate closing stock figure at any of the accounting dates.[35]

23 The referee then set out the amounts recorded in the partnership's financial statements for the closing stock figure at the relevant accounting dates.[36] The referee then discussed and analysed these figures in paragraph 17 to 51 of his report. In the course of performing this analysis, the referee performed an exercise designed to assess the reasonableness of the inventory value as at 15 April 2004. The result of this exercise was that the stock value of $1,093,555 recorded in the partnership's financial statements for the accounting date 15 April 2004 was shown to fall within the 'high/low ranges' determined by the referee. Upon this basis, the referee set out his conclusions with respect to question 1 as follows:[37]

(a) Mr Maric has not used a conventional method of calculating closing inventory in the Partnership's accounts, however, it appears that he has consistently applied his method of calculating closing inventory for each of the Accounting Dates.

(b) The inventory has not been recorded in accordance with AASB 1019.[38]

(c) On the records available it is not possible to calculate or estimate the value of inventory in accordance with AASB 1019[39] at any of the Accounting Dates.

(d) The valuation of inventory in the Partnership financial statements is heavily reliant on the cost of goods sold figure, which is based on the standard cost of the products which includes the actual cost plus a buffer.

(e) The inventory value recorded is heavily reliant on the accuracy of the buffer. If the buffer is too high, the inventory would be under valued and the converse applies.

(f) The accuracy of the buffer is unable to be tested or assessed in any meaningful way. It is more likely that the inventory value may be understated rather than overstated; however, it is not possible for me to reasonably quantify the potential understatement.

(g) The reasonableness assessment I have conducted indicates that the closing balance of stock at 15 April 2004 is within the high/low range assessed.

(h) If the inventory valuations at each of the Accounting Dates are under valued, the profit figure recorded for each of the accounting periods will be understated.

(i) I am unable to calculate or estimate an alternative closing stock figure to that which has been recorded for the Partnership at each of the Accounting Dates.

(j) Accordingly, I do not propose to amend the inventory figures recorded and have adopted the Partnership's inventory figures for the purpose of my determination.

24 Having set out his conclusions, the referee then proceeded to answer question 1 as follows: The closing stock figure as at 30 June 2000 was $535,971; as at 30 June 2001 - $806,541; as at 30 June 2002 - $1,043,428; as at 30 June 2003 - $1,352,345 and as at 15 April 2004[40] - $1,093,555.

25 The applicant contends that the referee completed his terms of reference when he stated that he was unable to calculate closing stock figures at any of the accounting dates. The applicant then submits that the referee exceeded his jurisdiction when he undertook an assessment of the reasonableness of the inventory values recorded in the partnership's financial statements. However, these submissions depend upon a construction of the referee's report which is not borne out by a consideration and analysis of the whole of the report. In truth, the referee concluded that he was unable to independently value the partnership's inventory at each of the accounting dates.[41] That is, having considered all the relevant evidence, a valuation which was independent of the figures in the partnership's accounts was not possible. Accordingly, the referee examined the figures in the partnership accounts for the purpose of assessing them in order to arrive at an answer to question 1.

26 In the judgment below, the matter was put as follows:[42]

14. The situation was that the referee, having been asked to express an opinion as to the correct closing stock figure for the partnership at the relevant dates, was not able by any conventional method to calculate such a figure. What he did have, however, was the valuation methodology used in the partnership which appeared to have been used consistently over each of the accounting dates. At the same time there does not appear to have been an attempt by the plaintiff to put before the referee any extensive alternative figures or calculations or analysis. It can, therefore, be seen that what the referee was engaged in when he did the challenged 'Assessment of Inventory Value Reasonableness', was a process by which he could assess the reasonableness of the inventory value system that had been used by the partnership.

15. Such an exercise was plainly within his terms of reference because it was a technique he used to assess the only evidence advanced before him as to the closing inventory value. Using that check and his expertise and experience, he came to the conclusion that he should not amend the inventory figure recorded by the partnership and that the partnership inventory figures should be adopted for the purpose of his determination.

16**.** Thus he did no more and no less than a court would have done in the circumstances. From an evidentiary point of view, the reality was that the only evidence the parties could place before the referee was that contained in the partnership's own records and in view of the fact that what was involved was the gathering of information relevant to the dissolution of that partnership and the financial consequences that should flow from it, it was plainly just that, in the absence of better figures, those figures should be used.

27 As we were informed on the appeal, there was no dispute between the parties as to the amount of stock held by the partnership as disclosed in the partnership returns. It was the value of that stock that was in issue. It was acknowledged on appeal that the partnership stock valuations for each year comprised the historical cost figure for that stock together with what was described as a 'buffer' amount, which was an estimate made of a range of additional costs applicable to the stock including such things as freight, wastage, damage and obsolence. There were no accounting records for the 'buffer' as it was an estimate applied across the board. The assessment undertaken by the referee, to which His Honour referred in the above passage, was to determine the reasonableness of this allowance.

28 A recurring theme of the applicant's submissions was that, in respect of question 1, the referee did not answer the question asked of him. Significant reliance was placed by the applicant on the word 'correct' in the question 'What is the correct closing stock figure ...?'. Reliance was then placed by the applicant upon statements in the referee's report to the effect that he was 'unable to determine the value of the stock in accordance with the reference'.[43] However, this submission overstates the true position. In fact, the referee stated variously:

• "It has not been possible for me to independently calculate the closing stock figures at any of the accounting dates".

- "On the basis of the records and documentation I have received and reviewed as well as the inquiries I have made, I am unable to determine an accurate closing stock figure at any of the accounting dates".

- "On the records available it is not possible to calculate or estimate the value of inventory in accordance with AASB 1019 at any of the accounting dates".

- "I am unable to calculate or estimate an alternative closing stock figure to that which has been recorded for the partnership at each of the accounting dates".

29 At no stage did the referee say that he was unable to determine the value of the stock in accordance with the reference. Further, while each of the above statements were made, they are of course taken out of their context. Each of the statements was made in the course of providing reasons for the answer ultimately given - namely, the closing stock figures referred to above - and set out in paragraph 151 of the referee's report. There are a number of parallels between this case and cases where the evidentiary material makes a precise assessment of damages difficult. In such cases, Courts have repeatedly held that the assessor must do his or her best with the evidentiary material. In our view, that is what the reference required of the referee in this case. Put more precisely, it was open to the judge below to take that view. The use of the word 'correct' in question 1 does not gainsay this proposition.

30 Further, the fact that the answer to question 1 is attended with 'uncertainty'[44] is not, in the circumstances of this case, grounds for concluding that the exercise of the discretion in the Court below to adopt the report miscarried. A valuation exercise of the kind required to be performed in this case is often attended with uncertainty. If the exercise had to be performed by the trial judge, there would be the same uncertainty as existed before the referee. Similarly, it does not assist the applicant in this Court to characterise the figures relied upon by the referee as 'unexplained' or 'contradictory'. Some patent misapprehension of the evidence or perversity or manifest unreasonableness in the fact-finding, in the sense we have explained it, would be needed before one could conclude that the discretion of Smith J miscarried in relation to this issue.

31 Further, while the applicant sought to contend that figures relied upon by the referee were 'contradictory' on the basis that the partnership financial statements showed closing stock on 15 April 2004 in the sum of $1,093,555, whereas the stock summaries from March 2004 totalled $1,965,980,[45] the referee explained his rejection of the stock reports as at March and April 2004 in paragraphs 34 to 37 of his report. While it cannot be gainsaid that the stock reports for 31 March 2004 and 30 April 2004 disclosing totals of $1,966,678 and $2,113,836 contradict the figure of $1,093,555 for stock as at 15 April 2004, there was no relevant contradiction - remembering that the inventory in the reports was costed at the last purchase including the buffer, rather than at the lower of cost and net realisable value.

32 As part of its attack under this heading, the applicant asserted that figures relied upon by the referee were 'unexplained'. This was a reference to the figures of $2,040,258 and 15% and 20% referred to in paragraph 49 of the referee's report. In paragraph 49, the referee assessed the reasonableness of the inventory value as at 15 April 2004. He did this using a process which commenced with the value of the inventory according to the stock reports. It is to be remembered that the stock report as at 31 March valued the inventory at $1,966,678 and the stock report as at 30 April 2004 valued the inventory at $2,113,836. The average of these valuations was $2,040,258. It was from that figure that the referee commenced his reasonableness assessment. The referee then applied a 15% and a 20% discount reflecting the removal of the buffer. The buffer was assessed at these alternative amounts (15% and 20%) according to a report in evidence before the referee and the evidence of the second respondent.[46] There was nothing illogical or unexplained in the performance of this analysis. The figures used by the referee came from the evidence put before him. In the end, the attack concerning unexplained or contradictory figures was simply not made out.

33 We agree with the approach adopted by Smith J and with his conclusion. But it would be sufficient that we have concluded that the analysis below does not contain any demonstrable error and was reasonably open. Like his Honour below, we are of the view that it is not a correct construction of the referee's report to conclude that the referee answered question 1, in effect, 'unable to say' (or was compelled by his findings and reasons to give such an answer). On a proper construction of the referee's report, it is clear that the referee was unable to answer question 1 without reference to the figures in the partnership's financial statements. Having proper regard to those figures, the referee conducted an analysis which has not been shown to be incorrect, so as to arrive at his answer to question 1.

34 It was an unusual feature of this case that the parties applied for and consented to the appointment of a referee to deal with these quantum-related questions before the determination of the issue of liability. The applicant now submits that this worked an unfairness to it because the referee accepted the evidence of the respondents' witnesses - in circumstances where those witnesses' credit might subsequently be severely damaged in cross-examination (one such credit matter being said to be the respondents' initial denial of the existence of the partnership).

35 Ordinarily, if a party intends to rely upon witnesses to establish disputed facts in relation to quantum when their credit would be in issue in the trial on liability, it would be unlikely that the other party would agree to have questions of quantum first determined by a referee. But no objection of this sort had ever been raised before Teague J - or at any time prior to the referee delivering his report. We note that at one point during the course of oral argument, counsel for the applicant conceded that there was no credit issue which bore upon the referee's finding in relation to question 1. Later, he maintained that the issue of the credit of the respondents' witnesses remained a matter which Smith J should have taken into account when determining to adopt the report. However, it was never made clear how that could have impacted upon the answer to question 1.

36 The applicant asserted before us that the referee was not entitled to rely upon information that he could not independently verify. We do not agree. There was nothing in the reference that precluded him from doing so. On the contrary, it would have been well understood by the parties at the time that they agreed to the terms of reference and the wide powers conferred on the referee, that he might rely upon information provided by a party though there was no independent proof of that fact. The wisdom of the forensic choice exercised by the applicant in exposing itself to that risk is not a matter about which the applicant can now complain. A court may act upon the opinion of the Referee without specific or detailed regard to the primary evidence relied upon by the Referee, so long as the referee's reasons logically and cohesively lead to that opinion of fact.[47] The applicants' assertion that it did not know, at the time the order was made, that there were no accounting records kept which supported the 'buffer' cost must be viewed in that light.

37 The applicant relied upon the fact that the referee was critical of stock inventory calculations made by Mr Maric. There is no doubt that the referee was critical. While Mr Maric asserted that the partnership inventory was valued using the Retail Inventory Method ('RIM'), the referee was of the view that RIM had not been properly utilised by Mr Maric.[48] Further, the referee's conclusions[49] note that Mr Maric did not use a conventional method of calculating closing inventory in the partnership's accounts and that the inventory was not recorded in accordance with AASB 1019. All of these matters may be accepted. However, they do not form a basis for concluding that the referee made an error of such a kind as would have compelled the Court below, in the exercise of its discretion, to refuse to adopt the referee's report. Such criticisms as the referee had in respect of Mr Maric's accounting methodology was dealt with and formed part of the reasoning process of the referee in arriving at his answer to question 1. The applicant was unable to advance any compelling reason why the criticism of the manner of calculation of the closing stock would require the rejection of the material that might be sourced to that witness or why it could not provide a basis for further assessment by the referee.

38 Moreover, the approach adopted by the referee of undertaking an assessment of the reasonableness of the buffer allowance was the only course open. The applicant's accountant addressed some aspects of this issue in his submissions to the referee.[50] The applicant was provided with ample opportunity to place before the referee any material that it wished that bore upon the reasonableness of the buffer figure.

39 All parties joined in the request that the referee, armed with broad powers, answer the settled questions before the trial on liability was to proceed. The formulation of questions 1 and 2 were by consent.[51] There was no error or mis-exercise of the discretion conferred by r 50.04 in the Court below rejecting these contentions of the applicant.

40 We would not wish to be understood as endorsing the notion that where parties seek a referee's report, it is necessarily a desirable course to refer issues of quantum to a referee before the resolution of liability issues. Parties will have their own forensic reasons for seeking such orders. They may not share the same level of knowledge of the underlying facts relevant to the reference. The time at which it is appropriate to make an order seeking a referee's report and the issue of its adoption once it is received, are matters which should be reserved for the trial judge where the trial judge has a more developed understanding of the outstanding issues in the case including questions of credit.[52] The trial judge is then best placed to determine what is 'in the interests of justice' in all the circumstances of the case.[53]

41 As another discrete ground of complaint, the applicant submitted that the referee's answer to question 1 should not be adopted because the referee failed to take into account an analysis made by Mr Gowland of approximately 1400 invoices.[54] There was an issue in the Court below as to whether what was put before the referee was Mr Gowland's analysis of only 1100 invoices or 1400 invoices.[55] Nothing turns on this issue.

42 The point sought to be made by the applicant in relation to Mr Gowland's analysis was first encapsulated in Mr Gowland's report of 5 March 2005. Mr Gowland stated:[56]

An analysis of 1100 items revealed a cost on imported stock was 47.7% of the price invoiced to customers. If you add Freight/Cartage/Customs Handling of 4.1% average as listed in the accounts (refer Attachment B.1 and B.2), and 8% allowance for stock losses we calculated a cost of sales of 59.8% of invoiced value. From the years 2000 to March 2004 the average Cost of Sales was 68.4% on $12,781,745 of Sales. The difference in our calculated Gross Margin is 9.6% of $12,781,745 which is $1,227.048 over the period 2000 to March 2004.

$

Net Profit recorded in tax documents 408,045

Profit to March 2004 249,505

Gross Margin Adjustment 1,227,048

Recalculated profit 1,884,598

or $942,299 profit entitlement for each partner during the partnership.

[Mr Gowland then referred to an attachment to his report, which he said contained an estimated proprietorship for each partner at the end of March 2004 - and by which he (at least) implicitly asserted there was an understatement].

This understatement is caused by either understating the amount of stock on hand or overstating purchases. It is also unusual that the partnership which was for importing goods primarily from Asia, sourced around 30% of products locally.[57]

43 The items analysed by Mr Gowland were invoices.[58] This did not appear to be viewed as particularly helpful by the referee where issues such as obsolescence would need to be taken into account for the purpose of valuing closing stock. Similarly, the utility of a broad proposition that an apparently identified understatement is caused 'by either understating the amount of stock on hand or overstating purchases' can be debated.[59] While Mr Gowland provided the referee with a considerable amount of material, he at no time suggested any particular answer to question 1.

44 In answer to the complaint that the reasons of the referee were deficient, particularly in dealing with the Gowland submission, counsel for the respondents submitted that referees appointed under Order 50 did not necessarily have to provide reasons. He submitted that the Victorian position was to be contrasted with the New South Wales position where the rules in New South Wales contain a requirement for reasons.[60] However this submission overlooks the requirement for reasons referred to in r 50.01(2)(b). Further, the submission specifically overlooks, in this case, paragraph 14 of the orders of Teague J which required the referee to report in writing 'with reasons'.[61]

45 In addition to attacking the referee's failure to refer to Mr Gowland's analysis of the 1100 (or more than 1300) items, before us the applicant submitted that because there was no specific reference to any reliance upon, or consideration of, Mr Gowland's evidentiary material, the referee must have erroneously failed to take this material into account. This submission must be rejected. In paragraph 7 of his report, the referee acknowledges being provided with Mr Gowland's material. Further, during the course of his report, the referee deals with arguments advanced out of Mr Gowland's material (for example, see the references to the stock reports as at 31 March and 30 April 2004 referred to in paragraph 34 of the referee's report). The respondent submitted, with some force, that the referee's repeated references to stock 'obsolescence' in his report was in order to explain why Mr Gowland's analysis, which rested on invoices, was of little assistance. The mere fact that there is not an additional reference to Mr Gowland's material in paragraph 14 of the referee's report is of no moment. A fair reading of the report does not disclose any basis for suggesting that the referee overlooked Mr Gowland's material.[62]

46 The matter was dealt with in the judgment of the Court below as follows:[63]

Finally, counsel for the plaintiff submitted that the above paragraphs dealing with the first question should not be adopted because the special referee failed to take into consideration an analysis made by Mr Gowland of 1,400 invoices and that this constituted an error which vitiated the conclusion he had reached. But Mr Gowland's exercise concerned sales invoices and the calculation of gross profits. What the referee was investigating was the value of the stock that had not been sold. In those circumstances it is understandable that the referee did not mention that material in his report. In any event it has not been demonstrated that such analysis could have made any difference to the outcome.

47 We agree with this analysis of this issue. It is to be remembered that the report of the referee is the report of an expert and not the judgment of a Court. The report should be considered in that light and not subjected to any over-zealous attack.[64] As was said by McDougall J in Chocolate Factory Apartments Limited v Westpoint Finance Pty Ltd:[65]

Referees should give reasons for their opinions so as to enable the parties, the Court and the disinterested observer to know that the conclusion is not arbitrary, or influenced by improper considerations; but that it is the result of a process of logic and the application of a considered mind to the factual circumstances proved. The reasoning process must be sufficiently disclosed so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise.

48 The referee provided 39 paragraphs of reasons for his answer to question 1. While the reasons do not in terms refer to the exercise performed by Mr Gowland, they disclose an answer that is the result of a process of logic and the application of a considered mind to the facts of this case. Further, the reasons disclose that the referee's conclusion was not arbitrary. Without expressly doing so it provides the answer to the Gowland analysis. In any event, as Smith J rightly concluded, the reasons did not have to refer specifically to the analysis made by Mr Gowland.

49 Finally counsel for the applicant submitted that any unqualified adoption of the report should have been left to the trial judge - rather than being determined ahead of the trial upon the application of the respondents. Reasonable minds may differ as to this question. As we have already mentioned, there is much to be said for leaving any unqualified adoption of a referee's report to the trial judge. But modern trial management on occasions may necessitate the parties knowing in advance the answers to issues that have been referred for consideration before trial. The advantages of leaving any unqualified adoption of the report to the trial judge must be balanced against the risk that if its adoption is left until trial, the findings in the report remain alive. The party dissatisfied with the referee's report may seek to supplement the evidence put before the referee in an attempt to persuade the trial judge that ultimately the Court is in a better position than the referee to resolve the matters which had previously been the subject of a reference under r 50.01. Such an approach would encourage the party dissatisfied with the referee's report to treat the reference as a mere 'dry run'. Such an approach should not be countenanced in the absence of compelling reasons.

50 The Court below concluded that the referee's report should be adopted in these terms:[66]

No error of law has been demonstrated. Denial of natural justice has not been demonstrated. The plaintiff, in particular, had the opportunity to place all relevant material and to challenge that otherwise placed before the referee. The approach of the referee appears to have been thorough and analytical, independent and professional. In my view the proper outcome of the application is clear - it is in the interests of justice that the referee's report should be adopted [with an exception in respect of the answer to questions 4 and 5, which is irrelevant for present purposes].

51 The applicant has failed to demonstrate any error in the exercise of the discretion conferred by r 50.04 in the adoption of the report. The approach of the referee was thorough, analytical, independent and professional. The referee's reasons in respect of his answer to question 1 show that his conclusion was not arbitrary or influenced by improper considerations. The applicant failed in its attack upon the referee's answer to question 1. The complaint in respect of the referee's answers to questions 2, 6 and 7 being dependent upon a successful attack on the answer to question 1, those complaints must also fail. The judgment of the Court below discloses no error of principle bearing upon the decision to adopt the referee's report. The decision to adopt the referee's report with respect to answers 1, 2, 6 and 7 cannot be said to be unreasonable or plainly unjust.

52 The application for leave to appeal must be dismissed.

[1] This was the effect of orders made by the Court on 17 July 2008 and 1 September 2008.

[3] [1996] VSC 55; [1997] 2 VR 49.

[4] [2009] VSCA 171, [3]-[9]. We note for the sake of completeness that, unlike in Dura, no party before us sought to challenge the correctness of Border Auto Wreckers (Wodonga) Pty Ltd v Strathdee.

[5] See for example Hall v Nominal Defendant [1966] HCA 36; (1966) 117 CLR 423; Licul v Corney [1976] HCA 6; (1976) 50 ALJR 439 and Carr v Finance Corporation of Australia Limited [1981] HCA 20; (1981) 147 CLR 246.

[6] [1973] VicRp 82; (1974) 48 ALJR 11.

[7] (1971) 2 QB 597, 601. However, in that case Lord Denning applied the test propounded by Lord Esher MR in Salaman v Warner [1981] 1 QB 734, which involved a consideration of the nature of the application to the Court - and not the nature of the order which the Court eventually made.

[8] See also the judgment of Brooking JA in Border Auto Wreckers (supra at p 52):

'[W]hat orders are final and what orders interlocutory for the purpose of leave to appeal may be ascertained with tolerable certainty by reference to decided cases specifically in point or, in the absence of such a decision, to the rules which are now established by decisions of the High Court.'

[10] See Maybury v Atlantic Union Oil Company Limited [1953] HCA 89; (1953) 89 CLR 507, 515. See also O'Toole v Charles David Pty Ltd (1991) 171 CLR 232 as to orders answering questions reserved for a Court's consideration being interlocutory.

[11] Fidelitas Shipping Co Limited v V/O Exportchleb [1966] 1 QB 630, 642 (Lord Diplock).

[12] From paragraph 24 of the agreed summary as prepared by the applicant (dated 27 February 2009).

[13] Mrs He is the wife of Mr Ying He (also known as Henry He). Each of them are members and directors of the applicant, each holding 50 of the 100 issued shares in the applicant.

[15] Paragraph 49 of the referee's report recorded the performance of an exercise designed to assess the reasonableness of the inventory value as at 15 April 2004 - about which we will say more below.

[16] Described as invoices in ground 6 of the applicant's notice of appeal.

[17] See for example Part 72, r 13(1) of the then Supreme Court Rules of New South Wales considered in Chocolate Factory Apartments Limited v Westpoint Finance Pty Ltd [2005] NSWSC 784 (and on appeal, Westpoint Management Limited v Chocolate Factory Apartments Limited [2007] NSWCA 253), which provided:

'Where a report is made, the Court may, of its own motion, after notice to the parties, or on application by any party, on a matter of fact or law or both:

(a) adopt, vary or reject the report in whole or in part,

(b) require an explanation by way of report from the referee,

(c) on any ground, remit for further consideration by the referee the whole or any part of the matter referred for a further report,

(d) decide any matter on the evidence taken before the referee, with or without additional evidence,

and shall give such judgment or make such order as the Court thinks fit.'

[18] Re Markbys Renaissance Pty Ltd [1993] 3 VR 851, 859 [23].

[19] See Chocolate Factory Apartments Limited v Westpoint Finance Pty Ltd [2005] NSWSC 784, [7] (McDougall J).

[26] Ibid. See also Super Pty Ltd v SJP Formwork (Australia) Pty Ltd (1992) 29 NSWLR 549; Chloride Batteries Australia Limited v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60; White Constructions (NT) Pty Ltd v Commonwealth of Australia (1990) 7 BCL 193; Foxman Holdings Pty Ltd v NMBE Pty Ltd (1994) 38 NSWLR 615; Nicholls v Stamer [1980] VicRp 46; [1980] VR 479; Westpoint Management Limited v Chocolate Factory Apartments Limited [2007] NSWCA 253; Bellevarde Constructions Pty Ltd v CPC Energy Pty Ltd [2008] NSWCA 228; Re Markbys Renaissance Pty Ltd [1999] 3 VR 851 and Plumley v Adgauge Pty Ltd [1998] VSCA 70 (Plumley was the appeal in Re Markbys Renaissance - Markbys Renaissance having been decided on 16 June 1995, notwithstanding its appearance in [1999] 3 VR).

[27] [1936] HCA 40; (1936) 55 CLR 499.

[28] Westpoint Management Limited v Chocolate Factory Apartments Limited [2007] NSWCA 253, [10] and Bellevarde Constructions Pty Ltd v CPC Energy Pty Ltd [2008] NSWCA 228, [59].

[29] While the timetable in evidence (AB2 C17) states this date, we assume that this is a typographical error, as the referee's report discloses analyses of financial statements for the periods commencing with the financial year ending 30 June 2000.

[30] Remembering that the orders of Teague J permitted the referee (subject to the requirements of the rules of natural justice) to conduct the reference in such manner as he thought fit - which permitted the reference to be conducted in an investigative rather than adversarial manner (see paragraphs 5 and 8 of the orders of Teague J). As to the absence of legal representation, while paragraph 13 of the orders of Teague J permitted the parties to be represented by an accountant and/or by a legal practitioner, no complaint is made before us concerning the direction given by the referee as to a meeting with (and/or the meeting with) the accounting experts in the absence of legal representation.

[31] See p 10 of the report of the referee at AB2 C27.

[35] However, on p 6 of his report (AB2 C23), the referee stated that it had not been possible for him "to independently" calculate the closing stock figures at any of the accounting dates.

[36] 30 June 2000, 30 June 2001, 30 June 2002, 30 June 2003 and 15 April 2004.

[37] See paragraph 52 of the referee's report.

[38] Australian Accounting Standard AASB 1019 in relation to inventories.

[39] AASB 1019 requires inventories to be valued at the lower of cost or net realisable value, where 'net realisable value' is defined as the future proceeds from the sale of the inventory estimated at the reporting date (see paragraph 18 of the referee's report at AB2 C30).

[40] There is an error in the heading of the final column of the table in the executive summary of the referee's report. It is clear that the heading 30 June 2004 should be 15 April 2004.

[41] See p 6 of the referee's report (AB2 C23).

[43] See paragraph 9(a)(i) of the submissions of the applicant dated 19 August 2009.

[44] Cf ground 5 of the notice of appeal at AB3 H5 - and remembering that the question in this Court is not whether the referee was in error, but whether the judge erred in the exercise of his discretion.

[45] See paragraph 18 of the witness statement of Mr Gowland at AB2 C358.

[46] See paragraphs 29 and 32 respectively of the referee's report.

[47] Skinner & Edwards (Builders) Pty Ltd v Australian Telecommunications Corp (1992) 27 NSWLR 567, 575 (Cole J).

[48] See paragraph 21 of the referee's report at AB2 C31.

[50] See for example the passage from his report at [32]

[52] Under a form of docket system, or in managed lists such as the Corporation or Commercial list the trial judge will be known. If the judge who is to hear the trial is not known, a trial judge should be selected.

[53] See r 50.04; Wallfire Pty Ltd v Andwendrod Services Pty Ltd [2003] VSC 348; (2003) 176 FLR 408, 416-7 (Hansen J); Victoria University of Technology v Wilson [2006] VSC 186, [26] (Harper J); Chloride Batteries Australia Limited v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60, 69 (Cole J) and Foxman Holdings Pty Ltd v NMBE Pty Ltd (1994) 38 NSWLR 615, 620.

[54] Referred to in some of the applicant's material as '1400 source documents'.

[57] Subsequently, Mr Gowland sought to amend the first paragraph of his analysis 'on the basis of further consideration of the accounts' (see paragraph 11 of Mr Gowland's affidavit sworn 31 August 2005: AB2 C231) as follows:

'An analysis of over 1300 items revealed a cost of imported stock of 46.6% of the price invoiced to customers. If you add Freight/Cartage/Customs Handling of 4.1% average as listed in the accounts ... and 8% allowance for stock losses, we calculate a cost of sales of 58.7% of invoiced sales. From the years 2000 to March 2004: the average Cost of Sales was 68.4% of $12,781,745 of Sales. The difference on our calculated Gross Margin is 9.7% of $12,781,745, which is $1,239,829 over the period 2000 to March 2004.'

[59] The applicant accepted during oral argument that there was no understatement of the stock on hand for any relevant period.

[60] Cf Part 72 r 11 of the former Rules of the Supreme Court of New South Wales (now see r 20.23(1)(b) of the Uniform Civil Procedure Rules 2005).

[61] While paragraph 14 of the orders of Teague J was drawn to our attention after the conclusion of the hearing of the appeal by an email sent on behalf of the respondents, the content of r 50.01(2)(b) remains overlooked.

[62] We should say for the sake of completeness that the applicant's submissions concerning the overlooking of Mr Gowland's materials proceeded on a false premise that Mr Gowland had provided material disclosing the profitability of the partnership. In fact, Mr Gowland's conclusion in his report dated 5 March 2005 (AB2 C238) was:

'Due to the lack of information made available to us on the stock of the partnership we are unable to accurately determine the profitability of the partnership from 2000 to March 2004.'

[64] See generally Treacy v Newlands & Ors [2008] VSC 395, [7(b)-(g)] and the authorities referred to therein.

[65] [2005] NSWSC 784, [7(11)].