Yan v Yangdo Pty Ltd - [2024] NSWSC 1250 - NSWSC 2024 case summary — Zoe

NSWNSWSC

Yan v Yangdo Pty Ltd

[2024] NSWSC 1250

Supreme Court of NSW|2024-08-21|Before: Rees J

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At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2024-08-21

Before

Rees J

Catchwords

Tadros v 711 Hogben Pty Ltd [2016] NSWSC 697 ABB Service Pty Ltd v Pyrmont Light Rail Company Ltd (2010) 77 NSWLR 321
[2010] NSWSC 831 AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173 AIC Ltd v ITS Testing Services (UK) Ltd [2006] EWCA Civ 1601

Source

Original judgment source is linked above.

Catchwords

Tadros v 711 Hogben Pty Ltd [2016] NSWSC 697 ABB Service Pty Ltd v Pyrmont Light Rail Company Ltd (2010) 77 NSWLR 321[2010] NSWSC 831 AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173 AIC Ltd v ITS Testing Services (UK) Ltd [2006] EWCA Civ 1601

Judgment (31 paragraphs)

[1]

(1994) 217 ALR 201 Pancontinental Mining Ltd v Goldfields Ltd (1995) 16 ACSR 463 Queensland Phosphate Pty Ltd v Korda and Shepard (as joint and several liquidators of Legend International Holdings Inc (in liq)) [2017] VSCA 269 Re Estate of Boian (2014) 17 BPR 33,005 Re Global Mortgage Equity Corporation Pty Ltd (2013) 97 ACSR 30 Spencer v Commonwealth of Australia (1907) 5 CLR 418 Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16 Toepfer v Continental Grain Co [1974] 1 Lloyd's Rep 11 TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4 Veba Oil Supply and Trading GmbH v Petrotrade inc [2001] 2 Lloyd's Rep 731 Texts Cited: Clive Freedman and James Farrell, Kendall on Expert Determination (5th ed, 2015, Thomson Reuters) Doug Jones and Janet Walker, Commercial Arbitration in Australia under the Model Law (3rd ed, 2022, Lawbook Co) W Lonergan, The Valuation of Businesses, Shares and Other Equity (4th ed, 2003, Allen & Unwin) Category: Principal judgment Parties: Philip Kam Hung Yan (First Plaintiff/Fourth Cross-Defendant) Amelia Shu Man Yan (Second Plaintiff/Fifth Cross-Defendant) Fincob Pty Ltd (Third Plaintiff/Sixth Cross-Defendant) Yangdo Pty Ltd (First Defendant/First Cross-Defendant) Kam Wing Yan (Second Defendant/Second Cross-Claimant) Yangdo Service Pty Ltd (Third Defendant/Second Cross-Defendant) Pengie Pty Ltd (Fourth Defendant/Third Cross-Defendant) Penlop Pty Ltd (Fifth Defendant/First Cross-Claimant) Representation: Counsel: R Dick SC / P Gaffney (Plaintiffs) P Knowles SC / K Josifoski (Second and Fifth Defendants) Solicitors: Bartier Perry (Plaintiffs) Project Lawyers (Second and Fifth Defendants) File Number(s): 2024/211869

[2]

JUDGMENT

HER HONOUR: This case concerns an expert determination where the expert, of their own volition and before their determination became binding on the parties, advised that they had made an error. The expert issued a second report, changing their mind on a substantive matter. This has ramifications for the parties in the order of some $10 million. The question is which, if any, of the reports issued by the expert binds the parties.
The underlying dispute was between two brothers from the Yan family, Philip Kam Hung Yan (the plaintiff) and Kam Wing Yan (the defendant). The brothers signed a Deed of Settlement and Release after mediation. The Deed provided that three commercial properties held by various corporate entities and trusts would be valued. The property valuations would then be used by Ernst & Young to value the corporate entities and trusts (the asset valuation). Ernst & Young would issue a draft report, on which the brothers could make submissions. Ernst & Young would then issue a final report. The asset valuation would become binding on the brothers in five business days, absent notification that either considered the valuation to contain an arithmetic, mechanical or manifest error. The plaintiff would then buy-out the defendant's interest in the corporate entities and trusts at the price fixed by the asset valuation.
The commercial properties were valued at $128 million. Where the commercial properties had been acquired decades earlier, a contingent capital gains tax (CGT) liability was 'embedded' in the corporate entities and trusts; that liability would be incurred if and when the properties were sold. Ernst & Young considered how to address the 'embedded' CGT liability, seeking instructions from the brothers and assistance from the Ernst & Young tax team. Ernst & Young issued a draft report, which deducted the contingent CGT liability before arriving at a valuation of the corporate entities and trusts. During the submissions phase, however, the defendant argued that there should be no deduction for the contingent CGT liability. Ernst & Young issued the final report on 30 April 2024 (the first report), agreeing with the defendant. Ernst & Young then withdrew the first report and issued a revised valuation on 3 May 2024 (the second report) on the basis that the first report contained an error. In the second report, Ernst & Young reverted to their opinion held in the draft report.
The defendant gave notice that the second report contained a manifest error. The plaintiff commenced these proceedings, seeking a declaration that the second report contained no such error, together with a declaration that the asset valuations as contained in that report were binding on the parties. Orders were sought that the defendant specifically perform his obligations under the Deed. The defendant filed a cross-claim, seeking a declaration that the first report was binding, together with an order that the plaintiff specifically perform his obligations under the Deed in accordance with the asset valuations in that report. In the alternative, declarations were sought that the second report contained arithmetic, mechanical or manifest errors, as the valuation ought not to have accounted for 'embedded' CGT.
The issues are, essentially: 1. what was the task assigned to the expert for determination? 2. when issuing the first report, did the expert perform the assigned task such that they became functus officio and could not depart from the determination? 3. was there a manifest error?

[4]

The property investments

The brothers acquired three commercial properties using various corporate entities and trusts.
First, in 1994, Yangdo Pty Ltd, as trustee for the Yan Unit Trust, bought a commercial property in Bondi Junction for $16.85 million. The property is a 12-level commercial building with six ground-floor retail tenancies, 11 floors of office space and three parking levels.
The brothers are directors of Yangdo. The plaintiff owns 51% and the defendant owns 49% of the shares of the company. Yangdo is the trustee of the Yan Unit Trust. Units in the trust are issued equally to the corporate vehicles of the brothers and their respective family trusts. Relevantly, Penlop Pty Ltd is the corporate vehicle of the defendant and his family trust.
Second, in 1996, Pengie Pty Ltd bought a commercial property in Ashfield. The purchase price is not in evidence. The property was developed into 41 residential apartments.
The brothers are directors of Pengie. The plaintiff owns 51% and the defendant owns 49% of the shares of the company.
Third, in 2002, Yangdo Service Pty Ltd, as trustee for the Yan Sub-Trust, bought a commercial property in Harris Park for some $22.6 million, being apparently for a leasehold interest. The office building was refurbished and has ground-floor retail, three levels of car parking and eight office levels.
The brothers are directors of Yangdo Service. The shares are wholly owned by Yangdo. Yangdo Service is the trustee of the Yan Sub-Trust. Units in the trust are issued to Yangdo. As Ernst & Young later observed, all 'value' in the Yan Sub-Trust flows into the Yan Unit Trust.
In December 2022, the brothers signed financial statements for the Yan Unit Trust and Pengie for the 2022 financial year. The commercial properties were recorded as follows: 1. the Bondi Junction and Ashfield properties were recorded in the balance sheet of the Yan Unit Trust at cost less accumulated depreciation and impairment, being $2.14m (plus improvements of $1.867m) and $6.138m respectively; and 2. the Harris Park property was recorded in the balance sheet of Pengie as inventory, at the lower of cost and net realisable value, being $1.134m.
That is, the commercial properties were recorded in the balance sheets at less than what was paid for the properties, and less than the likely market value of the properties some 20 to 30 years later.

[5]

The Deed

The brothers fell out. On 16 and 23 June 2023, the brothers participated in a mediation. A Deed of Settlement and Release was signed. Relevantly, the plaintiff would acquire the defendant's interests in the corporate entities and trusts which held the commercial properties. As the Bondi Junction property was held by Yangdo on trust for the Yan Unit Trust, the Harris Park property was held by Yangdo Service on trust for Yangdo (which in turn held it on trust for the Yan Unit Trust) and the Ashfield property was owned by Pengie, the buy-out process involved the plaintiff acquiring the defendant's 50% interest in the Yan Unit Trust and his 49% interest in Pengie.
Clause 2, "Settlement" was the operative provision and contained a number of sub-headings addressing the steps to be taken to complete the buy-out.
The first sub-heading, "Entitlements", concerned trust distributions to the defendant, both declared and those which may be declared before all payments under the Deed were finalised. Clauses 2.2 and 2.3 provided: (emphasis added) "2.2 Yangdo must pay the sum of $3,000,000 in partial payment of the unpaid distributions (that is, the unpaid present entitlements) owed to Penlop as at 22 June 2023 within 7 days of [bank] approval … 2.3 Yangdo must pay any remaining unpaid distributions (being the remainder of the unpaid present entitlements) and any other distribution declared, in the usual practice, by the Yan Unit Trust after 22 June 2023 to Penlop, by no later than the final payment referred to in paragraphs 2.10 and 2.16."
The operation of the italicised words is in issue.
Under the second sub-heading, "Property Valuations", cll 2.4 and 2.5 provided that, within 7 days, the brothers would jointly instruct Cushman & Wakefield to value the Bondi Junction, Ashfield and Harris Park properties. On receipt of a draft report from Cushman & Wakefield, the brothers had 14 days to make further submissions to the property valuer for consideration before the valuer finalised the valuations: cl 2.5(e). The property valuation was then binding on the parties "except in the case of an arithmetic, mechanical or manifest error which either party must notify the other party and the Nominated Property Valuer within 5 business days of receipt of the Property Valuations": cl 2.5(h).
In respect of the valuation of Bondi and Harris Park, the property valuer was required to "consider and have regard to the costs of the capital works and maintenance to be undertaken" for the properties but "this does not require the … Property Valuer to accept such costs or deduct such costs from the valuation": cl 2.5(d)(i). For the Ashfield property, the valuer was to consider the value of the rights held in the ground lease: cl 2.5(d)(ii). Beyond this, cll 2.4 and 2.5 did not specify the basis on which the property valuer was to value the properties, presumably leaving this to the parties' representations and submissions to the valuer and the valuer's professional judgement.
The third sub-heading is "Asset Valuations", with which this judgment is principally concerned. The procedure for the property valuations was largely replicated, as follows: Asset Valuations 2.6 Within 3 days of receiving the Property Valuations, [the brothers] agree to jointly instruct Ernst & Young (Nominated Asset Valuer) to determine: (a) the net assets of the Yan Unit Trust (Yan Unit Valuation): (i) based upon the market value of the assets at the material date (as identified by the Nominated Property Valuer) including the cash at bank or equivalent; (ii) treating the value of the interest of Yangdo in the Yan Unit Sub-Trust as having a value equal to the net assets of the Yan Unit Sub-Trust, with that value arrived at in the same fashion and based on the market value of the property in which the Yan Unit Sub-Trust held interests; and (iii) the liabilities (as at the material date referred to in paragraph 2.6(a)(i) above) to exclude the costs not yet incurred of future maintenance, rectification and/or refurbishment of the buildings; and (b) the value of the units held by Penlop … calculated by reference to the net assets of the Yan Unit Trust proportionate to Penlop's interest in the Yan Unit Trust.
Clause 2.7 of the Deed set out the same series of steps in relation to the valuation of the defendant's shares in Pengie: 2.7 Within 3 days of receiving the Property Valuations, [the brothers] agree to jointly instruct the Nominated Asset Valuer to determine: (a) the net assets of Pengie (Pengie Valuation): (i) based upon the market value of the assets at the material date (as identified by the Nominated Property Valuer) including the cash at bank or equivalent; and (ii) the liabilities (as at the material date referred to in paragraph 2.7(a)(i) above) to exclude the costs not yet incurred of future maintenance, rectification and/or refurbishment of the buildings; and (b) the value of the 49 shares held by [the defendant] in Pengie … calculated by reference to the net assets of Pengie proportionate to [the defendant's] interest in Pengie (Kam's Pengie Shares).
Clause 2.8 set out the procedure to be followed by the brothers and the asset valuer in respect of both the Yan Unit Trust and Pengie valuations: 2.8 The parties agree that: (a) each party must do all things reasonably necessary and provide all information required by the other party or the Nominated Asset Valuer within 2 days of any such request being made in writing; (b) each party will be entitled to make such representations to the Nominated Asset Valuer for the purposes of determining the Yan Unit Valuation and the Pengie Valuation and a copy of such representation must be provided to the other party at the same time to ensure transparency; (c) the Nominated Asset Valuer shall consider and give such weight as it deems appropriate to all representations made by it by the parties; (d) upon receipt of a draft report by the Nominated Asset Valuer, each party will have a period of 14 days to make any further submission to the Nominated Asset Valuer for its consideration prior to the Nominated Asset Valuer finalising the Yan Unit Valuation and the Pengie Valuation; … (g) the Yan Unit Valuation and the Pengie Valuation will be binding on the parties, except in the case of an arithmetic, mechanical or manifest error which either party must notify the other party and the Nominated [Asset] Valuer within 5 business days of receipt of the [Asset] Valuations.
Once the Assets Valuations were to hand, the fourth sub-heading in cl 2 dealt with the buy-out of the defendant's units in the Yan Unit Trust. Penlop agreed to sell its units to the defendant at the price determined by the asset valuer: cl 2.9. The plaintiff agreed to pay that amount "within 6 months of the date of receipt of the Yan Unit Valuation": cl 2.10. Further, cl 2.12 provided: 2.12 Penlop agrees: (a) to transfer the Penlop Units in accordance with paragraph 2.9 above to [the plaintiff] at the time of the payment referred to at paragraph 2.10 above and cause for Penlop to sign all documents and do all things reasonably necessary to transfer all of its rights, title and interest in respect of such units; and (b) waives its rights to any profit entitlement from the date of the Yan Unit Valuation.
The operation of the italicised words is in issue. Specifically, how does cl 2.12(b) work with cl 2.3 and is the defendant entitled to a profit share, dividend or distribution after the material date?
The fifth sub-heading of cl 2 concerned the buy-out of the defendant's shares in Yangdo. The defendant agreed to sell his shares to the plaintiff for $1 each: cl 2.13. Payment was to be made at the same time as payment for the Penlop Units: cl 2.14.
The sixth sub-heading concerned the buy-out of the defendant's shares in Pengie. The defendant agreed to sell his shares in Pengie "at the price determined by the … Asset Valuer for those shares in the Pengie Valuation": cl 2.15. The plaintiff agreed to pay that amount "within 6 months of the date of receipt of the Pengie Valuation": cl 2.16.
The Deed proceeded to deal with a change in officeholders and interim arrangements until the payments were made, mutual releases, warranties, confidentiality, non-disparagement and the like, before concluding with "General" provisions in cl 11. These included an entire agreement clause (cl 11.3) and a "Further assurance" that each party must do all things reasonably required of it to give the other party the full benefit of any obligations owed to that party in the document: cl 11.4. Finally, cl 11.13 provided that time was of the essence.

[7]

Instructing the asset valuer

On 21 December 2023, a joint letter of instruction was sent to David Mullins of Ernst & Young, together with the Deed and the property valuations. Mr Mullins is a partner of Ernst & Young in the Claims & Disputes division of the Forensic & Integrity Services practice. Mr Mullins was asked to provide a fee proposal "as the single expert" to determine the net asset value of the Yan Unit Trust, Pengie and Penlop's interests in these entities at the material date identified by the property valuer. By the joint letter of instruction, the brothers restated the task for the asset valuer as set out in the Deed and confirmed their agreement to appoint Mr Mullins "as a single expert" to determine these matters.
On 22 December 2023, Mr Mullins requested the financial statements for the Yan Unit Trust and Pengie. On 11 and 15 January 2024, the plaintiff provided Mr Mullins with the 2022 and 2023 financial statements for the Yan Unit Trust and Pengie, signed by the brothers. The book values of the Bondi Junction, Harris Park and Ashfield properties were recorded in the balance sheets as earlier mentioned. Market values were obviously much higher, given the property valuations now to hand.
On 15 January 2024, having looked over the material, Mr Mullins had some questions. Where the dates of the valuations for the Bondi Junction and Harris Park properties differed from the date of valuation for the Ashfield property, confirmation was sought as to the date on which the asset valuation was to be undertaken, "Whatever the date, could I ask for the balance sheet at that date(s) to be extracted from the relevant accounting system, so that the position at the specific date can be assessed." Further: "… Capital gains tax In assessing the value of the interests in the entities, a relevant consideration is any capital gains liability that is 'embedded' in the assets. This is relevant to consider as I understand that each of the properties are post-CGT assets. Evidently, the market value of the assets are significant ($128 million in aggregate), and consideration of the tax position of the assets is a matter of some significance. Whilst, in the course of preparing business valuations I often consider tax matters, I am not a tax expert."
Mr Mullins sought instructions to involve the Ernst & Young tax team to consider the CGT position of the properties. On 17 January 2024, Mr Mullins emailed again, advising that Ernst & Young had no conflicts and could accept the retainer. Further: "In relation to the involvement of EY tax, the extent of any involvement likely depends on intentions regarding the underlying property assets. If, for instance, there was no intention of the acquiring party to sell the assets, then the calculation of capital gains on the assets may not be necessary. That is to say, if the acquiring party had the intention of retaining the assets for the long term, then whilst they would be acquiring an asset with an 'embedded' tax liability (the capital gains tax ultimately payable on the sale of the asset(s)), there would be no present liability. If the intention / expectation was to sell the assets at a certain future time (say, in 10 years), then the assessment of the value now would involve an assessment of the present value of the tax liability (CGT assessed based on the market value now, discounted to a present value reflecting when the tax would ultimately be paid). If the parties are in a position to confirm any intention regarding the period of time over which the underlying property assets are intended to [be] retained, that would assist. Subject to the above, it may be necessary to nonetheless consult with EY tax, but detailed tax analysis and calculations may not be required."
On 24 January 2024, the parties provided joint instructions to Mr Mullins in respect of the matters raised. The parties agreed that the valuation date of 18 December 2023 should be adopted and agreed to provide a balance sheet for the relevant entities as at that date. (This date became the 'material date' for the purposes of cll 2.6 and 2.7 of the Deed.) The parties also agreed for the Ernst & Young tax team to be engaged to consider CGT for the purposes of the valuation. As to the instructions sought by Mr Mullins regarding the commercial properties: "Presently, [the plaintiff] cannot say with certainty whether the assets will be sold or retained and for what time period as the business environment is fluid. For that reason we ask EY to assess the CGT liability matter as part of the valuation process."
On 29 January 2024, Mr Mullins forwarded an information request prepared by his colleague in the tax team. On 1 February 2024, the brothers signed Ernst & Young's engagement letter, according to which the brothers retained Ernst & Young to perform "independent expert services" in accordance with the Deed. After a fairly laborious process of obtaining agreement on the answers to Ernst & Young's information request, the brothers also provided a package of material on 23 February 2024. This included a summary of the cost of each property, settlement sheets for the Bondi Junction and Harris Park properties, and various accounting reports for the Yan Unit Trust, the Yan Sub-Trust and Pengie as at 18 December 2023.
On 27 February 2024, Mr Mullins pressed for the financial statements for the Yan Unit Trust and Pengie as at 18 December 2023. Providing the financial statements also proved laborious, where the plaintiff wanted the defendant to complete a director's declaration, confirming that the financial statements fairly reflected the financial position of the Yan Unit Trust, the Yan Sub-Trust and Pengie as at 18 December 2023, and the defendant was reluctant to sign. Mr Mullins was not prepared to proceed unless all information provided to him was agreed between the directors. Ultimately, a revised form of director's declaration was agreed and signed. On 12 March 2024, Mr Mullins was provided with financial statements for the Yan Unit Trust, the Yan Sub-Trust and Pengie period for the ended 18 December 2023, together with the signed directors' declaration that the documents were fair and accurate. The brothers did not make representations to the asset valuer under cl 2.8(b).

[9]

Submissions

The plaintiff submitted that the parties agreed that the net assets should be determined on the basis of market value rather than cost less depreciation. It was inevitable that the net assets calculation would need to include an estimate of the CGT payable on sale of the properties. By choosing to use the market value of the properties, the parties chose to attribute to the entities a value based on what could be obtained if that real estate was sold in a hypothetical sale at the material date. It followed that the realisable value of the real estate (and the net assets as a whole) would be overstated if that assessment excluded liabilities that would be incurred during or because of that hypothetical sale, such as a CGT liability. Where a balance sheet values assets at estimated realisable value, there is a deduction for "CGT on sale of assets": W Lonergan, The Valuation of Businesses, Shares and Other Equity (4th ed, 2003, Allen & Unwin) at 101. Mr Lonergan's text is authoritative, referred to by Black J as "a well-known Australian text on valuation" (Re Global Mortgage Equity Corporation Pty Ltd (2013) 97 ACSR 30 at 48, [61]) and relied upon in: Re Estate of Boian (2014) 17 BPR 33,005 at [39] (Young AJA); Pancontinental Mining Ltd v Goldfields Ltd (1995) 16 ACSR 463 at 470 (Tamberlin J); and, Crystal Auburn Pty Ltd v IL Wollermann Pty Ltd [2004] FCA 821 at [105] (Goldberg J).
The defendant submitted that Ernst & Young was directed to calculate the "net assets" of the Trust and Pengie, not the market value of those entities: cll 2.6(a), 2.7(a). The "net assets" of the trust and Pengie were total assets less total liabilities. "Net assets" was not the same as market value. Market value could be understood as the amount a willing but not anxious buyer would be prepared to pay a willing but not anxious seller to purchase the asset in an arm's length transaction. In that sense, the market value of an entity may include an assessment of factors that goes well beyond the net assets of an entity.

[10]

Principles

The learned authors, Doug Jones and Janet Walker, in Commercial Arbitration in Australia under the Model Law (3rd ed, 2022, Lawbook Co) describe expert determination at [1.420]: (emphasis added) "Expert determination involves submitting a dispute, pursuant to a contractual dispute resolution provision, to a neutral expert for final and binding determination. The parties choose an expert with specialist knowledge in the field. … The contractual provision establishes the scope of the expert's authority and may set out certain procedural matters, such as whether the expert may receive and consider submissions from the parties in its determination … expert determination is not a step on the way to arbitration or litigation, but rather is intended to replace all further dispute resolution processes by making a final and binding determination on the dispute at hand."
Whilst the Deed does not use the words "expert determination", or even the word "expert", the features of cll 2.6 to 2.8 are encapsulated by this passage. Consistently with this, Mr Mullins was asked for a fee proposal "as the single expert" to determine net asset value. The letter of engagement noted that Ernst & Young was retained to perform "independent expert services" in accordance with the Deed. In his reports, Mr Mullins noted that he had been jointly appointed as a single expert under the Deed, to determine net assets: para 6. The parties proceeded on this basis in their submissions to the Court.
Where the parties have entrusted the power of decision to an expert, "the extent of the expert's jurisdiction depends on the terms of the contract between the parties": Clive Freedman and James Farrell, Kendall on Expert Determination (5th ed, 2015, Thomson Reuters) at 11.6-1, p 245. An expert determination is only binding if the expert performed the task stipulated by the contract. In Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314, McHugh JA explained at 335-336: (emphasis added) "By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision. … as between the parties … the valuation can stand even though it was made negligently. … but a valuation which is the result of the mistake in application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of the contract? … The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract."
The rationale for this approach, voiced in the context of valuations, was explained by Giles JA in Kanivah Holdings Pty Ltd v Holdsworth Properties Pty Ltd [2002] NSWCA 180 at [74]: "There is good reason for an expert valuation clause to operate in this way. There is not necessarily one correct valuation answer, and there is certainly likely to be room for dispute. This is what the parties to the contract seek to avoid, agreeing to rely on the honest and impartial decision of the valuer but also agreeing that they will be bound even if the valuer makes a mistake in doing what the contract says shall be done."
In Holt v Cox (1997) 23 ACSR 590, Mason P noted that McHugh JA, in Legal & General, was not propounding the view that a valuation will stand regardless of error; the issue is whether the valuation was in accordance with the parties' contract: at 597. If it is, then the fact that the valuation contains a factual error or considers matters that should not have been taken into account does not mean that the result is outside what the contract contemplated would be within the realm of determination by the valuer: at 597. Similarly, in Heart Research Institute Ltd v Psiron Ltd [2002] NSWSC 646, Einstein J noted, "the seminal question remains whether or not the Expert has acted outside the scope of the agreement which appointed him": at [23].
In AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173, Nettle JA (with whom Maxwell P and Bongiorno AJA agreed) elaborated at [52]: "An expert appointed under contract has an area within which the contract contemplates that he or she may make mistakes without relevant consequence. … [However] those appointed under contracts to make determinations may make errors which are beyond the area of tolerance which it is to be supposed the contract had in view."
Nettle JA drew a distinction between "an error in the exercise of a judgment, opinion or discretion entrusted to an expert, and an error which involves objective facts or a mere mechanical or arithmetical exercise. Subject to the contract in question, it is easier to suppose that parties to a contract contemplate that an error of the former kind be beyond the realm of review than it is to think that they intend to be fixed with errors of objective fact or in processes of mechanical calculation": at [53]. The question in each case is to be determined objectively from the terms of the contract, bearing in mind the context in which the contract was created: at [54].
Similarly, in Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd [2015] NSWCA 275, Bathurst CJ stated at [74]-[75]: "The question of whether the [expert] determination is open to review rather depends on whether or not the expert has carried out the task which he or she was contractually required to undertake … If the expert in fact carried out that task, the fact that he made errors or took irrelevant matters into account would not render the determination challengeable. On the other hand, if the expert had not performed the task contractually conferred on him or her, but rather performed some different task, or carried out his or her task in a way not within the contractual contemplation of the parties, objectively ascertained, then the determination will be liable to be set aside."
The expert may have to form a view on the construction of the contract in order to perform their task. In that event, the question is also whether the parties agreed to be bound by the expert's construction of the contract: Australian Vintage v Belvino at [78], [81]. In that case, the expert had to consider three matters which were "all matters of judgment and were peculiarly within the qualification of the expert" and then to apply these matters to a formula, "By contrast, the construction of the formula was an objective matter outside of the expertise of such a person": at [84]. Whilst the expert needed to make a decision as to the manner in which the formula operated, it was unlikely that the parties intended to bind themselves to the expert's determination on that issue, nor did the fact that the decision was said to be final and binding compel a contrary conclusion: [81], [84]-[85]. See likewise Strike Australia Pty Ltd v Data Base Corporate Pty Ltd [2019] NSWCA 205 at [49] (Basten JA) and [140]-[145] (Ward JA), where a valuer mis-construed the contract; the parties were not bound by the valuer's construction of the contract, nor by the expert determination.
In considering whether the expert performed the task stipulated by the contract, the expert's reasons may disclose that their determination was not in accordance with the contract such that it is not binding: Shoalhaven City Council v Firedam Civil Engineering Pty Ltd [2011] HCA 38 at [27]. The Court may have regard to further correspondence issued by the expert after delivering their determination: Homepace Ltd v Sita South East Ltd [2008] EWCA Civ 1 at [33]. In that case, a party challenged the validity of an expert determination by writing to the expert three times, to which the expert responded on each occasion. Lloyd LJ observed at [36]: "[the expert] need not have responded to the requests for clarification … However, since he did so, and thereby made clear the basis on which he had proceeded, it seems to me that the court must look at his explanations when considering what was the reasoning which led him to issue his certificate, and whether it was prepared on the correct basis."
Homepace was followed in Epping Hotels Pty Ltd v Serene Hotels Pty Ltd [2015] VSC 104, where a party sought clarification of an expert determination, and the expert provided a supplementary report amplifying their reasons. Croft J considered that both reports should be considered as forming part of the expert's reasons for determination: at [92].

[11]

Consideration

The Deed is a commercial contract. Clause 1.2(k) of the Deed provides that the contra proferentem rule does not apply. The relevant principles of construction are notorious, recently repeated in Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6 at [27], quoting Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544 at [16] (per Kiefel, Bell and Gordon JJ): "It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it."
The quality of drafting may also be taken into account when giving a businesslike construction to a contract: Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16 at [14] (Moshinsky, Derrington and Colvin JJ). This may be apposite where the Deed was signed at the conclusion of a mediation. The Deed contained some obvious errors, where cl 2.5 had been 'copied and pasted' to cl 2.8 but not all consequential amendments had been made. (The parties agreed that the reference to a property valuer in cl 2.8(g) should be a reference to the asset valuer.) Nonetheless, the Court is entitled to approach the task of construction on the assumption that the parties intended to produce a commercial result, construing the contract so as to avoid making "commercial nonsense or working commercial inconvenience": Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35] (per French CJ, Hayne, Crennan and Kiefel JJ); see likewise Lepcanfin Pty Ltd v Lepfin Pty Ltd [2020] NSWCA 155 at [78]-[94] by Bell P (Payne and McCallum JJA agreeing) in respect of construing dispute resolution clauses.
Post-contractual conduct may also indicate what was important or essential to the transaction and indicate the parties' contractual intention: Queensland Phosphate Pty Ltd v Korda and Shepard (as joint and several liquidators of Legend International Holdings Inc (in liq)) [2017] VSCA 269 at [37] (per Tate and Beach JJA and Sifris AJA). Post-contractual conduct may also amount to an admission against interest as to the terms of the contract: JR Consulting & Drafting Pty Ltd v Cummings (2016) 239 ALR 625; [2016] FCAFC 20 at 637, [54] (per Bennett, Greenwood and Besanko JJ).
Looking at the commercial context, the brothers appear to have been experienced property investors and businesspeople who were legally represented. In parting ways, the Deed is focussed on achieving a buy-out price which is fair to both brothers, favouring neither and ascertained by independent, external experts. Where the main assets of the corporate entities and trusts were commercial property, and where the recording of those assets in the financial statements bore no resemblance to market value (given that they were recorded at cost less depreciation), the steps set out in the Deed were directed to updating the value of those assets to present time so that the asset valuer could then determine the buy-out price.
Looking at the two 'rounds' of valuations in the Deed broadly, there appears to have been some issue between the brothers as to capital works and maintenance on the commercial properties, such that these apparently contentious items were highlighted for the property valuer's consideration and to be removed from the calculation of liabilities by the asset valuer. Beyond this, in the context of disputation, independent experts were jointly appointed to ascertain the objective value for the properties and assets. This suggests market value, being what a willing but not anxious purchaser would offer to induce a not unwilling vendor to sell the asset: Spencer v Commonwealth of Australia (1907) 5 CLR 418 at 432. Of course, an asset may have special value above market value, arising "from some attribute of the land, some use made or to be made of it or advantage derived or to be derived from it, which is peculiar to the claimant and would not exist in the case of the abstract hypothetical purchaser": Arkaba Holdings Ltd v Commissioner of Highways [1970] SASR 94 at 100 (Bray CJ). There is no suggestion in the Deed that the properties or assets would be valued at special value. Consistently with this, the brothers' joint instructions were devoid of information on that subject, providing minimal and purely objective details.
But the language used by cll 2.6(a) and 2.7(a) is not "market value" or "special value" but "net assets". "Net assets" is not defined but is, presumably, assets less liabilities: Repatriation Commission v Harrison (1997) 24 ACSR 711 at 718 (Tamberlin J). Further, while sub-cll 2.6(a)(i) and (ii) and cl 2.7(a)(i) specifically refer to "market value", cll 2.6(a) and cl 2.7(a) do not. That said, if the assets and liabilities are both at market value, then there may be no relevant difference between "net assets" and "market value" in any event.
Turning to cl 2.6, it will be recalled that the Bondi Junction property and the Harris Park property were held by the Yan Unit Trust (albeit the Harris Farm property was held via the Yan Unit Sub-trust). Clause 2.6 made plain that the same methodology was to be used to assess the value of the trust and sub-trust: cl 2.6(a)(ii). Each of cl 2.6 and 2.7 then set out the task allotted to the valuer, being to value "the net assets" of the Yan Unit Trust or Pengie. In doing so, the valuer was to start with the material date, being "as identified by the … Property Valuer". Both assets and liabilities were to be ascertained as at that date, for the purpose of determining the net assets of the trust, sub-trust and company.
Looking then at the assets of the trust, sub-trust and company, the valuer was to have regard to "the market value of the assets at the material date … including the cash at bank or equivalent". Should the financial statements record some assets at historical, rather than market value, it would be necessary for the asset valuer to make adjustments to the assets to ensure that the market value of all assets at the material date was to hand. This is supported by the fact that the asset valuation was to take place after the "Property Valuations" had been obtained under cll 2.4 and 2.5 and the material date was the date of the property valuation. Obviously enough, the market values as assessed by the property valuer were to be utilised by the asset valuer when determining the market value of the commercial properties.
Looking then at the liabilities of the trust, sub-trust and company, the valuer was to have regard to "the liabilities (as at the material date …)" and to exclude some liabilities, being "costs not yet incurred of future maintenance, rectification and/or refurbishment of the buildings". Presumably, excluding the specified liabilities would involve some review and apportionment of current and contingent liabilities for building maintenance and improvement. Beyond excluding the specified liabilities, the valuer was otherwise to have regard to the liabilities as at the material date.
There was no stipulation that the liabilities be valued at "market value", "special value" or any other basis. Where the Deed proposed that the asset valuer would be provided with property valuations, and it must have been reasonably supposed at the date of the Deed that the market values of the commercial properties would differ wildly from the balance sheet values, the brothers left it to the valuer's professional judgement to factor in any consequential liabilities associated with the present day values of those properties. The fact that a contingent liability in respect of CGT was not recorded in the balance sheet did not mean that the valuer could not take it into account in their deliberations.
Consistently with this, a contingent liability in respect of CGT was immediately apparent to the valuer as "a matter of some significance": see [35]. The valuer sought instructions from the brothers on any plans to sell the commercial properties, which may affect whether this contingent liability should be taken into account at all, or perhaps discounted to present value from the expected sale date. The brothers provided joint instructions, requesting that the expert "assessed the CGT liability matter as part of the valuation process": see [37].
The brothers were entitled to make "representations to the Nominated Asset Valuer for the purposes of determining the Yan Unit Valuation and the Pengie Valuation": cl 2.8(b). The valuer was required to "consider and give such weight as it deems appropriate" to all representations made by the parties: cl 2.8(c). The procedure outlined in cl 2.8 of the Deed also enabled the brothers to make "any further submission to the Nominated Asset Valuer for its consideration" prior to finalising the valuations: cl 2.8(d). There were two opportunities to seek to persuade the valuer as to how they ought go about their task. The valuer was required to have regard to any representations or submissions made by the brothers and to apply their professional judgment, determining the net assets "based upon" the assets and liabilities.
Each of cl 2.6 and 2.7 provided that, "based upon" the assets and liabilities, the valuer was "to determine" the "net assets" of the trust, sub-trust or company. This task, as phrased, was not simply mechanical or arithmetic but involved a determination requiring the asset valuer to form a judgement having regard to the items of information identified in cl 2.6 and 2.7. The fact that the third sub-heading of cl 2 is headed "Asset Valuations" and that Ernst & Young is defined as the "Nominated Asset Valuer" makes plain that the expert's task was to perform a valuation and not merely to insert the property valuations obtained from Cushman & Wakefield into the balance sheets and then tallying up the balance sheet items. Beyond this, cll 2.6 and 2.7 did not specify the basis on which the asset valuer was to value the "net assets", presumably leaving this to the parties' representations and submissions to the valuer and the valuer's professional judgement, as had been done with the property valuers. The Deed did not require that "net assets" would, in the result, reflect "market value" or "special value" or some other consideration.
Having determined the "net assets" of the trust, sub-trust and company, the asset valuer was then to apply a simple formula to determine the value of the units and shares, "calculated by reference to the net assets … proportionate to [the defendant's] interest" in the trust or company. The scope of this task was to apply a simple formula.

[13]

Submissions to asset valuer

In accordance with cl 2.8(d) of the Deed, the parties now had 14 days to make any further submissions to Mr Mullins for his consideration in relation to the draft report, before Mr Mullins was required to finalise the Asset Valuations.
On 10 April 2024, the brothers provided their submissions in respect of the draft valuation. In particular, the defendant submitted that the approach taken by Mr Mullins to the 'embedded' CGT liability of the Yan Unit Trust was not appropriate. So far as the Yan Unit Trust was concerned, Mr Mullins had assumed that the trustee of the Yan Unit Trust would be liable for CGT rather than the beneficiaries of the trust. This assumption was disputed where the trustee's practice was to annually distribute the net income of the trust "which would include any crystallised capital gains [resulting] in the passing of the capital gains tax liability to the Unit Holders" and accounted for by the unit holders having regard to their own tax affairs. The defendant submitted that, if Mr Mullins proceeded on the basis of his erroneous assumption, then the plaintiff would receive a windfall, having received a discount or reduction to account for the 'embedded' CGT liability but where the trustee was not and would not reasonably expect to be liable for the CGT liability. The defendant submitted that the net asset value of the Yan Unit Trust was understated by some $14.6 million and his interest in the Yan Unit Trust was understated by some $7.3 million.
In relation to Pengie, the defendant submitted that the CGT liability failed to take account of existing tax losses. As a consequence, the defendant's interest in Pengie was understated by some $160,000. To the extent that the 'embedded' CGT was accounted for as a discount or reduction in the value of the shares, it was said to be appropriate to account for the value of the benefit arising from tax credits as a consequence of paying the associated tax liability. It was said to be reasonable to conclude that Pengie would make available to shareholders the franking credits available in full.

[14]

First report

On 30 April 2024, Mr Mullins provided "my final report", which he signed. The final report followed the draft report but with some changes. Mr Mullins explained that he had been assisted by members of Ernst & Young's tax team and had relied on their technical support "in the identification of issues relevant to, and the calculation of, capital gains tax on the property assets owned by the entities that are the object of the valuation." The internal memorandum from the Ernst & Young tax team was again attached, calculating the CGT payable on the hypothetical sale of the commercial properties on the material date.
Mr Mullins identified his task as determining the net assets of the Yan Unit Trust and Pengie and, having done so, to determine the value of the interest held by the defendant in each. Mr Mullins considered that the differential ownership between the brothers in Yangdo had no implications for determining value. Mr Mullins then summarised the task described in cll 2.6 and 2.7 in more detail, being "to assess the market value of the net assets at the 'material date'": para 10(a), 11(a).
Mr Mullins summarised the submissions made by the brothers. Mr Mullins noted that he had prepared his report in accordance with "APES 215 - Forensic Accounting" and "APES 225 - Valuation Services" as issued by Chartered Accountants Australia and New Zealand.
Part 9 set out Mr Mullins' methodology, which was unchanged from the draft report. Mr Mullins advised that, in valuing the Yan Unit Trust and Pengie, he had analysed the balance sheets of each entity and made adjustments to the reported value of assets and liabilities "so that these values (and, therefore, the value of net assets) reflect market value": para 26. The adoption of a net assets based valuation of each of the Yan Unit Trust and Pengie was considered appropriate, where the primary assets of these entities were property assets. The market value of the property assets was drawn from the valuations prepared by Cushman & Wakefield. Mr Mullins set out the balance sheets of the Yan Unit Trust and Pengie "along with the market value of assets and liabilities. The net asset value of each of the Yan Unit Trust and Pengie, therefore, reflects … [t]he market value of assets; less … [t]he market value of liabilities": para 28. Mr Mullins continued at paras 29 to 30: (emphasis added) "29 Having assessed the market value of the net assets of the Yan Unit Trust and Pengie I have considered any taxation implications associated with the underlying assets; that is, the property assets that form the bulk of the value of the Yan Unit Trust and Pengie. Having done so, I have identified that the taxation implications associated with undertaking an assessment of the value of the net assets includes consideration of any capital gains tax liability that is 'embedded' in the property assets. 30 I have considered whether there is any capital gains tax liability because if one party was to acquire the interests of another in the entity that owned the assets based on a valuation that did not account for any capital gains tax liability that was embedded in the asset that was being acquired, then: a. The acquiring party would be acquiring an asset with a tax liability without being 'compensated' for this liability; and b. The selling party would be selling an asset that included a tax liability without having to pay the liability, being a liability the selling party would otherwise bear upon the distribution of value from the asset owning entity (in this case, being the Yan Unit Trust and Pengie), which would result in a misstatement of value."
To clarify the position, Mr Mullins stated at para 32: "For the avoidance of doubt, taxation (and, specifically, capital gains tax) has been considered in respect of the assets owned by Yangdo, Yangdo Service and Pengie, being the asset-owning entities. Any taxation implications associated with, for instance, the acquisition of the other parties interest (such as in relation to land duty) is outside the scope of this report as it does not relate to the market value of the assets owned by Yangdo, Yangdo Service and Pengie."
Mr Mullins advised that he had adopted the same approach when valuing the defendant's interests in the Yan Unit Trust or Pengie, being equal to a proportionate share "of the market value of net assets of the Yan Unit Trust and Pengie" and without any discount for lack of control: para 34(a).
Part 10 set out Mr Mullins' consideration of the materials. Mr Mullins took the property values assessed by Cushman & Wakefield as "the starting point in my assessment of the market value of the property assets": para 38. He then considered whether there was any CGT liability associated with the property assets: para 40. Mr Mullins considered that, to the extent that any CGT liability arose in connection with the property assets, "then it was necessary to 'account' for this so as to ensure there was no misstatement in the assessment of the value of the interests in the Yan Unit Trust and Pengie": para 41.
Mr Mullins noted that an obligation to pay CGT arose on the occurrence of 'Capital Gains Tax Event', which included a sale of the asset. Whilst these properties were not currently for sale, Mr Mullins understood that, following the intended acquisition by the plaintiff from the defendant, there was no certainty as to whether the assets would be sold or retained, or for what period of time the assets would be retained if in fact they were retained following the acquisition. In light of this, there was no apparent 'Capital Gains Tax Event' that would result in the crystallisation of a CGT liability.
Mr Mullins further noted that the plaintiff's acquisition of the defendant's interest in the Yan Unit Trust and Pengie did not constitute a 'Capital Gains Tax Event', as the underlying property assets did not change ownership; there was only a change in the ownership of the entities that owned those properties. As such, the process contemplated by the Deed would not, of itself, result in a CGT liability arising in respect of the property assets. That said, as at the valuation date of 18 December 2023, and having regard to the market value of the properties as assessed by Cushman & Wakefield, and the cost base of the property assets, a CGT liability "is 'embedded' in each of the property assets". Further, at paras 48 and 49: "48 The capital gains tax liability is 'embedded' in each of the property assets because the acquirer of the interest in the 'entities' that own the property assets is acquiring an interest in entities that own assets to which a capital gains tax liability exists. In this regard, the capital gains tax liability could be considered to be a 'contingent liability', where the contingency relates to when the property assets is ultimately sold. 49 Whilst there is no present obligation to pay the liability, and whilst the amount of the capital gains tax liability will change (increasing or decreasing based on the value that is ultimately obtained from the sale of the property assets), there remains a liability in respect of the property assets."
Mr Mullins considered that it was necessary to account for the CGT liability that was 'embedded' in the property assets "because if this was not done … [t]he acquiring party would be acquiring an asset with a tax liability without being 'compensated' for this liability; and [t]he selling party would be selling an asset that included a tax liability without having to pay the liability, which would result in a misstatement of value; the selling party receiving a 'pre-tax' value for their proportionate share of the assets in circumstances where, when properly considered, the selling party would otherwise only obtain the 'post-tax' value for their proportionate share of the assets: para 50. At para 51: "Expressed another way, regardless of what decisions the acquirer of the interests in the Yan Unit Trust and Pengie ultimately makes regarding ownership of the property assets, the seller of the interests in Yan Unit Trust and Pengie receives their share of the underlying value in the Yan Unit Trust and Pengie by receiving a price that is equal to the value after accounting for the (embedded) capital gains tax liability in the property assets that are owned by Yangdo, Yangdo Service and Pengie and which form the bulk of the underlying value of the Yan Unit Trust and Pengie."
Mr Mullins set out revised calculations of CGT, apparently having regard to the brothers' submissions in respect of the precise calculation. He then returned to the defendant's submission, at paras 59 to 60: (emphasis added) "59 To paraphrase, [the defendant's] position is that the acquiring party would receive a windfall because they would receive the benefit of the discount for the embedded capital gains tax liability and, at the same time, the cost base of the units they acquired would reflect the value of the property acquired, meaning that they would not ultimately incur the embedded capital gains tax liability on the units acquired (as the acquiring party would be acquiring the units from the selling party at a value that was equal to market value (as informed by the property valuations)). 60 I agree with [the defendant's] submission that the better approach in relation to the treatment of the embedded capital gains tax liability in respect of the property assets held by the Yan Unit Trust is to ignore this liability for the purpose of the assessment of the value of the Yan Unit Trust, and of Penlop's 50% interest in the Yan Unit Trust on the basis that [the defendant] will incur the capital gains tax liability when the units in the Yan Unit Trust are sold."
Mr Mullins also agreed with the defendant's submission on the 'embedded' CGT liability of Pengie: "62. … the rationale behind making an adjustment for the embedded capital gains tax liability is to avoid a misstatement in value; with the acquirer being 'compensated' for capital gains tax that they will ultimately pay upon the sale of the asset (where the 'compensation' is calculated by reference to the embedded capital gains tax liability at the time of the acquisition from the selling party). 63. Upon the ultimate sale of the underlying property asset by Pengie, capital gains tax will be paid, and franking credits will be generated in respect of the tax paid. Following the acquisition of the interests of the selling party by the acquiring party, the acquiring party is entitled to the benefit of franking credits in respect of all of the capital gains tax paid including, relevantly, the portion that is referrable to the interest that had previously been acquired from the selling party. 64. To the extent, therefore, that the acquiring party was 'compensated' for the embedded capital gains tax liability in the determination of the market value of the net assets of Pengie (in the form of paying a price for those assets that accounted for the embedded capital gains tax liability) whilst also receiving a benefit in respect of franking credits generated upon the payment of capital gains tax liability, the acquiring party would receive 'double compensation', being: a. A reduction in the amount paid to acquire the selling parties interest in Pengie; and b. The benefit of franking credits that will be generated by Pengie on the ultimate sale of the property asset and payment of capital gains tax. The franking credits generated from the sale of the property asset enabling the payment of a franked dividend to the shareholder."
Mr Mullins set out a simplified example. If the Ashfield property sold for $200 and generated CGT of $30, then the shareholder would receive a franking credit for that amount. Based on this example, Mr Mullins considered that the franking credits generated from the payment of CGT adequately compensated the plaintiff for the embedded CGT liability, "As such, it is not necessary to reduce the valuation of the interest acquired from the selling party to account for the embedded capital gains tax liability - to do so would result in the acquiring party receiving 'double compensation'": para 67. Thus, "In determining the market value of the net assets of Pengie, I do not adjust for the embedded capital gains tax liability": para 68.
Mr Mullins concluded that, while there remained an 'embedded' CGT liability associated with the properties owned by the Yan Unit Trust and Pengie, ("being an embedded capital gains tax liability that does have an impact on the net assets of the Yan Unit Trust and Pengie), in light of the structure of the proposed settlement", namely that the plaintiff would buy the units in the Yan Unit Trust and the shares in Pengie from the defendant, then the CGT would be paid by the defendant upon the sale of his units in the Yan Unit Trust and the capital gain would generate franking credits in Pengie. This would enable the plaintiff to extract value from Pengie in a tax-effective manner by way of payment of a fully franked dividend, thereby offsetting the CGT. As such, there was no need to account for the 'embedded' CGT liability as the plaintiff, in paying an amount equal to the market value of the properties, would not suffer from a misstatement in value: para 69. Mr Mullins' revised approach was to disregard the 'embedded' CGT liability "when determining the value of the Yan Unit Trust and Pengie". In the result, the plaintiff was to pay the defendant $48,844,420 for his interest in the Yang Unit Trust and Pengie.

[15]

Second report

Under the Deed, the brothers now had five business days to notify any arithmetic, mechanical or manifest error, following which the asset valuation would be binding on the parties: cl 2.8(g). On 2 May 2024, of his own volition and without having heard further from the parties, Mr Mullins emailed, "I now realise that I have made an error in the approach adopted. Please disregard the 30 April report. I will re-issue my report, along with an explanation as to what has caused the change, in the coming days." The next morning, on 3 May 2024, Mr Mullins emailed again, attaching a revised report reflecting his opinion on "the market value of the net assets of the Yan Unit Trust and Pengie, and the interests therein". Mr Mullins explained in his cover email: "The reason I withdrew my report dated 30 April 2024 is because, on reflection … I realised that the approach adopted in my 30 April report was incorrect, failing to reflect an assessment of market value and instead introducing concepts of special value. This is addressed in detail in the revised report …"
Mr Mullins reverted to the views expressed in the draft report. In the methodology section, Mr Mullins added after para 31 of the first report (extracted at [77]): (emphasis in original) "32. … given that the assessment that is being undertaken is of market value, the assessment is one that is concerned with the position of hypothetical parties, and is not one which has regard to the specific circumstances of either the acquiring party or the selling party. In that regard, if the assessment was to have regard [to] matters that were specific to the particular parties this would introduce considerations relevant to special value, not market value."
Mr Mullins repeated the opinions expressed in respect of 'embedded' CGT and the need to take it into account, to avoid a misstatement in the assessment of market value. Mr Mullins returned to the defendant's submissions, noting that he had agreed with those submissions in his report dated 30 April 2024. He continued at paras 60-63: (emphasis in original) "60 … Since providing that report I have given further consideration to the principles of market value and now believe that report to have resulted in a mischaracterisation of the analysis that was required to be undertaken, improperly focusing on the position of the parties (and my assumptions regarding the structure of any transaction) rather than on the market value of the Yan Unit Trust, and the market value of the net assets that comprise the Yan Unit Trust. 61 When properly considered, the 'willing but not anxious buyer' of an interest in the Yan Unit Trust would not pay an amount for that interest where, upon acquiring that interest, they were acquiring an asset with an embedded capital gains tax liability without discounting the amount they were willing to pay reflecting that embedded capital gains tax liability. 62 The tax consequences for the individual unit holders are a matter for them and are not matters that are relevant to (or can be considered in connection with) an assessment of market value. Consideration of the specific circumstances of the particular parties involves matters relevant to special value, not market value. The focus of the analysis is on the market value of the net assets of the Yan Unit Trust and on matters that are relevant to an assessment of market value. 63 When considered in this context, I consider that the correct approach is to assess the market value of the Yan Unit Trust (being the amount that the 'willing but not anxious buyer' would be willing to pay to acquire the interest in the Yan Unit Trust) is to have regard to, and therefore deduct, the embedded capital gains tax liability; noting, of course, that the embedded capital gains tax liability is a liability and, as such, should be deducted when undertaking an assessment of net assets (and the market value of net assets)."
As such, Mr Mullins expressed his disagreement with the defendant. Rather, he deducted the 'embedded' CGT liability "when assessing the market value of the net assets of the Yan Unit Trust". Mr Mullins also now disagreed with the defendant's submissions in respect of franking credits of Pengie, "upon further consideration of the object of the exercise, being the assessment of the market value of Pengie": para 67. A 'willing but not anxious buyer' of Pengie would not be willing to pay a price for the net assets of the company that did not account for its liabilities. Mr Mullins deducted the embedded CGT liability "when assessing the market value of the net assets of Pengie".
Mr Mullins concluded that the 'willing but not anxious buyer' would not be willing to pay an amount to acquire an interest in either the Yan Unit Trust or Pengie without receiving a discount for the embedded CGT liability; "As such, I consider that it is necessary to account for the embedded capital gains tax liability associated with the property assets of each of the Yan Unit Trust and Pengie as such amounts, being liabilities, necessarily affect an assessment of the market value of the net assets of each of the Yan Unit Trust and Pengie": para 70. He deducted the embedded CGT liability when determining "the market value of the Yan Unit Trust and Pengie". In the result, the plaintiff would be required to pay $39,012,037 to the defendant for his interest in the Yan Unit Trust and Pengie.

[17]

Submissions

The plaintiff submitted that the defendant's submissions to Ernst & Young in respect of the embedded CGT in the Yan Unit Trust did not have anything to do with the assessment of the net assets of the trust and conflated the CGT payable on different units and CGT payable on the underlying property assets. At the time that the units are sold or redeemed, the value that the unitholder will receive will reflect the liability for CGT that the trustee has paid, or will pay, upon the sale of relevant real property.
The plaintiff submitted that historical distributions of income by the Yan Unit Trust had nothing to do with calculating the market value of the assets, less estimated liabilities, at the material date. Even if the Yan Unit Trust distributed income (including realised capital gains) to unitholders each year, which was taxed in their hands, the defendant's suggestion was that the CGT was never 'really' incurred by the Yan Unit Trust and so ought not be taken into account in calculating the trust's net assets. On that logic, it was said that the capital gains made by the Yan Unit Trust each year was never 'really' enjoyed by the Yan Unit Trust either, and so none of the assets of the Yan Unit Trust should be taken into account, giving a value of $0. Obviously this was not the correct approach and not what the parties intended.
The plaintiff submitted that it was not correct to suggest that he would enjoy a windfall. While it was true that the proposed transaction did not immediately result in a CGT liability, nor did the proposed transaction immediately result in the trustee realising the value of the real property in question. Thus, there was no windfall if the unrealised CGT liability was taken into account. On the contrary, there would be a windfall (and indeed, a material misstatement of the net asset value of the Yan Unit Trust) if the estimated CGT liability was excluded, because the accounts would in effect be pretending that the trustee could realise the market value of CGT assets without paying CGT, which was not correct.
As to Pengie, the plaintiff argued that the defendant's submissions to Ernst & Young made no sense and should not have been accepted by the asset valuer. A franking credit issued to a shareholder of Pengie in respect of dividends paid by Pengie to that shareholder was not a liability or asset of Pengie and should not be accounted for in any determination of the net value of Pengie assets. Further, if Pengie made a capital gain and pays CGT at 30% on that gain, and then pays a shareholder a fully franked dividend, then the shareholder would receive a franking credit. The result was that the capital gain was not taxed twice, once in the hands of Pengie, and again in the hands of the shareholder. But it was still taxed once. The shareholder will always bear the economic cost of CGT payable in respect of a capital gain that is passed on as a dividend, either in the hands of the company, or in the shareholder's own hands; the franking credits just ensure that the same capital gain is not taxed twice.
The plaintiff submitted that Mr McMullin adopted this fallacious reasoning. The worked example was wrong as a matter of principle - assessing the issue at the shareholder level was not part of an assessment of net assets - and wrong in its assessment of the net effect of shareholders. The example failed to include that the shareholders (themselves being companies with a 30% tax rate) would be subject to a tax liability on their dividend that was equal to the franking credits on CGT paid, such that the end result of the value obtained by shareholders would be $170, not $200. Thus, the buyer of shares in Pengie would, as stated in the draft report, approach the matter on the basis that, insofar as the shares were being valued in part on the basis of the market value of real property owned by Pengie in a hypothetical sale, that market value would need to account for the CGT liability payable by Pengie upon realisation of that market value. The plaintiff submitted that the second report met the requirements of the Deed, whilst the first report did not.
The defendant submitted that the first report met the requirements of the Deed, whilst the second report did not. It was apparent from the second report that Ernst & Young saw their task as determining the "market value" of his interests in the Trust and Pengie. This led to a focus on the position of the hypothetical seller and purchaser, rather than the actual position of the plaintiff and the defendant, where the Deed contemplated that the plaintiff would purchase the relevant interests of the defendant: paras 61 and 62. This led to Ernst & Young adopting the approach it did in relation to 'embedded' CGT: para 60. Where the asset valuer was to determine the net assets of the entity, rather than the market value, this was an obvious error, effectively discounting the value of the net assets to take account of an uncrystallised future liability. Any embedded CGT was not a liability to be taken into account. The defendant submitted that the second report was not in accordance with the terms of the Deed and did not bind the parties. The error meant that the determination went "beyond the area of tolerance which it is to be supposed the contract had in view": AGL Victoria v SPI Networks.

[18]

Consideration

The question is not whether the first report was right or wrong, but whether the expert, in making any mistake, was performing the task stipulated by the contract. When considering this question, the Court may have regard to further correspondence issued by the expert after delivering their determination, as it may shed light on their reasoning and the task, in fact, undertaken. Here, Mr Mullins' emails of 2 and 3 May 2024 and the second report may indicate whether the expert undertook the task entrusted to him by the contract, or some different task, in the first report.
There is a variability of language in the first and second reports, which provided fertile ground for the brothers' opposing senior counsel. However, these submissions 'cut both ways' as any infelicities in expression were generally repeated in both reports. Mr Mullins is a valuer, not a lawyer. The question remains whether he did the task assigned by the Deed.
There is a problem with the first report, which indicates that Mr Mullins did not carry out the task which he was contractually required to undertake. Mr Mullins stated his task at the outset as "assess[ing] the market value of the net assets at the 'material date'". For the reasons earlier given, "net assets" may be the same as market value, but it does not have to be. The Deed called for the former. Mr Mullins repeatedly stated that he was required to provide the latter.
Mr Mullins was not constrained nor required to assess the market value of the net assets. Whilst he was required to assess the market value of the assets, he was not so required in respect of the liabilities and was further required to exercise his judgement to determine the net assets based on both the market value of the assets and the value of the liabilities: see [60]-[67].
Nor do I consider that the parties agreed to be bound by the expert's construction of the contract. Whilst the parties accepted a binding determination of value, based on the valuer's judgment and expertise, the Deed imposed a structure and some limitations on the exercise of that judgement. If the valuer misunderstood that structure or those limitations, then the brothers did not agree to be bound by the value assessed on the basis of that misunderstanding. Here, the expert's misunderstanding imposed restrictions on his approach to the assessment of value by which he was not, in fact, constrained.
Whether Mr Mullins would have arrived at a different figure for the "net assets" of the Yan Unit Trust and Pengie, as opposed to the "market value of the net assets" of the Yan Unit Trust and Pengie, is unknowable. Nor is it the business of the Court to weigh the importance of a stipulation in a contract; if the requirement to use a specified method is contractual, that is the end of the matter, whether or not the Court thinks it was important or would have made a difference: Veba Oil Supply and Trading GmbH v Petrotrade inc [2001] 2 Lloyd's Rep 731 at 734 (per Morison J). The brothers did not agree to be bound by an expert determination other than as described in the Deed. In the result, the first report is not binding on the parties.

[19]

Can an expert correct their determination?

Where the source of the expert's power is contractual, that power comes to an end when the expert has performed their function; they become functus officio (meaning, having discharged their function). What is meant by functus officio was explained by Jagot and Beech-Jones JJ in CBI Constructors Pty Ltd v Chevron Australia Pty Ltd [2024] HCA 28 at [72]: (footnotes omitted) "Functus officio is not a substantive legal doctrine or theory. Instead, it simply 'describes a conclusion [about] the legal authority of a person' to the effect that 'an exercise of power, or a performance of a function or duty, is complete and the person has no power left to exercise, or no function or duty left to perform'. A conclusion that a body is functus officio must be justified, rather than asserted. Such a conclusion can only be 'reached by close examination of the particular circumstances, and the nature of the power, function or duty in question'. This is so regardless of whether a public or private power or duty is exercised or performed …"
An expert is entitled to change their mind up to the point in time at which they send their determination to the parties; the expert is then functus officio and their determination (as sent) becomes binding: Griffin v Wainwright [2017] EWHC 2122 (Ch) at [48] Bacon QC (sitting as a Deputy Judge of the High Court); London Borough of Camden v Thomas McInerney & Sons Ltd (1986) 9 Con LR 99 at 116 (Lewis J); AIC Ltd v ITS Testing Services (UK) Ltd [2006] EWCA Civ 1601; [2007] 1 Lloyd's Rep 555 at [338] (per Rix LJ, Nourse and Buxton LJJ agreeing).
Similarly in the context of arbitrations, in CBI Constructors Pty Ltd v Chevron Australia Pty Ltd [2024] HCA 28, Gageler CJ, Gordon, Edelman, Steward and Gleeson JJ noted, "When an award is rendered, the arbitral tribunal is not empowered to revisit the award that it has made": at [22]. In ABB Service Pty Ltd v Pyrmont Light Rail Company Ltd (2010) 77 NSWLR 321; [2010] NSWSC 831, Ward J (as the President then was) concluded that, when an arbitrator makes a valid award, they are functus officio and have no power to alter their award subject to the 'slip rule'; any alteration is a nullity: at [62], [64]. If, however, the award was itself beyond power and a nullity, then there has been no valid determination and the arbitrator is not functus officio: at [69].
As such, an expert's ability to change their determination to correct a mistake turns on whether they are functus. The learned authors of Kendall on Expert Determinations state at [12.8-7]: "Once a decision which deals with all the points requiring to be dealt with has been issued to the parties, the decision is binding on the parties and the expert is functus officio [citing AIC v ITS Testing]. He cannot amend his decision even to amend an acknowledged mistake, though there is likely to be an implied term that the expert may correct a decision so as to remove any clerical mistake or error arising from an accidental slip or omission, or to clarify or remove any ambiguity in the decision, provided that this is done within a reasonable time and without prejudicing parties other than the party requesting the correction."
In Kurc v Eyecare Pty Ltd [2004] VCAT 1139, an expert volunteered to revise their determination to correct an error, albeit prompted by a party. A valuer issued a "final and binding" rental determination under a lease. The landlord suggested that the determination was flawed and requested a meeting with the valuer. Without further communication with either party, the valuer issued a revised rental determination. Deputy President Macnamara concluded at [41]: "… in the absence of a specific contractual authorisation to revise or correct his determination, [the expert] was most likely in the same position as the arbitrator …, incapable of correcting even the most obvious error in his determination. Since the power to make expert determinations derives from a contract it is self evident that if the consent of both parties or perhaps … at the request of one party and without opposition from the other party a correction could be made."
Deputy President Macnamara found that the valuer's original determination was what he intended it to be, but he had "second thoughts" after the landlord's communique and "changed his mind": [42], [44]. The parties were unaware that the valuer intended to issue a revised determination. The revision did not fall with any 'slip rule'. The expert did not have power to 'second guess' themselves, "Such a power would be totally subversive of the intention that the rental determination be final and binding": at [46].

[24]

Submissions

The defendant submitted that the second report had a "manifest error" in taking into account 'embedded' CGT. Mr Gangemi's views were said to confirm this, where there were ways to mitigate 'embedded' CGT. Following distribution of capital gains, the Yan Unit Trust could be wound up and a capital loss claimed on the plaintiff's family trust. Or the units could be redeemed at a higher cost base, claiming a capital loss on their redemption. A different strategy could be adopted for Pengie, using the tax consolidation rules. Mr Gangemi's report was said to show that Ernst & Young's approach was unarguably incorrect. Alternatively, Ernst & Young should have discounted the embedded CGT to net present value to allow for the prospect that the plaintiff might be able to deploy tax minimisation strategies rather than deduct the entire amount.
In the alternative, the defendant submitted that the Court retained a discretion to refuse the declarations sought by the plaintiffs: John Nelson Developments Pty Ltd v Focus National Developments Pty Ltd [2010] NSWSC 150 at [205] and [300]. That course was appropriate in this case where the second report was said to contain an obvious legal error regarding the proper construction of the Deed, and where that error was significantly disadvantageous to Kam and his associated entities: John Nelson at [14]-[19]. (In reply, the plaintiff submitted that any discretion should be exercised in his favour as the first report was significantly disadvantageous to him.)
The plaintiff submitted that was no error in the second report, and certainly no manifest error. If anything, Mr Gangemi's evidence confirmed that Ernst & Young had identified the right issue, being whether there should be any deduction for estimated tax liability upon the sale of relevant assets valued at market value; his view was that Ernst & Young made an error as the estimate was wrong because the tax liability could be avoided or reduced. The alleged errors suggested by Mr Gangemi were not obvious and, if errors, are only ascertainable through detailed knowledge of State and Commonwealth taxation legislation, the application of commercial judgment and experience about the desirability and feasibility of the proposed mitigation strategies, and some amount of risk analysis about the likelihood that these proposed mitigation strategies would attract the attention of the Commissioner of Taxation. These 'mitigation strategies' involved restructures or reorganisations of the affairs of Yan Unit Trust or Pengie, or selling all the shares in Pengie. Reorganisations or restructures that might occur in the future had no relevance to the valuation of the net assets of the Yan Unit Trust or Pengie as at 18 December 2023. Mr Gangemi's views failed to have regard to the dangers of enforcement in respect of these strategies, as demonstrated in Merchant v Commissioner of Taxation [2024] FCA 498 at [342], [405]-[408] (Thawley J).

[25]

Principles

The asset valuations are binding except in the case of "manifest errors". What does this mean? In Galaxy Energy International Ltd v Eurobunker SpA [2001] 2 All ER (Comm) 912, Thomas J observed that manifest error should be construed in its commercial context, where 'manifest' meant, in ordinary language, "plain and obvious". Further, the manifest error must relate to the certificate or procedure that led to the making of the expert certificate, for example, a plain and obvious error in testing, sampling or mixing the samples, "In deciding whether there was a manifest error the court should take into account the technical knowledge that parties would have about the testing procedure": at [16(vi)]; followed in Drane v Aqualyng Holdings [2017] QSC 233 at [18] (Henry J).
In TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4, Brereton J considered the meaning of "manifest error" in a contract which made an expert determination binding absent manifest error, negligence, fraud or error of law. At [20]: "In this context, a 'manifest error' is an error presented upon the face of the Expert's determination and accompanying reasons, and does not distinguish between 'facile errors' and 'those of complexity', nor between obvious errors and less obvious errors, nor between errors of law and errors of fact (although, as errors of law are separately addressed, without any requirement that they be manifest, 'manifest error' will usually be relevant in the case of non-legal error) [Westport Insurance Corporation v Gordian Runoff Limited [2011] HCA 37; 85 ALJR 1188, [42] (French CJ, Gummow, Crennan and Bell JJ), [163] (Kiefel J)]. The key requirement is that the error be apparent on the face of the determination and reasons."
In Funtastic Ltd v Madman Film and Media Pty Ltd [2016] VSC 708, Almond J concluded that the meaning of "manifest error" was to be ascertained following established principles of contractual interpretation, including the object and context of the expert's appointment. At [53]: (footnotes omitted) "The Oxford English Dictionary defines 'manifest' as 'clear or obvious to the eye or mind'. The Macquarie Dictionary similarly defines 'manifest' as 'readily perceived by the eye or the understanding; evident; obvious; apparent; plain'. A 'manifest error' in the context of arbitral awards liable to be set aside for 'manifest error of law on the face of the award' has been variously described as an error that is 'apparent to the understanding of the reader', 'obvious rather than arguable', 'easily demonstrable without extensive investigation', 'an oversight [or] blunder so obvious as to admit no difference in opinion' or 'apparent to the judge upon a mere perusal of the reasoned award'. It is clear that an error that is 'abstruse, obscure or inconsequential' will not fall within the definition of 'manifest error'."
Given the nature of the expert's task under the contract in that case, being to provide an expeditious and cost-effective means of resolving disagreements and being conferred with "absolute discretion" under the contract, Almond J concluded that manifest error was confined to a clear and obvious error: at [54].
In 711 Hogben Pty Ltd v Tadros; Tadros v 711 Hogben Pty Ltd [2016] NSWSC 697, Stevenson J considered that "manifest error" was an oversight or blunder so obvious as to admit no difference of opinion, or a conclusion "obviously wrong" and "apparent to the judge upon a mere perusal of the reasoned award itself without the benefit of adversarial argument": at [50] (citations omitted). This summary was followed by Beech-Jones J in 711 Hogben Pty Ltd v Tadros (No 2) [2016] NSWSC 1683, who added Kirby P's observation in Natoli v Walker (1994) 217 ALR 201 that manifest error "requires swift and easy persuasion and rapid recognition of the suggested error": at [19]-[20].
In considering whether the expert determination contains a manifest error, the court may again have regard to further correspondence issued by the expert after they became functus as shedding light on their reasons and how they went about their assigned task. In Invensys Plc v Automotive Sealing Systems Ltd [2002] 1 All ER (Comm) 222 (Thomas J), an accounting expert issued their determination but was challenged by one of the parties, who advised that they did not understand the reasons for determination in a particular respect. The expert replied and provided further comments "by way of clarification of our reasoning in respect of matters which you do not appear to have understood": at [11]. The party was not satisfied and wrote again, and the expert responded briefly. Thomas J considered that, where the terms of reference to the expert required the determination to contain reasons, at [17], [19]: "… [the parties] must have contemplated an examination of the reasoning of the determination to see if it disclosed any manifest error. … If an expert considers it necessary to amplify or (as in this case) clarify the reasons given, when the terms of reference require reasons, it would not be right to ignore those further reasons in examining the question of manifest error. The document setting out the further reasons, together with the original reasons, represent the totality of the reasoning and it is that totality that should be examined."
Thomas J cautioned, however, "The effect of the word 'manifest' must not be diluted; the finality of the determination must not be subject to attack because another view could, in the light of further argument, properly be taken of the matters dealt with during the determination. It must be proved by the party disputing the determination that there was a manifest error in the determination": at [22]. Invensys was followed by the Court of Appeal in Homepace v Sita South East and Epping Hotels.

[26]

Consideration

The fact that Mr Mullins variously self-described the first report as "an error" or "incorrect" is not dispositive as to whether the first report contained a "manifest error" within the meaning of the Deed. Having regard to the use of the term in the "Property Valuations" and "Asset Valuations" clauses, I consider that it means a plain and obvious error in the valuation process. As Brereton J observed in TX Australia, this is not limited to 'facile errors' but may involve errors of some complexity.
Neither brother disputed Ernst & Young's identification of a contingent liability in respect of CGT, or the calculation of the amount of the contingent liability. The point of difference was whether the expert should have ultimately taken the liability into account. As to the plaintiff's submissions that this Court should accept Mr Lonergan's methodology as correct, the Court of Appeal noted in Masters Home Improvement Pty Ltd v Northeast Solution Pty Ltd [2017] VSCA 88, "To the extent that the Judge may have relied on Mr Lonergan's text book, this was not well founded. Mr Lonergan was not a witness, his text book was not in evidence and was not put to any witness who adopted what was said in it": at [434]. Whether Mr Mullins chose to adopt the approach suggested by Mr Lonergan in The Valuation of Businesses, Shares and Other Equity (5th ed, 2003, Allen & Unwin) p 109 - making an adjustment to arrive at the value of an entity based on the value of its net assets, to allow for CGT on the sale of assets - was a matter entrusted by the parties to the expert for the exercise of his professional judgement.
It was not suggested that there was only one way to address this issue and, indeed, the different approaches to the issue taken in the draft report, first report and second report suggest that it was an issue of some complexity which could be tackled in different ways. If Mr Mullins, in fact, undertook the task assigned by the Deed when preparing his first and/or second report, then I have already noted that his task was not simply mechanical or arithmetic. The task involved a determination requiring him to form a judgement having regard to the items of information identified in cl 2.6 and 2.7, not merely to insert the property valuations obtained from Cushman & Wakefield and then tallying up the balance sheet. Mr Mullins' treatment of 'embedded' CGT in the first report is not a plain and obvious error but one approach to the issue which, on reflection, the expert considered was not correct. The fact that the expert changed his mind on an issue which was not straightforward does not mean that the deduction of 'embedded' CGT in his first report amounted to a "manifest error" within the meaning of cl 2.8(g) of the Deed. For the same reasons, the treatment of the issue in the second report was not a "manifest error" either.

[28]

Submissions

The plaintiff submitted that if there was any profit entitlement after execution of the deed, then it was waived after the material date. The waiver in cl 2.12(b) meant that the obligation in cl 2.3 excluded what was waived, otherwise cl 2.12(b) would have no work to do.
The defendant submitted that the plaintiff's construction gave no work to cl 2.3 to do. Clause 2.12(b) should be read as waiving a right to any undeclared profit entitlements, as "profit entitlement" likely meant something different from "distribution declared" in cl 2.3. What needed to be paid was any declared distribution. What was waived was any accrued profit in the trust that would in due course be declared but had not yet been declared. The plaintiff's construction was said to be uncommercial, where the defendant would be taxed for declared distributions which he would not receive. Where the Deed was signed shortly before the end of the financial year, the parties may have anticipated that the valuation process would not be completed by the end of the financial year and were careful to ensure that declared distributions after that date were to be paid. However, undeclared profits should stay with the trust and with the new owner of the units in the trust, where the parties did not know when the date of final payment would be made.
In reply, the plaintiff submitted that there was no distinction drawn in cl 12.12(b) between undeclared and declared profit entitlements. Nor would one read the word "undeclared" into cl 12.2(b) as, strictly speaking, a profit entitlement only arises when declared. The defendant's submissions were simply that such a reading might give rise to a better commercial deal, but was describing another deal that could have been done and could have been given effect to if additional words were added in. There was no warrant to do that where the wording was perfectly clear on its face.
In yet further reply, the defendant submitted that his proffered construction gave a different meaning to the words in cl 2.3, being "other distribution declared in the usual practice" and cl 2.12(b), "profit entitlement". Where the parties had chosen to use different words, and the defendant's construction gave effect to that difference, the plaintiff's construction was said to give no work for cl 2.3 to do where cl 2.3 said the distributions in the future would be paid but, on the plaintiff's construction, the defendant also said in cl 2.12(b) that he was going to waive that entitlement. This did not sit together harmoniously.

[29]

Consideration

The Deed was signed on 23 June 2023. The Deed provided that time was of the essence: cl 11.13. The Deed provided for two 'rounds' of valuations before a buy-out figure was determined. Strict timeframes were imposed on the brothers in instructing the valuers, providing information required by the valuers, making submissions and notifying any objection to the valuations. However, no time restrictions were imposed on the valuers. Once the asset valuations were to hand, then the plaintiff was given time to pay the buy-out amounts, being within six months of receipt of the asset valuations: cl 2.10, 2.14, 2.16. Even if everything went well, the whole process would take some time to complete.
Clauses 2.2 and 2.3 concern the payment of unpaid present entitlements owed to Penlop at the date of the Deed. Further, cl 2.3 obliged Yangdo to pay "any other distribution declared, in the usual practice, by the Yan Unit Trust after [the Deed was executed] to Penlop" when the plaintiff paid the defendant for his units in the Yan Unit Trust. Where a trustee will ordinarily make an annual distribution to beneficiaries, and where the buy-out process may take some time, cl 2.3 covered the possibility that the trustee would declare another distribution to unitholders while the buy-out process was in train. However, the defendant's corporate vehicle which held his units in the Yan Unit Trust, being Penlop, agreed in cl 2.12(b) to "waiv[e] its rights to any profit entitlement from the date of the Yan Unit Valuation". How do these clauses work together?
In terms of the defendant's entitlement to distributions from the Yan Unit Trust, cl 2.3 and cl 12.12(b) address two distinct phases of the buy-out process. The first phase ends when the asset valuation process is complete and the buy-out price for defendant's units in the Yan Unit Trust is fixed. The asset valuer was obliged to consider the assets and liabilities of the Yan Unit Trust and Yan Sub-Trust at the material date before determining the buy-out price for the units: cl 2.6. Consistently with this, Ernst & Young's assessment of the value of net assets as at the material date took into account a "Liability for payment of profit entitlements to 18 December 2023", being $2,708,409: paras 85, 86(d) of the first report. The buy-out price factored in the liability to pay profit entitlements as at the material date, reducing the net assets of the Yan Unit Trust and thus the unit price.
The second phase ends when the plaintiff pays the buy-out price so fixed. Clause 12.12(b) modifies the operation of cl 2.3 during the second phase by drawing a 'line in the sand' in respect of any profits earned by the Yan Unit Trust after the material date. The defendant's entitlement to the profits of the trust, up to and including the material date, have been calculated by Ernst & Young. If Yangdo declares a distribution after execution of the Deed, then the defendant's entitlement to that distribution, or a portion of that distribution, may be readily calculated having regard to Ernst & Young's figures. If, for example, Yangdo declares a distribution for the 2024 financial year, then a calculation of the defendant's portion of that declared distribution can be readily made. Penlop is not entitled to the whole of that distribution but only 50% of $2,708,409.

Yan v Yangdo Pty Ltd

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (31 paragraphs)

Parties

Cases Cited (35)