De Costi (Franchises) Pty Ltd and Anor v Wachtenheim and Anor (No 3) NSWDC 54 (3 May 2013)
In this edition of Expert Matters Alex Canale, manager in our Sydney office, discusses a judgment in a case where both accounting experts engaged by the Defendant were lacking the required independence.
The role of independent expert witnesses in assisting a trier of fact to understand and draw conclusions from complex evidence is built on several well established foundations. Matters such as the independence of experts, the relevance of their opinions to assisting the trier of fact to determine the matters before them and the admissibility principles of the Uniform Evidence Acts, as expanded in Makita1, must be sufficiently addressed prior to the tendering of expert evidence.
Each of these issues were raised in a recent NSW case, De Costi (Franchises) Pty Ltd and Anor v Wachtenheim and Anor (No 3)2, which highlights the consequences to a party's case of a failure to meet these criteria when appointing and producing expert witness testimony.
Mr Wachtenheim purchased a seafood retail business which he operated via a franchise agreement with De Costi Seafoods. After a period of initial profitability, the business fell into financial difficulties and subsequently closed. Mr Wachtenheim brought an action against the franchisors alleging that he was induced to enter into the purchase and franchise agreement by the misleading and unconscionable conduct of the franchisors, and for breach of the terms of the franchise agreement.
Mr Wachtenheim tendered reports by two experts; reports by his accountant Mr B regarding the profitability of the business, and a report by Mr D regarding the quantum of loss suffered by Mr Wachtenheim.
The expert reports
The expert reports faced substantial criticisms. First, the independence of the experts was brought into question. Mr B had acted as Mr Wachtenheim's accountant for 30 years and had involved himself in the seafood business that was the subject of the dispute. Mr D was the accountant for witnesses to the litigation whose perceived interests in the proceedings were apparently similar to Mr Wachtenheim's.
Although the witnesses may have had relevant expertise and experience in accounting, and in fact particularly relevant expertise when assessing Mr Wachtenheim's business, Mr B's 'natural allegiance to his client'3 and the circumstances surrounding Mr D's evidence operated to diminish the experts' independence and greatly limit the weight that could be placed on their evidence.
While the expert reports were not expressly ruled to be inadmissible4, Taylor SC DCJ noted a litany of factors which he considered went to both the credit of the experts and the weight that could be placed on their reports, including:
- a failure to identify whether the expert opinion was based on knowledge or expertise of the expert
- reliance on inaccurate or incomplete documents as a basis for an opinion
- a willingness to blindly do as instructed, rather than exercise independent professional judgment to assist the court
- inconsistency of factual documents with the facts identified in the reports tendered
- an unwillingness of the experts' parties to adopt their own report following cross examination
- the substantial involvement in the preparation of an expert report by an unqualified party
- adoption of assumptions that were inconsistent with the facts presented to the court
- giving of opinions in areas where the expert lacked qualifications
- lack of identification of the assumptions made and of the process of reasoning and expert judgment applied to those assumptions, and coherent explanations of how opinions had been derived.
In addition, there appears to have been some difficulty with the instructions provided to the experts as to the appropriate method of calculating Mr Wachtenheim's loss. As the claim brought by Mr Wachtenheim concerned a loss arising from misleading representations, the Court noted that damages would ordinarily be based on the difference between the value of the business when purchased and the price actually paid by Mr Wachtenheim to acquire the business5.
Mr B's report sought to establish the profitability of the business but did not attempt to calculate the value of the business at the time of Mr Wachtenheim's purchase, and no other evidence of value was provided to the Court. This meant that the expert reports tendered by Mr Wachtenheim were unable to assist the Court to determine the matters that were relevant to quantifying the damages claimed by Mr Wachtenheim.
As Mr Wachtenheim was unable to establish the misleading conduct or breach of the franchise agreement, the expert opinion as to loss was ultimately irrelevant. However, Taylor SC DCJ considered that 'whether or not the document has been admitted formally, these matters illustrate that I should give the material little weight6 and that the state of the evidence was 'wholly inadequate7'.
This case raises many of the potential problems that can befall expert evidence. Care needs to be taken in selecting experts that meet the professional independence requirement of the relevant Code of Conduct, and that the principles of admissibility of expert opinion are considered when expert reports are prepared. Experts need to be properly instructed so as to allow them to maintain their independence, and so that the opinions expressed are both relevant to the matter in dispute and, in the case of a report as to damages, able to assist the Court to reach an informed decision as to the quantum of loss suffered based on the cause of action pleaded.
2De Costi (Franchises) Pty Ltd and Anor v Wachtenheim and Anor (No 3) NSWDC 54 (3 May 2013)
3Ibid, at 287.
4See our previous Expert Matter's article regarding whether Makita represents a 'counsel of perfection', The Counsel of Perfection
5De Costi (Franchises) Pty Ltd and Anor v Wachtenheim and Anor (No 3) NSWDC 54 (3 May 2013) at 282
6Ibid at 295.
7Ibid at 308.
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