Australia: Not all expert evidence is good expert evidence

Last Updated: 24 March 2016

Contracts can sometimes use terms which appear to have specialised meanings. Even so, it will not always be helpful to obtain expert opinion evidence on how to interpret those terms.

Background

Up until August 2015, the defendants had been franchisees of the plaintiff. The franchise business involved renting household items to consumers. The franchisees asserted that, by reason of changes to the franchisor's business system which were unacceptable to them, they ceased operating as its franchisees and began to operate the same business in their own names.

However, the franchise agreements entered into by the franchisees included a term under which, if the agreement expired or were terminated for any reason, the franchisor had the right (but not the obligation) to buy "such of the Business Assets" as it might select and, if it wished, to "have the Franchisee assign or transfer to the Franchisor...or surrender..." the lease of the premises from which the franchisee carried on the franchised business. If the option was exercised, a purchase price was payable, defined as:

22.7 Purchase Price
The Purchase Price to be paid by the Franchisor (or its nominee) to the Franchisee ... shall be the price nominated by the Franchisor in the notice exercising the option ... unless within seven days of receipt of such notice the Franchisee notifies the Franchisor that it requires the price to be the lesser of:
  1. the written down value of the Business Assets selected by the Franchisor as recorded in the Franchisee's books of account, or
  2. the fair market value of the Business Assets selected by the Franchisor as determined by the Valuer. In conducting the valuation the Valuer acts as an expert and not as an arbitrator and must not include any component for leasehold improvements. The Valuer's decision is final and binding on the parties and the Valuer's costs must be shared equally between the Franchisee and the Franchisor, or
  3. The Valuer, in determining the fair market value, must take into consideration, in any goodwill calculation, the value of the goodwill, based on the current customer transfer policy in operation at that time.

Around three weeks before the scheduled commencement of the trial in this matter, the franchisees filed applications to amend their pleadings and rely on the expert report of a valuer, Mr H. The Court made the following comments in relation to Mr H's report:

Although I have not had the opportunity of reading [Mr H's] splendid report in complete detail, it seems that he says in substance that the concept of goodwill is irrelevant to, or meaningless in the case of, a chattel asset of a business. He says, in substance, that goods do not have 'goodwill' attached to them as a matter of valuation and expertise and practice. Further, he says, as a matter of such expertise and practice, the concept of goodwill cannot inform any calculation of the fair market value of goods.
The case for the franchisees, in relation to reception of this evidence, is that it is admissible to explain a special meaning to be given to the word 'goodwill' in the practice of valuers: in effect, a meaning to be derived from that practice.

Conclusion

The Court rejected the franchisees' application for leave to rely on Mr H's report. Its reasons included that:

  1. The application was too late and brought without advance warning or sufficient explanation for the delay. The almost certain consequence would be that the hearing date would be vacated while the franchisor considered the report and obtained its own expert evidence in reply.
  2. It did not appear that the evidence on which the franchisees sought to rely had any real utility. 'Goodwill' was only a relevant consideration if the franchisees did not accept the purchase price in the 'notice' and elected to have the 'Valuer' derive 'fair market value' (rather than adopting 'written down value').
  3. If Mr H was correct, any valuation which included 'goodwill' would invalidate the Valuer's opinion, hence making Mr H's opinions redundant.

In any case, the Court said that:

... it seems to me that what [Mr H] is really trying to do is tell the Court how a valuer could and should apply the concept of 'goodwill' in carrying out the exercise for which cl 22.7 calls. I do not think that this is an acceptable use of expert evidence.

Significance

Many terms, including 'goodwill' have different meanings in different contexts. This does not necessarily mean that a Court will be assisted by 'expert' evidence on the meaning of a term in an agreement. Rather, care is required to assess whether any explanation of contractual terms will be assisted by 'expert' evidence and, if so, when such evidence might usefully be put forward. Just before trial may be too late.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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