Elanor Funds Management Ltd v Alceon Group Pty Ltd [2024] FCAFC 121 (18 September 2024)
Introduction
Elanor Funds Management Ltd ("Elanor") purchased the Bluewater Square Shopping Centre in Redcliffe, Queensland from Alceon Group Pty Ltd ("Alceon"). CPRAM Investments Pty Ltd ("CPRAM") had been appointed by Alceon as a joint manager of the "Bluewater Trust," an unregistered, managed investment scheme. Part of CPRAM's duties involved identifying opportunities to dispose of the Centre.
The case revolved around three alleged representations said to be misleading: the "commencement date representation," the "arrears representations" and the "rental return representation". Elanor claimed it had been misled regarding nine tenants operating in the Centre's restaurant precincts (referred to collectively as the "Food Court Tenants"). The misleading conduct concerned whether the Food Court Tenants had unpaid rent at the time Elanor conducted its due diligence.
At trial, the court dismissed Elanor's claim, concluding that Elanor had failed to establish misleading or deceptive conduct by Alceon or CPRAM, failed to demonstrate its reliance on such conduct and failed to prove any resulting loss. On appeal, Elanor succeeded on several grounds, particularly regarding the trial judge's treatment of expert evidence.
Expert Evidence
A major part of the appeal dealt with concerns over the admissibility and credibility of expert evidence presented by both sides. The focus was on whether one expert had relied on untested hearsay and whether another expert lacked independence due to prior involvement.
- Expert relying on untested hearsay assumptions
Expert evidence from Chartered Accountants:
- Mr GW: Chartered Accountant engaged by Elanor.
- Mr HE: Chartered Accountant engaged by the respondents.
Mr S, an employee of CPRAM, had prepared annotations as part of his financial analysis of the Centre. Mr HE, a chartered accountant jointly engaged by Alceon and CPRAM, relied on these annotations to form his expert opinion.
The Full Court ruled that these annotations were inadmissible. The court found that "Mr S's annotations were inadmissible and ought to have been rejected" [224]. As Mr HE had heavily relied on these annotations, his expert opinion was also undermined.
Key takeaway: Reliance on untested hearsay assumptions in forming expert opinions creates a significant risk of rendering the report inadmissible. All assumptions relied on by an expert in formulating their opinion must be proven through admissible evidence.
- Expert evidence relating to market value of Bluewater Square Shopping Centre in Redcliffe, Queensland
Experts:
- Mr K: A registered valuer from Queensland, engaged by Elanor.
- Mr GO: An NSW-based valuer, engaged by the respondents.
Mr K's Prior involvement with Elanor
Mr K had prior dealings with Elanor's executive director, Mr McNaughton, having provided a valuation for the purpose of a bank valuation before being instructed as an expert witness. The trial judge found Mr K's lack of independence affected his impartiality, commenting that "the involvement of Mr K had impaired his ability to approach the retrospective valuation question uncritically and independently" [891].
However, the Full Court rejected this finding, stating: "Mr K's evidence was wrongly described as unprincipled or unexplained" [416]. The Full Court pointed out that Mr K had, in fact, explained his reasoning "adequately on three occasions" and that the trial judge had erred in dismissing his evidence based on a perceived lack of independence [418].
The court further noted that "[prior] involvement does not necessarily imply a lack of independence, far less impartiality. It will depend on how the judge perceives the evidence ..." [892]. The trial judge had made an implicit adverse credibility finding concerning Mr K, but the Full Court found that this finding was "unsound" [417].
Moreover, the court emphasised that Mr K's valuation, which accounted for the likelihood of capital expenditure, was credible and supported by evidence: "An amount of $500,000 should be allowed in the valuation calculation 'below the line' for capital expenditure" [424].
Key takeaway: Solicitors should be mindful when engaging an expert with prior involvement with a matter or party to a proceeding. However, prior involvement in the matter or with the party, does not render the expert incapable of giving admissible opinion evidence. The independence and impartiality of an expert should be assessed based on the expert's reasoning and conduct, not solely on their previous association with the parties. This is particularly significant in respect to experts in small fields of expertise or industry.
Reference to Pirmax Pty Ltd v Kingspan Insulation Pty Ltd
Although not cited in this case, the principle from Pirmax Pty Ltd v Kingspan Insulation Pty Ltd [2022] FCA is highly relevant. In that case, the Federal Court held that an expert's prior relationship with a party does not automatically undermine their independence or impartiality. As long as the expert demonstrates independence in their reasoning and conduct, prior associations should not be determinative. You can read our case note on this judgement here.
Experts "attacking" another expert's expertise
As mentioned previously, Mr K was a practising valuer in Queensland, having valued more than 100 retail centres in Queensland each year. In the trial judgment, Mr K provided evidence of his experience, stating:
- [389]: "I perform over 100 retail centre valuations in Queensland each year. I have been preparing such valuations for over 25 years. By reason of my experience, I am very familiar with persons who also perform valuations in retail centres. In the course of my time performing such valuations, I have never encountered Mr GO previously providing valuation evidence of retail centres. I had not heard of Mr GO prior to reviewing his report."
Mr K was cross-examined extensively on this paragraph, with suggestions that he was acting as an advocate. During the hot tub (concurrent evidence), Mr K asked Mr GO how he could practise in Queensland if he was not registered there. The trial judge found this interaction inappropriate:
- [398]: "The trial judge was unimpressed with Mr K's question during the joint expert evidence session, questioning how Mr GO could practise as a valuer without being registered in Queensland. The judge viewed this as an advocacy role for Elanor, despite Mr K's denial, and inferred that it was a personal challenge rather than simple curiosity."
Despite the trial judge's negative assessment, the Full Court noted that the questioning took place in the context of litigation and concurrent evidence, where experts often challenge each other's opinions. While it may have appeared adversarial, it did not necessarily undermine Mr K's impartiality or credibility.
In contrast, "Mr GO is undoubtedly experienced, but his experience in the Queensland market in relation to shopping centres was less than Mr K's" [480].
- [400]: The trial judge concluded that "there was no question of lack of expertise or independence" concerning Mr GO. However, the court did acknowledge a material difference in expertise between Mr K and Mr GO in the Queensland market, particularly in retail centre valuations, which should not be underestimated.
Key takeaway: Experts should be careful when questioning another expert's credibility. In this case, while the trial judge saw Mr K's actions as advocacy, the Full Court tempered this finding, noting the "cut and thrust" of litigation and Mr K's lack of prior experience giving evidence in court [399].
Trial judge treated reliance evidence with "caution" overridden
The trial judge concluded that caution should be exercised when accepting Mr K's evidence, particularly where it differed from Mr GO's, due to Mr K's prior involvement with Elanor and his extensive correspondence with Mr McNaughton. The judge believed this prior relationship undermined Mr K's independence and his ability to critically approach the retrospective valuation, including his uncritical acceptance of assumptions, such as the nine-vacancy figure, without thoroughly assessing all evidence [891].
However, the Full Court disagreed with this conclusion. The court stated that prior involvement in a matter does not necessarily imply a lack of independence or impartiality. The reliability of an expert's evidence depends on the judge's evaluation of the facts. In light of the primary judge's own description of Mr K's evidence [387], the Full Court found no reason to doubt Mr K's impartiality. Consequently, the primary judge's conclusion that caution should be exercised before accepting Mr K's evidence, where it differed from Mr GO's, was an error [893]. This view was further supported by observations made by Bromwich and Thawley JJ, with which the Full Court agreed [894].
Conclusion
Elanor's successful appeal was significantly influenced by the treatment of expert evidence. The case illustrates two key lessons:
- Reliance on hearsay: Experts must ensure that their assumptions are tested and based on admissible evidence. Untested hearsay assumptions can severely undermine the admissibility of their reports.
- Independence of experts: An expert's prior relationship with one of the parties does not necessarily preclude their independence or impartiality. Courts focus on demonstrable expertise both on their CV and whether the expert demonstrates independence in their reasoning and approach in joint reports and concurrent evidence.
This case underscores the importance of scrutinising the credibility and foundation of expert evidence, as well as the treatment of experts' independence in litigation.
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