Byrd and Byrd (Expert’s Report Inadmissible (No 2) - [2011] FamCA 804

FAMILY COURT OF AUSTRALIA

BYRD & BYRD (EXPERT’S REPORT INADMISSIBLE (NO 2)

[2011] FamCA 804

FAMILY LAW – EVIDENCE - Expert evidence – Evidence rejected where expert relies on inadmissible evidence

Clarke v Ryan (1960) 103 CLR 486
Pownall v Conlan Management Proprietary Limited (1995) 12 WAR 370
R v Turner [1975] 1 All ER 70
Daniel and Others v Western Australia and Others (2000) 178 ALR 542

Evidence Act 1995 (Cth)

APPLICANT:

Mr Byrd

RESPONDENT:

Ms Byrd

FILE NUMBER:

SYC

767

2009

DATE DELIVERED:

27 September 2011

PLACE DELIVERED:

Sydney

PLACE HEARD:

Sydney

JUDGMENT OF:

Le Poer Trench J

HEARING DATE:

26 September 2011

REPRESENTATION

COUNSEL FOR THE APPLICANT:

Mr Campton
Mr Richardson SC

SOLICITOR FOR THE APPLICANT:

Gibsons Lawyers

COUNSEL FOR THE RESPONDENT:

Ms Rees

SOLICITOR FOR THE RESPONDENT:

Watts McCray

Orders

The valuation by Ms D of S Company contained in her affidavit filed 16 September 2011 is rejected as evidence in the current proceedings.

IT IS NOTED that publication of this judgment under the pseudonym Byrd & Byrd (expert’s report inadmissible No 2) is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).

FAMILY COURT OF AUSTRALIA AT SYDNEY

FILE NUMBER: SYC 767 of 2009

Mr Byrd

Applicant

And

Ms Byrd

Respondent

REASONS FOR JUDGMENT

Before the Court is an application by the husband that the evidence of Ms D, contained in a report annexed to her affidavit filed on 16 September 2011, relative to the valuation of the husband’s business, S Company, be struck out. This application comes on the heels of a determination, just now completed by me, whereby the evidence of Mr K, a valuer of the husband’s business S Company, was struck out. The reason for that determination is important to be borne in mind when reading these reasons. In short Mr K refused to provide details of the sales of comparable businesses upon which he based his opinion as to the value of S Company.
For the purpose of the hearing before the Court, the only relevant portion of Ms D’s evidence is her valuation report of S Company. It is trite to say the parties are at issue about the value of S Company. Ms D, on behalf of the wife, concludes that the value of the business is $6.5 million. Mr P, the single expert, concludes that the value of the business is almost $2.4 million. The husband submits that Ms D has, in effect, declared herself to have insufficient expertise to determine key information or calculations in order to arrive at the value of the business as a whole.
The key areas of dispute between the valuers are:
a)The adjustment, if any, which should be made for remuneration for the manager for the business. This adjustment is determined by Ms D to accord with commercial remuneration rates;
b)Adjustment of excessive salaries. This relates to the number of employees the business should or could operate with, and produce the same gross income; and
c)The multiple to be applied to the calculated EBIT to produce a goodwill figure.
The husband refers to the following specific portions of Ms D’s report:
Paragraph 2.9 on page 7. In this paragraph Ms D explains she has allocated an annual notional salary to the husband of $150,000. This is then one of the adjustments she makes in determining the EBIT figure. In so doing, she says:
In determining the appropriate notional salary allowance, I have relied on the expert opinion of [Mr K], as detailed in the [K] report.
At point 8 on page 19 of the report she again states her reliance upon Mr K’s expert opinion to determine commercial salary allowance.
At point 9 on page 19 of the report Ms D says she has “...relied upon the expert opinion of [Mr K] in respect of a commercial remuneration for the salary packages paid to all employees.” She relies upon his opinion that staff remuneration and benefits inclusive of a commercial salary package to the owner, but exclusive of bonuses, revenue shares, and KPI rewards, should not exceed 35 to 40 per cent of commission income.
Ms D then adopted the maximum percentage rate of 40 per cent. No explanation for that decision is provided. Ms D determines adjustment of $270,098 for the 2011 financial year, $148,177 for the 2010 financial year, and $178,779 for the 2009 financial year. This includes the adjustment of the husband’s remuneration.
I note point 18 on page 20 of the report. At this place Ms D, in relation to her selection of a multiple, said:
I have relied on the expert opinion of [Mr K] that the appropriate multiple for a business of the size and quality of [S Company] is 6.5 to 7. I have applied the midpoint of this range, being 6.75 times, and believe that this is reasonable, considering the following –
Ms D then set out other reasons for her considering the multiple 6.75 was the appropriate figure. Those factors appear to arise from her own expertise. Ms D noted at the bottom of page 20:
I note that the implied EBIT multiple, on the basis of 2011 actual performance, is 6.48 times.
In paragraph 4 of the joint statement of experts, exhibit X1, the following is set out:
[Mr P] and [Ms D] did not discuss the value of [Mr Bird] [S Company]. [Ms D] offered a three-way discussion between [Mr P], [Ms D] and [Mr K]. [Mr K] has prepared a report on which [Ms D] has relied for key issues in her report. These issues were the EBIT multiple, the salary of the principal, and the overall level of associated and non-associated wages.
The statement is dated 22 September 2011 and is signed by Ms D and Mr P. The husband submits there is no statement by Ms D claiming she had the expertise to value the subject business without the expertise of Mr K. The thrust of Ms D’s report is to suggest the subject business has some very special aspect to its operation which requires expert opinion from a person such as Mr K.
It is to be remembered that Mr K claimed expertise which arose out of a business, in which he had an involvement, which brokered sales of businesses in the financial services section of the Australian commercial environment.
The husband relies on the decision in Pownall v Conlan Management Proprietary Limited (1995) 12 WAR 370, and in particular the passages which appear at page 376. Ipp J said:
As regards evidence that contains a mixture of objectionable hearsay and legitimate material, obviously there may be instances where the evidence will be trimmed, with the objectionable material being discarded, so that the legitimate evidence remains. But there may be cases where the inadmissible and the admissible evidence are so intertwined that they cannot readily be separated. In such event, the entire body of the evidence is rejected.
I pause there to note that the husband submits, so far as Ms D’s report is concerned, the admissible and inadmissible are irrevocably intertwined. Further, on page 377 of Pownall the following appears:
As regards Mr Zelestus’ final proposition, it is to be noted that in R v Schafferius (1977) Qd R 213 at 217, the Queensland Court of Criminal Appeal appears to have assumed that the trial judge has a discretion to exclude opinion evidence based on inadmissible hearsay, or to admit it and attach to it whatever weight is merited by the circumstances. A similar inference could be drawn from Gordon v R (1982) 41 ALR 64. On the other hand, English Exporters (London) Limited v Eldonwall Limited, Wright v Sydney Municipal Council, Syke v Hunter, R v Turner, Redge v Abanon, and Steffen v Ruban are contrary to that proposition. They are to the effect that opinion evidence based on unconfirmed specific hearsay is inadmissible, and should be excluded.
In my opinion, expert opinion based entirely on inadmissible evidence is itself inadmissible, and there is no discretion to admit it. I form the view that to admit such an opinion would be to admit indirectly the inadmissible evidence itself. If opinion based solely on evidence which the Court, by application of law, is required to exclude is itself admitted, the inadmissible evidence would have some influence over the Court’s decision. Such a result would defeat the purpose of the law that excludes the inadmissible evidence. If the primary facts on which the evidence is based are not admissible, the opinion is valueless and irrelevant and, in my opinion, should be excluded. It is for this reason that the Court of Appeal in R v Turner [1975] 1 All ER 70 observed (at 73) that an expert in examination-in-chief should be asked to state the facts on which his opinion is based, and that it was wrong to leave it to the other side to elicit the facts by cross-examination. It is only when the primary facts upon which the opinion has been based are established that the opinion should be admitted into evidence.
The ruling relating to admission of hearsay evidence in Pownall still stands. The area in which Pownall has been overturned is in the area of full disclosure of the factual basis of the opinion of the expert. In Daniel and Others v Western Australia and Others (2000) 178 ALR 542Nicholason J said at 16:
In Quick v Stoland Proprietary Limited (1998) 87 FCR 371, Branson J, with which Emmett J relevantly agreed, said that unlike the common law, as set out in Pownall v Conlan Management Proprietary Limited, the Evidence Act and section 79 do not require that the admissibility of expert opinion depends upon proper disclosure and proof of the factual basis of opinion. This is because it was intended that the general discretion of the Court to refuse to admit evidence was sufficient to deal with problems that might arise in respect of expert opinion, the basis of which was not disclosed: ALRC Report No.r 26, volume 1, para 750. Section 79 [of the Evidence Act] was therefore to be seen as concerned with the view estimation or judgment inherent in the inference drawn by the expert from the factual basis. Her Honour said, “It is the expert’s inference in this sense which section 79 requires to be wholly or substantially based on his or her specialised knowledge.”
The learned authors of Cross on Evidence, at paragraph [29-150], have the following to say [omitting footnotes]:
The Court will require an expert giving opinion evidence to state the facts on which the expert relies. This will normally require the expert to identify and to prove or assume the specific facts from which the inference is drawn. But the expert is not required to prove the contents of the texts or journals to which reference has been made. No one ever thinks to call the author of a dictionary to give evidence. Likewise, a witness is entitled to draw upon the corpus of knowledge available in the field, even if this material is not published, and even if it is obtained, for example, by a valuer in conversations with other valuers, some of it in relation to specific transactions, but not so as to prove the details of those transactions, but so as to form part of the general experience, knowledge and expertise of the valuer.
Strictly speaking, such material is not evidence before the Court unless the witness adopts a passage or part of the testimony. But in such a case, the judge or jury may make reference only to that passage. The material is not, strictly speaking, opinion evidence, but is information outside the ordinary range of human experience, of a type to which persons who have the requisite degree of study or experience may depose. Police officers are permitted to give evidence as to the characteristics, prices, packaging, terminology, and availability of illicit drugs based on their accumulated experience received through intelligence reports from informants and from conversations with other police officers.
Subject to these qualifications, apart from the case of a team of investigators of laboratory research assistants under a witness’ control, where there is an expert report containing evidence or expertise attributed by someone other than the apparent author, that person’s contribution should be identified so that the appropriate cross-examination can take place. Where the existence or non-existence of some fact is in issue, a report about the fact in issue by an expert who is not called as a witness is not admissible merely by the production of the report. If another expert called as a witness relies on the report, relying either on the opinion or some fact observed by the first expert, the opinion of the latter is not admissible. Hence, scientific tests run by assistants of the expert witness on which the expert witness relies must be called.
In her report Ms D relies on the expertise of Mr K in making her ultimate conclusion as to the value of S Company. That evidence/opinion of Mr K is hearsay. It is used in crucial aspects of the opinion reached by Ms D.
Further, in relation to the suggestion that the wife would seek to rely on Ms D’s report based upon the 2010 figures for the business (that is, the earlier report filed by her), the husband would oppose any such application. He submits that the earlier report does not value the husband’s business as at 30 June 2011, and would be subject to the point made in the High Court decision of Clark v Ryan (1960) 103 CLR 486. At this time I do not regard the wife as having made an application to rely on Ms D’s earlier valuation, and to update that report based on the 2011 figures, although such an application has been foreshadowed.
Applying the principle quoted above to the facts as set out herein, I conclude that Ms D’s report on the value of S Company contained in her affidavit filed 16 September 2011 is inadmissible. If I be in error about that conclusion, then I would conclude that, if admitted, the valuation could be given no meaningful weight and would therefore not be of assistance in the Court being able to determine the issue of value of S Company.

I certify that the preceding twenty (20) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Le Poer Trench delivered on 27 September 2011.

Associate:

Date: 10 October 2011