Darrow & Hamm
[2022] FedCFamC1F 532
Federal Circuit and Family Court of Australia
(DIVISION 1)
Darrow & Hamm [2022] FedCFamC1F 532
File number(s): MLC 5090 of 2019 Judgment of: MCNAB J Date of judgment: 26 July 2022 Catchwords: FAMILY LAW –PROPERTY – Application in a Proceeding – Application to adduce evidence of a further expert witness – rule 7.08 – whether substantial body of opinion contrary to any opinion given by the single expert-whether there was compliance with rule 7.13 Legislation: Federal Circuit and Family Court of Australia (Family Law) Rules 2021 r 1.31, 7.08, r 7.13. Cases cited: Salmon and Ors & Salmon [2020] FamCAFC 134
Georgeson and Georgeson (1995) FLC 92-618
Tsoutsouvas & Tsoutsouvas and Ors [2012] FamCA 521
Division: Division 1 First Instance Number of paragraphs: 37 Date of last submission/s: 21 July 2022 Date of hearing: 21 July 2022 Place: Melbourne Counsel for the Applicant: Mr A Robinson Counsel for the Respondent: Ms D Issaacson Solicitor for the Applicant: Pearsons Lawyers Solicitor for the Respondent: Lander & Rogers ORDERS
MLC 5090 of 2019 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 1)
BETWEEN: MR DARROW
Applicant
AND: MS HAMM
Respondent
order made by:
MCNAB J
DATE OF ORDER:
26 JULY 2022
THE COURT ORDERS THAT:
1.The applicant’s Application in a Proceeding filed 18 July 2022 is dismissed.
2.The applicant pay the respondent’s costs of and incidental to the application with the quantum of costs reserved to trial.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 10.14(b) Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 10.13 Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth).
Section 121 of the Family Law Act 1975 (Cth) makes it an offence, except in very limited circumstances, to publish proceedings that identify persons, associated persons, or witnesses involved in family law proceedings.
IT IS NOTED that publication of this judgment by this Court under the pseudonym Darrow & Hamm has been approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
(Delivered ex tempore)MCNAB J
INTRODUCTION
The applicant seeks pursuant to an Application in the Proceeding (“the application”) filed on 18 July 2022 to tender and adduce evidence of Mr B pursuant to Rule 7.08 of the Federal Circuit Court and Family Court of Australia (Family Law) Rules) 2021 (“The Rules”).
The affidavit in support of the application is an affidavit of Mr B filed on 18 July 2022 which exhibits a report by Mr B dated 11 July 2022 (“the B report”). The application is made in circumstances where the parties have engaged a single expert valuer pursuant to the rules, namely Mr C of D Company to value the business E Pty Ltd (“the business”).
Rule 7.02 provides:
The purpose of this Part is as follows:
(a)to ensure that parties obtain expert evidence only in relation to a significant issue in dispute;
(b)to restrict expert evidence to that which is necessary to resolve or determine a proceeding;
(c)to ensure that, if practicable and without compromising the interests of justice, expert evidence is given on an issue by a single expert witness;
(d)to avoid unnecessary costs arising from the appointment of more than one expert witness;
(e)to enable a party to apply for permission to tender a report or adduce evidence from an expert witness appointed by that party, if that is necessary in the interests of justice.
Rule 7.08 of the Rules provides:
7.08 Appointing another expert witness
(1)If a single expert witness has been appointed to prepare a report or give evidence in relation to an issue, a party must not tender a report or adduce evidence from another expert witness on the same issue without the court’s permission.
(2)The court may allow a party to tender a report or adduce evidence from another expert witness on the same issue if it is satisfied that:
(a)there is a substantial body of opinion contrary to any opinion given by the single expert witness and the contrary opinion is or may be necessary for determining the issue; or
(b)another expert witness knows of matters, not known to the single expert witness, that may be necessary for determining the issue; or
(c)there is another special reason for adducing evidence from another expert witness.
The applicant submits that the report of Mr B constitutes a substantial body of opinion contrary to any opinion given by the single expert and that the contrary opinion is or may be necessary for determining the issue. He also submits that there are other special reasons for adducing evidence from the other expert.
In correspondence to the court to have the matter listed, the solicitors for the applicant advised:
The applicant has engaged [Mr B] of [G Company] to prepare a shadow report setting out his valuation of the applicant's interest in [E Pty Ltd] and also identifying the limitations of the report prepared by the single expert. There is a significant difference in the two valuers ascribed by the respective valuers between[Mr C] and [Mr B]. [Mr C] values the applicant's interests as at between $1,300,000-$1,800,000. [Mr B] values the interest as at 31 December 2021 as at $163,500 or $7500 as at 30 June 2022.
The matter is listed for final hearing over nine days commencing on 29 August 2022. The hearing is to deal with both parenting and property issues. The court was also advised during the hearing of the application that Mr C will not be in Australia during the period which the matter is listed for hearing and will be holidaying in Europe. I was advised that Mr C would be in a position to give evidence via electronic means from overseas if needs be.
The applicant submits that the differing approach taken by each of the valuers to the methodology by which they have valued the subject business has led to the substantial differential between the two valuations. It is submitted that Mr B relies on a methodology based on the capitalisation of future maintainable earnings whereas Mr C has adopted the model of applying a multiplier of revenue.
The applicant refers to paragraph [35] of Salmon and Ors & Salmon [2020] FamCAFC 134 were in the full court per Kent J stated:
In my opinion, viewed in the context of s 97(3) of the Act, r 1.04 and the purpose of Part 15.5 expressed in r 15.42, the words “substantial body of opinion” in r 15.49(2) are to be given real meaning, as was the approach taken by the primary judge. The approach that the words have meaning of substance has been adopted, correctly in my view, in other decisions at first instance in this Court. The mere expression of an opinion as to value by another expert, no matter how substantially contrary it is to that of the single expert, does not in and of itself constitute “a substantial body of opinion” within the meaning of the rule. If such a contrary opinion is founded upon identified and accepted methodology recognised within the field, or some identified and recognised field of expertise different to that founding the single expert opinion, then the requirement of “a substantial body of opinion” will be fulfilled. As the Full Court observed in Chick and Chick, an expert witness may refer to textbooks and other published material to support his or her material without being forced to call the author for cross-examination. It is to be considered as one of the bases upon which the expert has formed his or her opinion.
It is submitted by the applicant that the adoption by a Mr B of a different mode of valuation constitutes a "substantial body of opinion” for the purposes of Rule 7.08 (2)(b). The applicant also submits that the fact that the experts have characterised the relevant field of industry which the company operates in constitutes another special reason for adducing evidence from another expert witness. It is submitted that Mr C identified the field of industry by characterising the company as a digital technology company whereas Mr B identified the company as a marketing company operating on the Internet or in the digital marketplace.
The respondent has objected to the reception of the report of Mr B into evidence on the basis that the mandatory rules set out in Rule 7.13 regarding the instructions to be provided to an expert witness have not been complied with and that the grounds set out in Rule 7.08 (2) have not been satisfied. The respondent refers to Rule 7 .13 which relevantly provides:
7.13 Instructions to expert witness
(1)This rule applies to any expert witness, whether a single expert witness or an expert witness engaged by only one party or some parties.
(2)A party who instructs an expert witness to give an opinion for a proceeding or an anticipated proceeding must:
(a)ensure the expert witness has a copy of the most recent version of, and has read, Divisions 7.1.4, 7.1.5 and 7.1.6 of these Rules; and
(b) obtain a written report from the expert witness.
(3)All instructions to an expert witness must be in writing and must include:
(a) a request for a written report; and
(b)advice that the report may be used in an anticipated or actual proceeding; and
(c) the issues about which the opinion is sought; and
(d)a description of any matter to be investigated, or any experiment to be undertaken or issue to be reported on; and
(e)full and frank disclosure of information and documents that will help the expert witness to perform the expert witness’s function.
The respondent by her written submissions submits that:
(a)there is a no letter of instruction the annexed to the [Mr B] report and indeed by paragraph 1.11 of that report he states expressly: "I have not been provided with a letter of instruction in relation to my engagement";
(b)[Mr B] states paragraphs 1.15 and 1.16 of his report "I have been provided with a copy of various documents in relation to [E Pty Ltd] that are listed at appendix B of this report.
I have made enquiries of [Mr Darrow] through (SIC) in relation to the business operations, and I have received various responses in relation to these enquiries. Where they impact my assessment, these comments are set out in my review of the business operations at section 2 below and my valuation of the company in section 6 below”.
The respondent submits that although the court has the power to exercise its discretion to dispense with compliance with the rules pursuant to Rule 1.31 if it is "in the interests of justice", and it is not in the interests of justice to do so in this case. The respondent submits that the applicant has been the managing director of the business since at least separation in 2018 and the respondent has had no knowledge of the inner workings of the business as she has been excluded from the business from that time. The respondent submits that it is not clear when Mr B was engaged by the applicant. By the affidavit of Mr B filed 18 July 2022 he states that he was initially instructed to "review” the first D Company report (released on 20 November 2020) and material was provided by the husband and that he has subsequently been instructed to "review the second [D Company] report and further material provided by the husband”.
The respondent submits that in the course of preparing his valuations, Mr C requested to speak to the non-executive director of the business so that he could query past performance and future prospects of the business but this permission had been denied by the applicant despite Mr C stating to the parties that he would be greatly assisted by a discussion with the independent director of the applicant's company: see affidavit of the respondent filed 20 July 2022. It is submitted that in circumstances where the single expert has not had full access to all the information sought by him in preparing his reports it would be unjust to permit the applicant rely on Mr B’s report where that expert apparently had free access to all information sought by him.
The respondent also points to the fact that the report is sought to be relied upon applicant shortly prior to the final hearing and that the matter has been the subject of considerable delay, noting that the proceedings have been on foot since May 2019; the matter was listed for final determination between before Judge Mercuri on 20 November 2020 however, the applicant had failed to file trial material in accordance with court orders made on 18 November 2019 and the matter was subsequently transferred to the Family Court (as it then was); the matter was listed for a trial before Justice Johns on 25 October 2021 but could not proceed as one of the 17 witnesses that the applicant stated he intended call was known to her Honour. The matter was then the subject of further delay with the respondent stating:
In late December 2021 the applicant sought an extension by consent to file his trial material which was due on 31 January 2022 and an extension was agreed between the parties until 21 February 2022. Despite the agreed extension, the applicant failed to file his trial material. Given that the parties were scheduled to attend upon [Dr F] on 4 April 2022 for the purposes of preparation of the family report, and the respondent was not in the position of file her trial material until the applicant had filed his, the respondent was left with no option to bring an application in a proceeding in relation to this to the breach. It was not until this application was listed that the applicant filed his trial affidavit, the body which is 106 pages, which totals 219 pages including annexures.
The respondent also refers to the costs expended by her. She has given evidence by affidavit filed on 20 July 2022 that she has incurred costs of $466,026.46 and submits that the reception of Mr B’s report into evidence would increase the costs of the trial by reason of the costs of expert conferral, add to the trial time, and may need the lead to the respondent potentially needing to obtain her own adversarial expert or to file further material in response.
The respondent submits that the differing approaches taken by the single expert and Mr B arise from Mr C arriving at that negative EBITDA as opposed to Mr B who arrived at the positive EBITDA. It is submitted by the respondent that this is not a case where the valuers do not agree on methodology, but rather they reach different conclusions as to the underlying value and is therefore plainly distinguishable from the circumstances “where a contrary opinion is founded upon identified and accepted methodology recognise within the field or some identified and recognised field of expertise different to that founding the single expert opinion.”.
The respondent also refers to Rule 7.11 (3) which provides:
(3)When considering whether to permit a party to tender a report or adduce evidence from an expert witness, the court may take into account the following:
(a) the purpose of this Part (see rule 7.02);
(b)the impact of the appointment of an expert witness on the costs of the proceeding
(c)the likelihood of the appointment expediting or delaying the proceeding;
(d) the complexity of the issues in the proceeding;
(e)whether the evidence should be given by a single expert witness rather than an expert witness appointed by one party only;
(f)whether the expert witness has specialised knowledge, based on the person’s training, study or experience:
(i) relevant to the issue on which evidence is to be given; and
(ii)appropriate to the value, complexity and importance of the proceeding.
By way of conclusion the respondent submits that:
(1)permitting the applicant to adduce the further expert evidence will have a significant impact on the costs of the proceedings arising from the additional trial time involved having evidence for two experts on the same point the cost of conferral and potentially the respondent needing to obtain her own report;
(2)the quantum of the asset pool is modest comprising of the value of the applicant’s shares in the business (49%) and a small amount of equity of approximately $370,000 in real property;
(3)the matters raised by Mr B’s report can be put to the single expert in cross examination by the applicant; and
(4)there is no specialised knowledge based on his training study experience that Mr B possesses which the single expert does not.
consideration
The applicant acknowledges that Rule 7.13 has not been complied with. Rule 7.13 (3) provides all instructions to an expert witness must be in writing and must include a request for a written report. Paragraph 1.11 of Mr B’s report states
I have not been provided with a letter of instruction in relation my engagement. I have provided you with a draft of my report prior to issue, and you confirmed that I have accurately summarised your instructions.
At paragraph 1.1 Mr B states:
I refer to your previous correspondence and note that you represent [Mr Darrow] in relation to his family law matters with [Ms Hamm] was represented by [Ms H] of Lander and Rogers lawyers.
The expert does not disclose what was contained in that correspondence and when it was sent.
In paragraph 1.9 Mr B states, "I was initially instructed to review the first [D Company] report…”. Details of what those instructions were and whether they are in writing are not provided.
Paragraph 1.10 of his report states: "I was subsequently instructed to review the second [D Company] report and further material was provided by your client…”. It is not made clear in the report whether that instruction was in writing and what the further material provided by the client was.
In response to the submissions made by the respondent, the applicant has submitted that whilst there was not strict compliance with the terms of the Rules, there has been substantial compliance and the failure to comply with the rules results in no injustice to the respondent. It is submitted that the scope of the report and instructions set out in part one of the report comply with Rule 7.21 in the sense that it sets out a summary of the instructions given to the expert witness.
In relation to sources of information its submitted that Mr B complied because 1.6 of the report states that he has made enquiries of the applicant's in relation to the business operation and received various responses in relation to those enquiries and "where they impact my assessment, these comments are set out in my review of the business operations in section 2 below and my valuation of the company in section 6 below".
By way of example the applicant referred to paragraph 4.29 (d) where Mr B states:
End of year adjustments – I was advised by [Mr Darrow] that it has been estimated that there are additional expense of approximately $34,000 to be recorded in the 2022 financial year. I included an allowance for additional expenses in the amount of $20,000 in my assessment and further at 4.29 (…) I refer to my comments at paragraphs 2.7 to 2.9 in relation to the platform and note that I was advised by [Mr Darrow] that approximately 20% of the total expenditure on the platform relates to development of enhancements. I have considered this advice and determined that it is reasonable to include an allowance for capital expenditure on the platform.
In my view, those particular references to specific instructions do not cure the defects in the report relating to properly setting out all instructions to the expert. The effect of the defects in this case are amplified by the fact that the applicant is effectively in control of the business, the single expert has not had access to all the people in management positions that he wished to and the respondent has been excluded from the business since separation.
The failure on the part of the applicant to comply with the mandatory requirements in relation to the instructions for an expert witness, in particular failing to disclose all previous correspondence that had been forwarded to the expert and the failure on the part of the expert to identify the terms of that correspondence and the full terms of his instructions from Mr Darrow, constitutes a significant failure which cannot be cured by relaxing the rules or ordering a further report to be provided by Mr B which seeks to cure those defects. That process would be likely to lead to further delay in the proceedings and substantial prejudice to the respondent.
In relation to Rule 7.08 (2), to the extent that the opinion of Mr B rests on “contrary opinion founded upon identified and accepted methodology recognised within the field”, both experts have identified the various methodologies including that adopted by Mr B. It has not been identified why Mr C cannot be cross examined about the difference of approach not has it been identified why Mr C cannot be cross examined about the assumptions that he has made in relation to the information that he has had access to, or why information disclosed to Mr B cannot be put to him, if that is said to found a difference of opinion. Those matters can also be raised in conference for the purpose of clarification.
Further, the so called contrary opinion as to the adoption of methodology is in fact an alternate approach and as such does not meet the requirement of establishing a “substantial body of contrary opinion” for the purposes of Rule 7.08(2) (a). I note that in the affidavit of Mr B affirmed 15 July 2022 he states at [12]:
When completing my review of the reports prepared by the single expert, I recognised a number of matters that impacted on the valuation of [E Pty Ltd] by the single expert. These include:
(a)The selection of the capitalisation of revenue method as the primary valuation methodology, when alternate methodologies were available to the single expert.
… (emphasis added)
In my view, the interests of the applicant can be met by the process of each of the parties being permitted to confer with the single expert (assisted by any accounting advisers) for the purposes of raising the matters dealt with in Mr B's report. Given limitation of time, that should occur within 14 days if it is to occur. Alternatively leave can be given to the parties to direct further questions to Mr C (in circumstances where the parties have already directed questions to him and he has answered).[1]
[1] Leave is required as r 27.26 (2) provides that questions to an expert can be put only once.
Otherwise, the applicant's interest can be met by cross examination based on the matters raised in Mr B’s report. It will be a matter for the court to then determine the best approach and the value based on the expert opinion evidence given at trial: see Georgeson and Georgeson (1995) FLC 92-618 where the full court stated at 82,218–82,219:
Expert evidence may be adduced as to the proper method to be adopted, in the circumstances of a particular case, to assist the Court in forming an independent judgment on the issue of valuation by the application of the appropriate principles. Whilst an expert may thus suggest an approach as being appropriate in a particular case, before accepting it, the Court must come to its own conclusions as to whether that approach is appropriate in the circumstances.
It is a matter for counsel conducting the examination and cross examination of the expert witness to persuade me of the appropriate approach. The failure to allow the introduction of the adverse expert will not lead to an evidentiary gap as points of difference of approach and any issue with the application of financial information and the consequences of that can be put to the single expert. The applicant has not established to the requisite degree that the contrary opinion is or may be necessary for determining the value of the asset.
There is force in the submission of the respondent that permitting further expert evidence is likely to increase costs, particularly if the respondent felt the need to engage her own expert. In this regard I refer to what Kent J, observed in Tsoutsouvas & Tsoutsouvas and Ors [2012] FamCA 521 at [26]:
In any case where a single expert has been appointed, allowing another party to tender evidence from another expert on the same issues creates an imbalance. That is, only one party may have what may be described as an adversarial expert, whilst the other party has only the evidence of the single expert who has acted within the constraints, in terms of instructions, as provided for in the Rules. The further possibility is the other party seeking to have their own expert to redress that perceived imbalance, undermining the original purpose of appointing a single expert; that is, to avoid a “battle of the experts”. (footnotes omitted)
I do not regard the other special reason put forward by the applicant, that being that there is a difference of opinion as to the field of endeavour the subject business operates in, is a sufficient reason to require further evidence. That, together with the other matters raised by Mr B at paragraph 12 of his affidavit, are matters that can be clarified in conference, be the subject of further questions, and or dealt with in cross examination if a conference does not proceed.
For these reasons, I dismiss the applicant's application to adduce the evidence of a further expert and will hear the party on hear the parties on costs.
I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McNab. Associate:
Dated: 27 July 2022
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