Fagenblat v Feingold Partners Pty Ltd

[2001] VSC 454

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 6934 of 2000

MARK FAGENBLAT	Plaintiff
v.
FEINGOLD PARTNERS PTY. LTD. (ACN 078 670 023)	Defendant

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JUDGE:	PAGONE, J
WHERE HELD:	MELBOURNE
DATE OF HEARING:	21 AND 22 NOVEMBER 2001
DATE OF RULING:	27 NOVEMBER 2001
CASE MAY BE CITED AS:	FAGENBLAT v. FEINGOLD PARTNERS PTY. LTD.
MEDIUM NEUTRAL CITATION:	[2001] VSC 454

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CATCHWORDS:      Expert evidence – Admissibility – Bias – Relationship between expert and litigant – Assumption made by expert – Arnotts v. Trade Practices Commission.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr. M. Dreyfus Q.C. and Mr. P. Santamaria	Nathan Kuperholz
For the Defendant	Mr. L. Glick	Strongman Crouch

HIS HONOUR:

1. An objection was taken during the course of the proceeding to the admissibility of the evidence of Thomas Peter Borsky.  I ruled in favour of the admission of the evidence at the time that the objection was taken and now give my reasons. 

1. The proceeding is in substance a partnership dispute between the solicitors who had conducted a legal practice through a trust and corporate structure.  The plaintiff, Mark Fagenblat, seeks, amongst other things, an order for the payment of money based upon the value of his share of the practice as at 30 June 2000.  An important issue in this case as it has been conducted before me is the determination of the value of the goodwill of the practice as at 30 June 2000.  Mr. Fagenblat has sought to rely upon the evidence of Mr. Borsky as an expert accountant who has had experience in valuations of this kind over a number of years.  Objection to the admissibility of his evidence has been taken at the outset on two bases.  The first is that there exists a relationship between Mr. Fagenblat and Mr. Borsky such that his evidence should not be admitted at all (and not merely that I should take into account the relationship when considering the weight that I should place upon that evidence).  The second ground of objection is that Mr. Borsky has failed to articulate the foundation upon which his opinion as an expert has been based.  I shall deal with each in turn.

A.       The bias issue

1. Mr. Borsky is a chartered accountant and is a member of Alexander & Spencer which has been engaged as the accountants and advisers of the legal firm in its various compositions for approximately 10 years.  Alexander & Spencer has prepared financial statements and taxation returns for the legal partnership and for the majority of the partners.  Mr. Borsky himself has occupied an important position in relation to the legal firm over that time and has obtained considerable professional and expert knowledge about the legal firm over the period that he and his partners have been acting for them.  This places Mr. Borsky in an important position with much detailed knowledge and experience as an expert engaged by the very people undertaking the practice which needs to be valued.  All other things being equal, Mr. Borsky might be thought to be an essential expert witness to be called by one of the parties, if not the plaintiff, about a central issue raised by the plaintiff.  Indeed, all else being equal, it might be thought that a failure to call him might provoke some adverse comment. 

1. The basis of the objection, however, is that Mr. Borsky happens also to be Mr. Fagenblat's brother in law.  It was, therefore, put for the defendants that I should not receive the expert evidence of a witness where it can be demonstrated that there exists a relationship between the proposed expert (Mr. Borsky) and the party calling him (in this case Mr. Fagenblat as trustee of a trust) which a reasonable observer might think was capable of affecting the views of the expert so as to make the expert unduly favourable to the party calling the expert.  In support of that submission I was asked to take into account the following matters.  First, that Mr. Fagenblat brought the action as trustee of the trust.  Second, that a specified beneficiary of that trust is the expert's sister who is also the wife of the trustee.  Third, that the expert, Mr. Borsky, expressed his opinion at a time when the party calling him knew that the defendants proposed a value of the goodwill of nil.  Fourth, that the sister of the expert had incurred very substantial personal debts which remain due and owing and which were due and owing at the date of the expert's opinion.  Fifth, that Mr. Fagenblat had given evidence that he would undoubtedly pay his wife's debts from any money received from any award that I might make in the proceeding. 

1. Direct judicial authority in support of this proposition was found in Liverpool Roman Catholic Archdiocese Trust v. David Goldberg Q.C.[1].  The matter considered in that case by Evans-Lombe, J. concerned the proposed expert evidence of a Mr. Flesch Q.C. on behalf of the defendant, David Goldberg Q.C.  The proceeding concerned a claim by the corporate trustee of the Roman Catholic Archdiocese of Liverpool against Mr. Goldberg Q.C. for professional negligence in the advice he gave in relation to the trustee's tax affairs between November 1989 and October 1996.  Mr. Goldberg Q.C. sought to rely upon the expert evidence of Mr. Flesch Q.C. in relation to a number of matters which, for these purposes, was accepted to qualify as the evidence of an expert.  However, Mr. Flesch Q.C. had had a close personal relationship with Mr. Goldberg Q.C. inasmuch as they had been friends and had been in the same chambers for a long time.  In giving evidence Mr. Flesch had said that his personal sympathies were engaged to a greater degree than would probably be normal with an expert witness, but expressed his belief that his relationship with Mr. Goldberg Q.C. would not affect his evidence as an expert. 

   [1][2001] EWHC Ch. 396 (unreported, 6 July 2001)

1. Evans-Lombe, J. accepted that some of Mr. Flesch Q.C.'s evidence qualified as that of an expert but considered that the Court should disregard it on the ground that Mr. Flesch "was unable to fulfil the role of an expert witness because of his close personal relationship" with the defendant[2].  The relevant general principle was expressed in the following terms:

"I accept that neither s.3 [Civil Evidence Act 1972] nor the authorities under it expressly exclude the expert evidence of a friend of one or the parties.  However, in my judgment, where it is demonstrated that there exists a relationship between the proposed expert and the party calling him which a reasonable observer might think was capable of affecting the views of the expert so as to make them unduly favourable to that party, his evidence should not be admitted however unbiased the conclusions of the expert might probably be.  The question is one of fact, namely, the extent and nature of the relationship between the proposed witness and the party."

The burden of this paragraph, for present purposes, was said to require that the proposed evidence of Mr. Borsky be ruled inadmissible rather than that I merely took into account the relationship when considering the weight and extent to which I could rely upon the evidence which he purported to give as an expert.  Counsel also relied upon the well-known decision in National Justice Cia Naviera SA v. Prudential Assurance Co. Ltd., The Ikarian Reefer[3] and also Whitehouse v. Jordan[4] and Clough v. Tameside and Glossop Health Authority[5].

[2]see paragraph 10

[3][1993] 2 Lloyd's Rep. 68

[4][1981] 1 W.L.R. 246

[5][1998] 2 All E.R. 971 at 976

1. In my view the evidence at the stage at which this objection was taken was not sufficient to require that I exclude the evidence on the ground relied upon.  An expert witness has a special and important role in judicial proceedings to assist the Court by providing objective and unbiased opinions about matters that bear upon the determination which the Court is called upon to make.  The exclusion of an expert's evidence should only occur where the Court is satisfied that the evidence to be led by the expert is unsound and cannot provide probative material of value to the Court's task of determining the issues in the proceeding.  The possibility of a witness having a bias in favour of a party (directly or indirectly) is undoubtedly a matter to take into account by a court when deciding what weight to give to the expert's evidence, but it is not a ground for the Court rejecting evidence that may be of assistance to the Court in reaching the correct result.  It is for the Court to do justice between the parties and in doing so should properly take into account all matters which bear upon the ultimate issues to be decided.  The bias, actual, potential or perceived, of any witness is undoubtedly a factor which the Court must take into account when deciding the issues between the parties, but the hearing of evidence from such a witness does not mean that the Court will not be doing justice to the parties impartially.  It is the Court, and not the witness, which has the task of doing justice to the parties and, in my view, the Court should not exclude from its consideration the probative evidence which expert witnesses may be capable of giving if the evidence which they do give can be shown to be probative and reliable.  Accordingly, I am unable to agree with the view by Evans-Lombe, J. in the Liverpool Roman Catholic Archdiocese Trust case and decline to follow it. 

1. The principal rationale of the test of reasonable apprehension of bias is to ensure that decision makers are perceived to be truly independent in their decisions.  A biased witness does not impugn the independence of the decision maker, especially where the proceedings are adversarial and the evidence can be tested.  The possibility that a witness of fact or expert opinion may be biased does not infect the impartiality of the Court.  The situation might be otherwise where the expert is appointed by the Court or where the role or function of the expert is more than that of a giver of evidence (whether that evidence be in the form of an opinion, as librarian of a body of knowledge, or otherwise).  In such a case the role or function of the expert may perhaps come to be incorporated into that of the decision maker, and,where the expert's role or function is such that there is actual decision making by the expert, then I can see some scope for the application of the test of reasonable apprehension of bias to exclude the evidence.  I can see no scope for that test, however, to exclude expert evidence that may assist the Court where the expert is called in adversarial proceedings by one party and where an opposing party is at liberty to test whether any bias corrupts the evidence.

1. Experts do have duties to the Court to be independent.  Those duties have some similarity to those owed by counsel conducting a case.  The risk that such duties might be breached permit a testing of the partiality of a witness so that the Court may assess the assistance that can be gained from the expert evidence which is given.  The product of the expert should itself be "the independent product of the expert, uninfluenced as to form or content by the exigencies of the litigation"[6].  The reason for these duties, however, stem from the need to ensure that the evidence which is before the Court is useful in the sense of being probative and reliable.  The fact of partiality goes to those issues rather than to admissibility.  It is for the Court to assess the value of the evidence.  It is easy to conceive of instances of expert evidence where partiality could have no conceivable impact upon the reliability of the expert evidence tendered. 

   [6]Whitehouse v. Jordan [1981] 1 W.L.R. 246. 256-7 per Lord Wilberforce; see also the criticisms by Lord Denning M.R. in the Court of Appeal at [1980] 1 All E.R. 650 at 655

1. In any event, it did not seem to me that the question of fact posed by Evans-Lombe, J. had adequately been answered in favour of the defendants in accordance with the principles concerning apprehension of bias as enunciated by the cases in Australia:  see Johnson v. Johnson[7];  Ebner v. Official Trustee in Bankruptcy[8].  The objections were taken at a time when in my view it could not be said on the evidence that a fair-minded lay observer might reasonably apprehend that Mr. Borsky might not bring an impartial mind to the matters upon which his opinions had been sought as an expert.  Those matters concerned an established body of learning.  Mr. Borsky had not been cross-examined in an attempt to show that the expert evidence tendered by him might be affected by the relationship which existed between himself and Mr. Fagenblat.  The defendant had accepted Mr. Borsky's other qualifications as an expert and did not challenge either his experience or standing within his profession.  Not all expert evidence is capable of corruption through bias.  The objection having been taken when it was meant that there was no testing of any relationship or connection between the assumed bias, on the one hand, and the particular evidence, on the other.  If the test of reasonable apprehension of bias does apply to exclude evidence, then what must be shown is how the relationship is capable of corrupting the expert evidence itself.  In my view that was not shown by the relationship between the witness and the parties.  What was not shown was how the evidence to be given was itself of a kind able to be influenced by the assumed influencing force.

   [7](2000) 74 A.L.J.R. 1380

   [8][2000] H.C.A. 63

B.       Duty to make clear assumptions

1. The second ground relied upon against the admissibility of Mr. Borsky's evidence at the same stage in the proceeding was that the expert opinion should be excluded on the ground that the evidence of Mr. Borsky did not list with sufficient clarity the assumptions and facts assumed by the expert. 

1. In Arnotts Ltd. v. Trade Practices Commission[9], the expert evidence of Dr. Williams was rejected.  The Court said at 352:

"The fundamental problem about his evidence is that he attempted to act as advocate without making his assumptions clear.  He did not assume a set of identified facts, consistent with those contended for by the appellants.  Rather, he told the judge what facts he should accept."

Mr. Glick of counsel, for the defendants, also relied upon the passages quoted[10] in the decision of the Court from what had been said by the learned trial judge.  He relied also upon the guidelines for expert witnesses in proceedings in the Federal Court of Australia as a guideline of the general duty in relation to the giving of expert evidence.

[9](1990) 24 F.C.R. 313

[10](1990) 24 F.C.R. 313 at 347 and 348

1. It is important for the proper evaluation by a court of expert evidence that the expert clearly identify what the expert has taken into account for the purpose of forming and expressing any conclusion or judgment.  An expert report that does not sufficiently reveal the underlying basis upon which the conclusions are expressed will be of limited value to a court.  The same is true in relation to the reasons why the conclusion or judgment is reached.  It is the what and the why which form the underpinnings of the evidence which must be sufficiently revealed to enable the parties to test the evidence and to permit the Court to understand those matters which form the foundation of the evidence relied upon for the disposition of the ultimate issue for determination by the Court.  The critical question, however, is what will amount to a "sufficient" identification of the what and the why of the expert's evidence.  A moment's reflection will indicate that not every conceivable matter could or should be the subject of specific identification.  A requirement of that kind would not serve to achieve the purpose of the requirement and would ultimately lead to absurdity.  It would also encourage unmeritorious objections from parties who might hope to obtain some forensic advantage by unreasonable or unhelpful scrutiny of witness reports for some dubious unstated premise of ultimately little value to the resolution of the issues in contention.

1. To deal with this objection I was invited to consider the proposed evidence of Mr. Borsky but upon the limited basis only of deciding whether or not it should be rejected.  In this case Mr. Glick focused the complaint upon the adoption by Mr. Borsky of a capitalisation rate of 30%.  In a number of places Mr. Borsky identified the adoption of 30% as the capitalisation rate for the purpose of reaching his conclusion.  Mr. Borsky stated in his written answers to the questions asked of him in answers numbered (b)(v) that the capitalisation rate he adopted was 30%.  In the last sentence of that sub-paragraph he expressed his opinion that this "is the appropriate capitalisation rate to be applied to the maintainable earnings" as at 30 June 2000 "in light of all of the circumstances prevailing at that date".  Mr. Glick complained that what Mr. Borsky did not do was to identify what "all the circumstances" were to which Mr. Borsky referred.  Mr. Glick went on to note, correctly, that some explanation of the capitalisation rate did appear later on that page, but objected to the evidence on the basis that not all of the relevant circumstances which may have been relied upon had been identified.

1. In this case the adoption of the 30% capitalisation rate is one of the facts or reasons which Mr. Borsky has adopted for the purpose of forming the opinion on the matters asked of him.  Whether there has been a sufficient identification of the what and the why in an expert's opinion, is to be judged by reference to what the opinion is that is proffered by way of expert evidence in the context of the issues to be determined by the Court.  The questions asked of Mr. Borsky in this case  are identified at the beginning of paragraph 11 of his witness statement and concern essentially the value of the goodwill of the practice.  Four questions were asked of him, all of which concerned the goodwill of the practice.  The first is whether the practice had goodwill, and each of the other three questions all depend upon an affirmative answer to the first.  The second asks how the value of the goodwill is to be calculated, the third question asks for an identification of the value of the goodwill of the practice, and the fourth asks whether that value might materially be affected by the absence of any relevant restraint clause between the members of the partnership. 

1. In answering these questions Mr. Borsky identified, as one of the matters he had taken into account, his judgment that there should be adopted a capitalisation rate of 30%.  In my view that is a sufficient identification of a matter taken into account by Mr. Borsky in reaching his conclusion about the goodwill.  Does he need to go on to identify what facts he has taken into account in adopting that as the appropriate capitalisation rate?  There may be some cases in which it would be appropriate for a subsidiary fact or reason which forms the basis of an expert's opinion to itself be the subject of further elaboration by way of identification of the matters or reasons which have led to its adoption as an integer in the expert's ultimate opinion.  However, I do not think that this is such a case.  Mr. Borsky has identified in paragraphs 9 and 10 of his witness statement the relevant factual material which he has taken into account.  He has identified in paragraph 5 what his previous involvement in the firm was;  in paragraphs 7 and 8 he has said what he had done;  and there is further factual material in the letter which formed the exhibit to his witness statement.  The technical appropriateness of a capitalisation rate is not a matter of great mystery for the profession from which Mr. Borsky comes.  The defendants are adequately put on notice that 30% has been adopted as the capitalisation rate which Mr. Borsky considered appropriate.  They may, therefore, obtain other advice about this and may themselves lead evidence of an alternative rate if 30% be thought by them not to be appropriate. 

1. A purpose for a rule that requires an expert to identify the what and the why of reaching a conclusion is so that the appropriateness of those matters may be exposed and debated.  It is understood that the capitalisation rate which Mr. Borsky adopted was 30%.  That puts the parties in the position of knowing what has been taken into account so that they can, if minded, make further enquiries about the matters that make integer appropriate.  In my view, therefore, the witness statement does sufficiently satisfy the obligation.

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