FGT Custodians Pty Ltd v Fagenblat
[2003] VSCA 33
•15 April 2003
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No. 6934 of 2000
| FGT CUSTODIANS PTY. LTD. (FORMERLY FEINGOLD PARTNERS PTY. LTD.) | Appellant |
| v. | |
| MARK FAGENBLAT | Respondent |
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JUDGES: | ORMISTON, CHERNOV and EAMES, JJ.A. | |
WHERE HELD: | MELBOURNE | |
DATES OF HEARING: | 2-4 September 2002 | |
DATE OF JUDGMENT: | 15 April 2003 | |
MEDIUM NEUTRAL CITATION: | [2003] VSCA 33 | |
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PARTNERSHIP – Solicitors – Valuation of goodwill on retirement of partner – Relevant factors – Likelihood of partner staying on as consultant/employee – Evidence – Expert witness called from valuer who was brother-in-law of plaintiff – Whether disqualified for interest – Relevance of alleged bias – Whether subsequent events relevant to valuation.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Dr C.L. Pannam, Q.C. | Strongman & Crouch |
| For the Respondent | Mr M.A. Dreyfus, Q.C. Mr P.D. Santamaria | Nathan Kuperholz |
ORMISTON, J.A.:
Again the Court has before it an appeal arising out of a bitter dispute between former partners in a solicitors’ practice, in which the amount in dispute is far exceeded by the heat generated by it. The appeal raises issues as to the value of the respondent’s interest as an outgoing partner in a solicitor’s partnership, of which he, or more precisely he as trustee of his family trust, was a member until 30 June 2000, and as to expert evidence given relating to that value. Judgment was given by Pagone, J. in favour of the respondent in the sum of $375,399 (together with interest) for the value of his 25% interest in the firm of Feingold Partners as at 30 June 2000. The appellant, representing the remaining members of the incorporated partnership, seeks to set aside the order, except as to $129,797, being the respondent’s agreed share in the other partnership assets.
The dispute arose not because of any explicit terms in the articles of partnership of the firm, but because of an agreement reached on 29 June 2000 (a memorandum of which was signed the next day), which gave or recognised the respondent’s right to a one-quarter share of the relevant partnership assets including goodwill. It is only the value placed on the share of goodwill which has generated problems and, at a trial in which that value was the principal issue in dispute[1], a number of valuers were called as expert witnesses on both sides. In the end Pagone, J. accepted the respondent’s experts, including one Borsky, a chartered accountant and valuer, and found in favour of the respondent. How the judge came to make that finding was subject to attack at two levels at the trial and it is the subject of the same two attacks on this appeal. The first is simple and conceptual, the second is detailed and requires analysis of the evidence. In substance the appellant challenged, unsuccessfully, the right of the respondent to call Mr Borsky as an expert on the ground of perceived bias, in that, in substance he was and is the brother-in-law of the respondent and his sister stood to gain, as conceded, by having certain debts paid by her husband if he won the action. Secondly, his expertise and his methods of valuation were challenged in an attempt to demonstrate that the sum he calculated for that purpose was infected with error and not to be relied upon. For the latter purpose both the facts found by Pagone, J. and his acceptance of Mr Borsky’s approach to valuation are now challenged on appeal in a number of ways to which it will be necessary to return in due course.
[1]A counterclaim by the appellant was dismissed and is no longer the subject of this appeal.
(i)Whether perceived bias is basis to disqualify an expert witness from testifying
The first point, however, is relatively straightforward. Acceptance of the appellant’s argument would show that the learned judge was wrong to admit Mr Borsky’s expert evidence,[2] upon which his Honour ultimately relied, so that in the circumstances it would be necessary to remit the proceeding for retrial. What is said, and what was urged below, is that Mr Borsky’s expert testimony should not have been admitted in evidence at all because his relationship with the respondent meant that it lacked the “independence” said to be a necessary characteristic of expert evidence, at least in recent years. The passage relied upon in particular is a dictum of Lord Wilberforce in Whitehouse v. Jordan[3] where he said that “it [is] necessary that expert evidence presented to the Court should be, and should be seen to be, the independent product of the expert, uninfluenced as to form or content by the exigencies of litigation.”[4] In addition, counsel particularly relied upon what is called a “Practice Note”[5] in which Evans-Lombe, J. in Liverpool Roman Catholic Archdiocesan Trustees Inc. v. Goldberg (No. 3)[6] sought to rule that, where “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”, then it was contrary to public policy to allow that evidence to be admitted “however unbiased the conclusions of the expert might probably be.”[7]
[2]Mr Borsky also gave direct evidence as to certain events relating to the partnership, but this part of the judgment relates solely to his capacity to give expert evidence. So any reference in paras.[3]-[30] to his evidence should be treated as referring only to his expert evidence.
[3][1981] 1 W.L.R. 246 at 256-257.
[4]The passage was cited with approval, but without further exposition, by Cresswell, J. in National Justice Compania Naviera S.A. v. Prudential Assurance Co. Ltd.(“The Ikarian Reefer”) [1993] 2 Lloyd’s L.R. 68 at 81. It formed the first of seven “propositions” on expert evidence.
[5]In truth his Lordship purported to hand down a judgment, or at least part of a judgment, in an action which had already been settled by the time the so-called judgment was handed down. Indeed, it is pointed out in the statement of facts (at 2337) that one of the terms of settlement was that the judgment “would not be handed down”, but the judge was said “in the exercise of his discretion” to have handed down that part of the judgment which dealt with an earlier application that certain expert evidence be declared inadmissible. The object, so it might appear, of the judge was to reject a view as to its admissibility expressed at an earlier pre-trial review by Neuberger, J., which, for better or worse, had been reported in The Times of 9 March 2001.
[6][2001] 1 W.L.R. 2337. After argument concluded, senior counsel for the appellant very properly drew the Court’s attention, on the day the report reached Australia, to the later decision of the Court of Appeal in R. (Factortame Ltd.) v. Secretary of State for Transport, Local Government (etc.) (No. 8) [2002] 3 W.L.R. 1104, which disapproved Liverpool etc. Trustees. Factortame (No. 8) will be discussed below.
[7]At 2340.
To ask whether the expert evidence given was admissible, however, was to deflect the Court from the true enquiry. Although it may be described as a sub-branch of the rules relating to admissibility,[8] the real issue must have been the testimonial capacity or competence of Mr Borsky to give evidence on the subject. There can be no doubt that the evidence as to value which Mr Borsky sought to give was relevant, indeed relevant to the critical issue in the whole action, namely, what was the true value of the goodwill as a component of the amount which the respondent was entitled to receive upon retirement. All evidence which is probative is relevant, so that: “If evidence is of some, albeit slight, probative value, then it is admissible unless some principle of exclusion comes into play to justify withholding it from [the Court’s] consideration”: per Gleeson, C.J. in Festa v. The Queen[9]. Although for obvious reasons proof of value in these circumstances must be established by suitable opinion evidence, if the witness from whom it is sought to adduce that evidence is suitably qualified, then there is no rule of exclusion to my knowledge which would deny either its relevance or its admissibility in general, nor did counsel point to any facet of that evidence which otherwise could be considered inadmissible either in whole or in part.
[8]See Wigmore on Evidence (Chadbourn Revision) Vol. II pp.640, 649 and 799.
[9](2001) 208 C.L.R. 593 at 599 para.[14].
In truth, therefore, the sole issue was whether Mr Borsky was competent to give the expert evidence which the respondent sought to adduce from him. There may be two aspects to that question of his competence, first one which has been called by Wigmore his “experiential capacity”[10], i.e., whether he was qualified by training or experience to give expert evidence, and, the second whether, because he was in breach of some other rule relating to the giving of this kind of evidence, he should be treated as disqualified from giving it. These matters must be firmly distinguished from those matters which may go to impeach the reliability[11] of a witness’s testimony, namely those that are based on cross-examination or other evidence to show inadequate expertise or bias or interest by reason of conduct or other circumstances.[12]
[10]See Wigmore, op. cit. Vol. II Chapter 23 paras.555ff.
[11]See per Handley, J.A. in Polycarpou v. Australian Wire Industries (1995) 36 N.S.W.L.R. 49 at 75.
[12]See Wigmore (Chadbourn Revision) Vol. IIIA paras.876, 939, 943 and 991 and in particular Chapter 33 (para.943ff.).
The appellant sought to argue that a person such as Mr Borsky, who fair-minded observers might consider to have a particular concern, if not technically an interest, in the outcome of the litigation, should have been precluded from giving any expert evidence and that his evidence should now be disregarded. Counsel does not point for this purpose to its actual unreliability – that is the subject of quite separate grounds of appeal directed to the witness’s approach and its particular application – but to the risk that he might, albeit unconsciously, have favoured his brother-in-law’s position to an extent which need not be specified but which would tend to showing its unreliability and the undesirability of it being received in evidence.
The test that counsel asked[13] the Court to lay down for the independence of expert witnesses was based on the tests for perceived bias of courts and tribunals, namely that the relevant person should be disqualified for an appearance of bias if in the mind of a fair-minded observer that person might not bring an impartial and unprejudiced mind to the resolution of the question at hand: see Livesey v. The New South Wales Bar Association[14]; Webb v. The Queen[15] and Johnson v. Johnson[16]. Presumably the “the resolution of the question at hand” in the case of expert evidence is the expression of opinion in evidence by such an expert: otherwise in an ordinary suit it is hard to see precisely what it is that the expert resolves or will determine, having regard to the other party’s right to cross-examine and the judge’s (or jury’s) obligation to weigh all evidence before accepting it.[17] Nevertheless the argument was directed to the reception of the witness’s expert evidence as a whole, assuming the expert is called solely in that role, and not to the reception of specific aspects of that evidence. In other words, the issue does not relate to the form or substance of the evidence, albeit opinion evidence, because, if the identical testimony were uttered by another witness unaffected by the alleged bias, there could be no objection to its reception, once the witness was properly qualified. Consequently the argument is essentially directed to the competence of the witness Mr Borsky as an expert rather than to particular aspects of admissibility of the evidence given by him. Technically competence also goes to admissibility, but the issue is to be resolved by determining whether the witness can give expert evidence at all and by considering the desirability of that witness giving any opinion evidence as to the value of the practice, not specific aspects of the evidence to be given.
[13]Doubtless counsel has not abandoned the argument, but his recent note (see fn.6) must be taken to acknowledge that the principal authority for the proposition, Liverpool etc. Trustees, has now been firmly disapproved in England: see Factortame (No. 8) at 1127 para.[70]; and see below paras.[27]-[29].
[14](1983) 151 C.L.R. 288.
[15](1994) 181 C.L.R. 41.
[16](2000) 201 C.L.R. 488.
[17]Different considerations might apply if the expert had been appointed the sole court expert, but it is unnecessary to resolve that question here. Such an expert may be seen to be closer in function to a referee or an assessor.
The issue, therefore, is whether Mr Borsky should have been precluded from giving expert evidence on behalf of the respondent by reason of his lack of capacity to give that evidence flowing from his interest in the outcome, in the sense of an appearance to a fair-minded observer that he might not have applied an unprejudiced mind to the formation of his opinion. One may either view the objection as founded on the kind of interest in the outcome of the litigation which should disqualify him from giving evidence or as depending on his lack of “experiential capacity”, which ought to have denied the respondent the right to qualify Mr Borsky as an appropriate expert witness as to value for the purposes of his case.
Whichever approach one may take to the question, there was, in my opinion, no basis in principle for excluding Mr Borsky’s expert evidence, whatever one might have said as to the wisdom of calling him as an expert in this action and whatever one may say as to the ultimate decision to prefer his evidence.[18]
[18]Cf. Factortame (No. 8) at 1127 para.[70].
As to the more general objection that the witness was disqualified by reason of interest in the nature of perceived bias, there is and never has been a basis for excluding evidence of the kind presently under consideration as incompetent or for any other reason. As Wigmore describes the history of the matter,[19] the common law recognised relatively few objections to competence, but for various reasons, probably connected with the influence of the ecclesiastical courts and the civil law, a number of strict rules began to be applied in England from the fourteenth and fifteenth centuries, including incompetence based on interest, which in particular barred the giving of evidence by the parties and their spouses. The rules as to incompetence through interest became complex, although it seems that, so far as the parties themselves were concerned, the only relatives affected were spouses and the rule never applied to parents, children or more remote relatives of the parties. As the rule was stated in 1842 by Starkie: Law of Evidence[20]:
“Hence, although a man and his wife cannot give evidence for each other …, yet no other degree of relationship or connection in society, whether natural or artificial, would incapacitate the parties from giving evidence for each other.”
So, according to an example there given, fathers might then have testified, even at that time, for their sons and vice versa.
[19]See Vol. II Chapter 24.
[20]3rd ed., at p.17.
There was, however, a further aspect to interest, being an interest in the outcome of the litigation, which was treated as precluding persons from giving evidence who had a direct or legal interest in the outcome, such as a tenant in a dispute as to the title of the landlord. But, as Starkie expressed it,[21] “it must be a legal interest in the event of the suit …, as contradistinguished from mere prejudice or bias, arising from the circumstance of relationship, friendship or any other of the numerous motives by which a witness may be supposed to be influenced.” Interest, therefore, as once understood in the law of evidence, did not comprehend the relationship of Mr Borsky to the respondent or to his wife or any of his alleged concerns as to the outcome of the litigation, for none were legal interests, nor any which were sufficiently direct to constitute a disqualification of him as an incompetent witness. In any event, the rule as to want of competence by reason of interest came under severe criticism at the beginning of the nineteenth century, for reasons discussed by Wigmore[22] and C.J.W. Allen: The Law of Evidence in Victorian England (1997)[23]. The relevant rules were abolished by the United Kingdom Parliament, starting in 1843, under Lord Denman’s Act[24] and proceeding by later legislation to permit both party and spouse to give evidence in civil and criminal proceedings, reforms which were generally adopted throughout the common law world. The abolition of the rule as to the disqualification of witnesses by reason of “interest” may be seen in ss.22 and 24 of the Evidence Act 1958 of this State.[25]
[21]3rd ed. at pp.103-104.
[22]Loc. cit.
[23]See especially pp.95-122.
[24]Law of Evidence Act 1843 (6 & 7 Vict. c. 85) (U.K.).
[25]See also Cross on Evidence (Aust. loose leaf ed. Service 57) para.[13015] and see also para.[13020].
Secondly, it may be thought that some such rule could derive from principles relating to the qualification of expert witnesses as such. Again, I know of no principle stated as a principle of the common law which would exclude as incompetent the evidence of a person otherwise qualified to give expert testimony but who is said to be affected by interest or bias. The considerations referred to in the last paragraph would, for the most part, seem equally applicable to expert witnesses, but it is conceivable that the courts may have taken a different approach to witnesses whose evidence has consisted only in expressing opinions on the subject matter of the dispute, albeit expert opinions. Nothing, however, was cited to us to support, nor have I been able to discover for myself, any basis in principle for the exclusion of such testimony, howsoever the tribunal of fact might deal with it once received into evidence. Nor does any work of authority suggest that there is any such principle, except to the extent that some more recent works reflect what has been expressed in the recent decisions to which I have referred, but which will have to be examined further in a moment. In broad terms, whatever be the criticism of expert witnesses, which has in fact been expressed in one form or another for at least 100 years if not far longer, the remedy has not been seen in denying the right of such witnesses to give evidence; rather it has been seen in devising court rules and protocols which will ensure that experts will try to be independent and that courts will not unnecessarily suffer the opinions of experts who may be thought to be in one camp or the other. That, however, has been seen so far to be a matter of administration and not, to my knowledge, a matter of principle or even one which has been expressed in terms of statutory disqualification, except as part of a regime designed to allow “court experts” or to limit the number of expert witnesses who may be called.
The question remains, nevertheless, whether anything which has recently been said on the subject of expert witnesses and the need for their “independence” requires the Court to lay down some principle which would deny a party the right to call a witness connected with it in the way that Mr Borsky was connected with the respondent in the present case.
The appellant sought to rest its submissions as to exclusion of Mr Borsky’s evidence on two primary propositions. In the first place it said that, as has been said on a number of occasions, “expert witnesses should provide independent assistance to the Court by way of objective unbiased opinion in relation to matters [concerning] that person’s expertise.”[26] Secondly, it was argued that in the administration of justice it is of fundamental importance that justice is not only done but is seen to be done so that the Court should not admit a witness as an expert who will not appear to a fair-minded lay observer to bring an impartialled and unprejudiced mind to the resolution of the question the expert has to consider. In my opinion the attempt to apply those propositions confused a number of important matters.
[26]Cross on Evidence (Aust. loose-leaf ed.) para.[29080] (Service 68).
As to the first proposition, all that has been said, particularly in recent years, about the desirability of expert witnesses providing independent evidence by way of opinion to the courts should be seen as expressions of the ideal manner in which expert witnesses should go about their tasks and the resultant opinions which those witnesses should strive to express. With but a few minor exceptions, none of them should be treated as stating principles of the law of evidence but they should be seen rather as admonitions to those who would give expert evidence, especially as to the way they should prepare and present that evidence to courts, if they and their clients wish it to be acted upon. Some of the statements are also directed to the ways in which courts prefer from time to time to direct the manner in which such evidence should be given, whether, for example, by way of appointment of so-called court experts or by directions requiring experts to consult and the like. However desirable these new rules and protocols may be, they cannot establish changes to the principles underlying the law of evidence, for they can do no more than change the relevant practice in particular jurisdictions, albeit that the form of such rules may involve an effective change in some of those rules under and by the authority of the relevant delegated powers invested in particular rule-making bodies.
In so far as counsel relied upon certain authorities to support the principle he would ask this Court to espouse, the whole edifice might seem to depend upon the dictum of Lord Wilberforce in Whitehouse v. Jordan set out above. What is almost invariably omitted[27] in its later citation is the sentence which followed immediately thereafter[28], in which his Lordship stated: “To the extent that it is not [scil. independent], the evidence is likely to be not only incorrect but self-defeating.” It is hardly likely that that his Lordship was intending to express a new principle as to the admissibility of evidence or the competency of expert witnesses by a passage which seemed to recognise that, when admitted, evidence of this kind will be to an “extent” both incorrect and self-defeating, adjectives which reflect merely both the undesirability of preferring such evidence and the lack of wisdom of parties who would seek to put it forward. Moreover, as may be seen also from the passage which immediately preceded it[29], the sentence relied upon was provoked largely by a comment made by Lord Denning, M.R. in the court below[30], which was directed to criticising the way in which counsel had settled a joint expert report by two professors which showed that it was more the product of “special pleading rather than an impartial report”. But, as is clear from the judgments as a whole, that was merely one of the reasons why Lord Denning, and for that matter one other member of the Court of Appeal[31], as well as all members of the House of Lords, thought that the evidence of the particular experts should not have been accepted and why they preferred the evidence given by others.
[27]But not, significantly, in its (full) citation in Factortame (No. 8) at 1126 para.[64].
[28]At 257.
[29]At 256.
[30]Whitehouse v. Jordan [1980] 1 All E.R. 650 at 655.
[31]Lawton, L.J.
Furthermore, most of the subsequent statements which would seemingly try to erect what is preferred practice into a principle of competence fall into two groups. The first group, such as the dictum of Cresswell, J., derived from a need to give effect to specific rules, guidelines and protocols which have valiantly attempted to reduce the number of expert witnesses called in trials to a few, reliable, witnesses, by authorising directions and the like designed to achieve those ends and which have been taken implicitly to require the limited number of experts thereafter called to be impartial. Thus, Cresswell, J. was dealing, as may be seen from the report[32], with witnesses called pursuant to guidelines laid down in the 1993 Guide to the Commercial Court Practice, which were in part directed to restricting the number of expert witnesses who could be called. It is again significant to note that the seven precepts laid down by his Lordship in that case were not directed to competence or admissibility in general but were introduced by the words: “The duties and responsibilities of expert witnesses in civil cases include the following …”.[33] I should treat them, therefore, as essentially precepts or ideals towards which expert witnesses should strive rather than the basis of any new exclusionary rules. Even the Civil Procedure Rules 1998 (Eng.) which flowed from the seemingly radical recommendations of Lord Woolf’s Final Report on Access to Justice July 1996[34], were not expressed in terms denying competence or admissibility, but merely in terms of a “duty” to aid the Court: see rule 35.03, but in any event the provisions of Part 35 now make it impossible for a party to call an expert without the Court’s permission, together with sundry other restrictions which clearly must have an effect on the practice in the English High Court.[35]
[32]At 81.
[33]Ibid.
[34]Lord Woolf's earlier Interim Report (1995) on the same subject made even more radical proposals (Ch 23), but they were admittedly tempered in the Final Report (Ch 11).
[35]Similar precepts appear in many jurisdictions, including the Federal Court of Australia, of which we were shown the guidelines laid down by the Chief Justice on 15 September 1998. They are likewise expressed in terms of duties to the Court, but I am not aware of any case in that jurisdiction where the present issue has arisen.
Another group of cases which might appear to have given some support to the existence of the first proposition advanced on behalf of the appellant were two criminal appeals decided in England and Canada in recent years: R. v. Hensman[36] and R. v. Kovats[37]. The circumstances surrounding each such decision were unusual but, inasmuch as they contain any suggestion that the Court might treat the evidence of certain expert witnesses as incompetent and therefore inadmissible, I would treat those courts as merely giving effect to the discretion which exists in all criminal courts to exclude evidence on discretionary grounds, such that the prejudicial nature of a biased expert’s evidence might be seen to outweigh its probative value. I have seen no decision in which it is suggested that the defence in a criminal trial is under any similar limitation. Two other Canadian cases to which we were referred do not appear to be based on any principle of which I am aware, unless it be some local rule applicable in that country.[38] So far as my understanding extends, the same rule as to the irrelevance of interest likewise applies in Canada: see Sopinka, Lederman and Bryant: Law of Evidence in Canada[39]. Nor does there appear to be any general rule excluding “interested” experts.[40] Moreover the “rule” applied in the three Canadian cases does not appear to be derived from some principle applied in the U.S.A. To the best of my limited understanding of the rules of evidence applied there, apart from the passages in Wigmore to which I have referred, the applicable principle is stated in the most recent revision (1996) of the relevant volume of the Corpus Juris Secundum[41]:
“It has been held that a witness is not disqualified as an expert because he is interested in the outcome of the proceedings. The bias or interest of the witness does not affect his qualification, but only the weight to be given his testimony.”
[36]Court of Appeal, Criminal Division, 6 July 1998, unreported.
[37]Provincial Court of British Colombia, 10 November 2000, unreported.
[38]See Northwest Mettech Corp. v. Mettech Services Ltd. (1997) 74 Can. Patent R. (3d) 464 and Hughes v. Haberlin (1997) 49 B.C.L.R. (3d) 366.
[39]2nd ed. 1999, published after the death of Sopinka, J. See paras.13.1 to 13.7 and 13.77-13.78.
[40]See Sopinka Ch.12, passim. (None of the three Canadian cases is cited.)
[41]32 C.J.S. Evidence (1996 revn.) §524 at p.328.
More importantly, there is no good reason in law why such a principle should now be erected save, arguably, where an expert is appointed as an “court expert” or the like. Witnesses give evidence in a wide variety of disputes in courts and tribunals of greater or lesser significance, as well as before arbitrators. Furthermore, issues requiring the giving of opinion evidence by persons suitably qualified as experts can arise in many and varied circumstances. One should resist the temptation to see expert witnesses as called only to establish some principal issue at trial, such as the extent and duration of injuries in personal injury cases, good planning practice in town planning disputes, the quality of merchandise in sale of goods disputes, or the value of property interests in rating disputes or cases such as the present, to name but a few. Experience shows, moreover, that expert evidence is frequently required to establish minor issues arising at trials or in other disputes. Any matter of which a judge cannot take judicial notice, or which a jury cannot similarly resolve from their own experience, requires expert evidence if technical issues arise or if proof of a matter requires the expression of suitably qualified opinion. Sometimes expert opinions are expressed by informants before magistrates in minor criminal hearings, such as technical questions relating to the content or value of drugs. In civil disputes in superior courts a party, or an officer of a corporate party, may often have to give evidence as to the practice in particular trades, industries or professions.
It would be totally impractical to require “independent” witnesses always to be called in these kinds of circumstance. Even if one were to lay down certain rules for superior courts (because, say, of the amount at issue), one could not expect such a “Rolls Royce” approach to minor disputes in lower courts and tribunals. Common sense requires a practical approach to the question of interest in the outcome of the dispute as and when the issue arises. Even if one were able to reach the conclusion that such evidence is not now challenged in the vast majority of cases, it is just as likely that no challenge is made because presently it is thought that no objection of that kind can succeed. That says nothing as to the potential for objections in the future if the appellant’s contention here were upheld, let alone the practical problems in criminal trials where lack of objection seems to have become less and less a basis for overruling an appeal point based on inadmissibility.
Moreover the need for some such rule seems to have its basis in the cynicism expressed by judges about expert witnesses, perhaps engendered by years of exposure to the kinds of disputes which arise in the two to four per cent of proceedings issued which ultimately lead to trial. There are honest witnesses, inasmuch as I would venture the opinion that the majority of people called upon to give evidence are honest, even if sometimes mistaken. Indeed one might conclude that a fair proportion of parties (or officers of corporate parties) are likewise honest in giving evidence. If cynicism is properly to be expressed, then it might more fairly be directed to an (unspecified) proportion of expert witnesses who find themselves obliged to earn their living by giving that kind of evidence, and who mistakenly think their own best interests are advanced by “gilding the lily”. But they would not be disqualified under the proposed rule (unless they had some form of retainer from one side or the other), so that the proposed rule would produce relatively little positive benefit in terms of its practical effect on litigation. Indeed the practical needs of litigants point in the contrary direction, for they would be put to unnecessary expense on undisputed and minor issues. Not that litigants would not be better advised, as I have already observed, to obtain independent expert witnesses where the subject of their evidence is a significant issue, for obvious reasons, in order to avoid attack on the unreliability of that evidence.
One may give examples of the kinds of evidence which may be given by a person having an interest in the outcome of the litigation (in the narrower and broader senses) which have been accepted by courts, at least in this jurisdiction. First, evidence is frequently admitted as to the way in which vehicles will be likely to move in certain specified circumstances, if the witness is suitably qualified by experience or training to give expert evidence on the subject. Thus, so long as one avoids the pitfalls of attempting to call such evidence in circumstances such as were described in Clark v. Ryan[42], it is possible that persons having long experience in driving or observing articulated vehicles may give evidence of the way they would be likely to move when rounding a curve or in other circumstances, such as was in fact admitted by the High Court from an expert witness in Weal v. Bottom[43]. There should be no reason why a party, if a highly experienced driver, could not give such evidence, subject to the risk that he or she may be subject to the usual comment. Similar evidence is often given by the informant or other police officers in prosecutions for driving offences, but it is sufficient to give the following example of evidence given by a member of the Accident Investigation Section of the Victoria Police in R. v. Dean Adrian Johnston[44]. There the witness gave evidence about where a rider of a motor cycle and a pillion passenger would be likely to come to rest after a collision of the kind which was the subject of the prosecution. On appeal it was argued that this evidence was inadmissible. Hayne, J.A. (with whom Callaway, J.A. and Hedigan, A.J.A. agreed) held that the evidence was probably best described as expert evidence, that the witness was appropriately qualified and that the evidence was admissible.[45]
[42](1960) 103 C.L.R. 486.
[43](1967) 40 A.L.J.R. 436.
[44]Court of Appeal, unreported, 30 August 1996.
[45]At 8-11.
A case where the question of interest was directly discussed arose when Pape, J. was considering the admissibility of evidence given by an officer of an insurance company as to materiality of risk and in particular as to what a prudent insurer would regard as facts which were material to a particular class of risk. In Babatsikos v. Car Owners Mutual Insurance Co. Ltd.[46], in a meticulous and frequently cited judgment, his Honour carefully analysed the kind of evidence which was required, at least at that time (before several subsequent statutory alterations led to certain practical consequences) distinguishing between the actual conclusion as to materiality and factors which prudent insurers would take into account in reaching a conclusion as to materiality. So in considering that issue Pape, J. made the following observations[47]:
“But although the cases establish that the evidence of experts other than the parties may be given, it is less clear that the insurer himself, or if it be a company, the officers of the company, is entitled to give evidence as to the practice of the insurer in regard to a particular class of risk, for the question is … not what the particular insurer would regard as material, but what a prudent insurer would so regard and it does not always follow that a particular insurer is necessarily a prudent insurer. There would seem to be little doubt that an officer of a defendant company (if he were qualified to do so) could give evidence of the general practice of other insurers …”
Then, after referring to a number of authorities, his Honour continued[48]:
“But the mere asking of the question [about a particular fact] would not make the matter material unless it were established that a prudent insurer would so regard it. Prima facie such a matter would not be material, but evidence might show that it was material and could be so regarded by a prudent insurer …”
[46][1970] V.R. 297.
[47]At 305-306.
[48]At 307.
Having regard to these authorities, it is unnecessary to pursue further examples. It is sufficient to say that in large numbers of commercial disputes, one party or the other frequently has particular expertise of a kind where it is frequently, but often only incidentally, necessary to qualify the witness to give expert evidence as to some particular aspect of that trade or business. It would be remarkable if one had to obtain another expert from a competitor or even from outside the country to prove particular aspects of that evidence, whether related to trade usages or technical mechanical processes or whatever. Such evidence can surely be given by a party, or by an officer of a corporate party, and the fact that it comes from such a witness, qualified if required as an expert, should be a matter merely for comment by counsel in argument and a matter of weight for consideration by the judge in reaching his ultimate decision.
As to this latter point, the giving of evidence by an employee, the recent decision of Factortame (No. 8) has revealed[49] what was formerly an unreported decision of the Court of Appeal in Field v. Leeds City Council[50]. There it was held, notwithstanding the new regime in England relating to expert witnesses, that employment by a party, there the local council, did not automatically disqualify a witness from giving expert evidence.[51] As May, L.J. expressed it[52]:
“I entirely agree with my Lord, the Master of the Rolls, that there is no overriding objection to a properly qualified person giving opinion evidence because he is employed by one of the parties. The fact of his employment may affect its weight but that is another matter.”
[49]See at 1126 paras.[67]-[68].
[50]Decided on 8 December 1999 but subsequently reported in [2001] CPLR 833. The unreported version appears only on the YAWS website.
[51]See per Lord Woolf, M.R. at 837 paras.[10]-[11] and per Waller, L.J. at 841 para.[25].
[52]At 842 para.[31]. Cited with approval in Factortame (No. 8) at 1126 at [68].
In my opinion, to the extent that it is desirable that expert witnesses should be under a duty to assist the Court, that has not been held and should not be held as disqualifying, in itself, an “interested” witness from being competent to give expert evidence.
The second aspect of the appellant’s argument[53], however, is pressed into play to support the contention that it is not the actual bias of the witness that should be in issue, but rather the perception of the fair-minded observer that the expert witness may not have applied an impartial and unprejudiced mind “to the resolution of the question at hand”. Again, to use a principle such as this in the context of determining who was or is a competent expert witness demonstrates a misconception of the present issue. There can be no reasonable belief, whether by a fair-minded observer or otherwise, that an expert “resolves” or determines any litigation, except in those rare cases where an expert is appointed a “court expert” or an assessor or referee and their reports remain unchallenged. The expert’s evidence ordinarily remains only that, namely, evidence which judge or jury may choose to act upon where they consider the evidence reliable and acceptable in all senses. The proposition is so obvious that it needs little elaboration. A party who loses a suit upon the basis of the evidence of such a witness can ordinarily complain only that its case has not been properly presented, whether by failing to attack the witness adequately or by failing to call suitable expert evidence to the contrary, or that it lost because the judge misconceived the questions at hand and was wrong to accept the particular “interested” expert witness. Again even that is an over-simplification, for it is just possible, from time to time, that a particular expert has given the preferable evidence, in that it was given by a person who has not allowed “bias” or interest to outweigh his or her professional abilities and competence to give accurate evidence on the relevant subject.
[53]See the propositions described in para.[14] above.
Insofar as Liverpool etc. Trustees might have been seen as “authority” for any different proposition, it cannot any longer be so relied upon in the light of the Court of Appeal’s decision in Factortame (No. 8). In the latter case Lord Phillips, M.R., speaking for the Court,[54] said of a passage[55] in the earlier case:
“This passage seems to us to be applying to an expert witness the same test of apparent bias that would be applicable to the tribunal. We do not believe that this approach is correct. It would inevitably exclude an employee from giving evidence on behalf of an employer. Expert evidence comes in many forms and in relation to many different types of issue.”
[54]Consisting of himself, Robert Walker, L.J. (as he then was) and Clarke, L.J. See at 1137 para.[70].
[55]At 2340.
However desirable it may be, as a matter of common sense in the presentation of a party’s case, that an expert witness be seen to be independent, there is therefore no authority requiring this Court to hold that an “interested” expert’s evidence be rejected because of a “perception” that the witness might favour the party seeking to adduce that evidence.
In my opinion, therefore, the ruling of Pagone, J. on this issue was correct, subject to what I have said above. It has in fact been subsequently followed at least twice in New South Wales: see Collins Thomson Pty. Ltd.[56] and Kirch Communications Pty. Ltd. v. Gere Engineering Pty. Ltd.[57]. Whatever I have here said, however, should not be treated as affecting the usual discretionary powers of judges in criminal trials.
[56][2002] N.S.W.S.C. 366 (Austin, J.)
[57][2002] N.S.W.S.C. 485. I cannot speak of the significance of the passing of the Evidence Act 1995 (N.S.W.).
(ii)Whether error as to value of respondent’s interest in partnership
(a)Factual background
The more specific issue raised by this appeal relates to the value placed on the interest of the respondent as a retiring partner for the purpose of the taking of accounts between the respondent and the remaining partners. Essentially complaint is made as to a number of the judge’s fact findings and as to the method he adopted in reaching conclusions as to the value of the respondent’s interest. An incidental, though not unimportant, point raised was whether the judge failed to take account of the evidence given by the appellant’s expert or, at the least, failed to explain properly or at all why he disregarded that evidence in favour of the expert evidence given on behalf of the respondent.
For this purpose it will be necessary to set out considerably more of the factual background leading to the dissolution of partnership, although, with one critical exception, an adequate general description of those matters appears in the judgment given by his Honour on 17 December 2001 reported in [2001] VSC 479.
The parties’ partnership had been carried on from 1 July 1997 to the agreed date of termination namely 30 June 2000 through trust and corporate vehicles effectively representing the ultimate 25% interests of the respondent (Mr Fagenblat), Mr Feingold, Mr Gurgiel and Mr Tuszynski.[58] In fact the respondent had joined Feingold Partners in 1990 and had been a partner since 1 January 1992. It seems that at all times the partnership had a capital account which included a substantial sum by way of goodwill, so that at the time the respondent originally acquired a 10% interest in the practice at the beginning of 1992, that was treated as having been “paid for” by the contribution of his own clients to the practice, many of whom had come with him when he joined as an employee in 1990. In 1993 he acquired a 23.33% interest in the partnership which cost him $233,000, which was effectuated by various alterations to the partners’ loan accounts which were thereafter equalised by differential drawings. In due course the respondent’s interest through his family trust was treated as 25% of the practice.
[58]There was a fifth partner for the first year, one Linacre.
The only written partnership agreement of which I am aware were heads of agreement dated 16 June 1997 when there were five partners and the respondent’s interest in the practice was forty 150ths. The partnership had no stated term and the capital was said to consist of all the assets of the practice Feingold Partners and of a related trust, but it did not otherwise condescend to detail. The shares of the five partners at the time were stated and there was a drawings clause which enabled each partner to draw out such sums as the partners might agree upon from time to time on account of share of profits, with an obligation to repay any excess at the end of each financial year. A list of twelve other matters were said not to have been agreed upon, which the partners said might be agreed in the future, such as their duties, the taking of accounts, termination, indemnification and assignment of interests. There was no reference in this clause or any other clause to any mutually agreed restraints on the partners practising after retirement or otherwise, nor as to the right to approach clients or former clients of the firm. Presumably these matters were to be left to the Partnership Act 1958 and in particular to the general law. When Mr Linacre retired from the partnership on 30 June 1998, a further deed was entered into (dated 8 July 1998), which was primarily directed to the retirement of Mr Linacre, but it recognised that the existing partnership was “dissolved by mutual consent so far as the retiring partner is concerned” and that the legal practice should be carried on on behalf of the continuing partners and their trusts. No change was made to the terms of the existing partnership, but it may be noted that the retiring partner by the deed specifically covenanted not to take any clients or customers from the practice for a period of four years thereafter. Later that year Mr Tuszynski acquired a further 5% equity so as to make the continuing four partners’ interests each 25%.
It is necessary to describe in some detail the circumstances which led to the departure of the respondent from the firm. The reason for doing so is that one of the primary issues on the appeal was whether the expert Mr Borsky, and in turn the learned judge, were correct in their conclusion that the respondent would remain with the firm as an employee after the termination of the partnership on 30 June 2000. It was a conclusion which led Mr Borsky to place no qualification on his estimate of future maintainable earnings after that date, nor to suggest that a different multiplier from the 30% applied was appropriate.
The respondent’s difficulties appear to have begun in about the month of May 1999 when he had a somewhat bitter personal falling out with Mr Feingold. At that stage it seemed largely unconnected with the practice but with a property investment scheme, which was intended to build up retirement assets for all partners and in which the respondent’s wife (who happened also to be Mr Borsky’s sister) acted on a part-time basis as Mr Feingold’s assistant for that purpose. Although the property investment scheme worked satisfactorily for a while, suddenly, according to the respondent, his wife was told to have nothing to do with a particular large investment property and he himself was told that the property was not to form part of their investment scheme, and indeed it seemed that no other properties were going to be developed in that way. In June 1999 a meeting of all the partners was held at which Mr Feingold spoke and apparently made a number of statements critical of the respondent which made him “extremely upset”. The dispute then affected the partnership to the extent that Mr Feingold sought to be appointed managing partner, which was resisted by the respondent and at first by the other partners, although by the end of the year Mr Feingold had got his way.
Whatever be the precise truth of these matters, the respondent did not take any action so far as the partnership was concerned for the time being, as he was unwilling at the age of 53 to start up a practice elsewhere.
Early the following June another dispute blew up between the two men. The respondent was the litigation partner and, for the purpose of a case involving the father of a solicitor employed in the practice, he wished to advance moneys to pay court fees by way of disbursements for the bringing of an application in this Court. A request to that end having been forwarded in the usual way to Mr Feingold for approval, that approval was not forthcoming on the basis that no such fees should ever be advanced, but the refusal was expressed to a member of the staff in terms which the respondent found personally upsetting. On that day, 7 June 2000, the respondent said that he came to the conclusion that he could not remain in partnership with Mr Feingold any longer and that he should retire from the partnership, although he wished to remain working in the practice as an employee solicitor.
On the same day the correspondence between the parties began. It is significant that most of the communications between the respondent and Mr Feingold (and the other partners) were conducted on paper and they each expressed themselves in some detail. The summary which follows will concentrate primarily on what was said by the parties as to the respondent’s future employment with the firm. I shall also ignore the fact that much of the correspondence was directed to the companies, to the trusts or to the partners as trustees for their trusts, for in practical terms each treated those interests as co-incidental with their personal interests. The first letter from the respondent to the other partners dated 7 June formally gave notice to each of them in each of their respective interests that it was the respondent’s intention “to retire from the partnership as from midnight on 30 June 2000”. He continued by saying: “Notwithstanding my trust’s retirement from the partnership …, I would be pleased to become an employee of Feingold Partners Pty. Ltd. … as from 1 July 2000 on terms and conditions to be agreed between us providing, of course, you are willing to employ me.” (Emphasis added.) He asked for discussion as to details of his retirement “as soon and as amicably as possible”. A few days later, on 13 June 2000, a meeting of the partners took place at which the respondent was asked to explain why he had decided to resign, but he said little more than that he did not believe that it was tenable for him to continue as a partner and that he desired to remain working in the practice, without amplifying precisely what he had in mind. He said he wanted to notify the staff, but the other three partners asked that he should not do so until the basis of his employment had been decided.
Notwithstanding that request, the respondent sent a memorandum to “everyone” on the staff the next day, on 14 June 2000.[59] It stated that he had made the decision to retire from the partnership but asserted: “I will remain with the firm on a full-time basis in the position of senior consultant. With the permission of the partners, I will retain my position as head of the litigation department”.[60] So he said there would be no major visible changes in the manner in which the office functioned except that he would not be taking part in the management of the practice. The precise order of the next meetings and responses is not entirely clear but it seems that, on the same day that the memorandum was sent to staff, the directors (and partners) other than the respondent met to consider their response. What they proposed was set out in a further memorandum sent on 20 June 2000, although it seems likely that some aspects of this proposal were communicated to the respondent before that date. Relevantly that proposal accepted the respondent’s retirement and proposed that he be “employed on a trial basis for six months from 30 June 2000, as a consultant or senior consultant on a salary and package to be determined and finalised by mutual agreement”. Further it was proposed that between 1 July and 31 December 2000 the respondent would receive an amount equivalent to his drawings on a monthly basis (effectively $10,000 a month), which would be apportioned “as to salary (to be determined)” and the balance of his entitlement as a retiring partner. The memorandum also recorded that at that same meeting the view had been expressed that “the position of employment of Mark was an unknown factor so far as its effect on his relationship with the other directors, the clients and the staff …”, but they would reluctantly accept his decision to retire. They continued by putting forward further proposals to the respondent, though he later commented that “this proposal was not clear”, to the effect that he should be given “a trial period of six months’ employment”, upon the basis that he would formally retire on 30 June from the partnership, that he would be paid his working capital over time and that “if either party was not happy with the employment arrangement then the employment would cease on notice and the respective options available … would be implemented”, referring to matters relating to his retirement which they wished to have agreed before 30 June.
[59]The judge wrongly found that the memorandum was sent “two weeks” after his resignation: see at para.[20]
[60]The words in bold type appeared in that form in the memorandum.
It seems that the following day (15 June), by a memorandum which was not produced in evidence, the respondent told the other partners that he was “unable to consider the trial period of employment in a vacuum and that he needed to know with particularity how it was proposed to pay his entitlements and what the options were if the trial employment did not work”. One may assume that in one way or another the broad outline of the three other partners’ proposals of the previous day had been passed on to the respondent. Possibly there was a direct meeting between the respondent and his fellow partners, for he certainly refers in his affidavit to another meeting (before the partners’ “final” meeting on 29 June 2000), at which he alleges that there was some form of negotiation between them although he was “extremely unhappy with the manner in which these negotiations [had] commenced”. He said that Feingold had suggested that his remuneration be at $120,000 per annum but he had the impression that the other partners had determined not to pay him his proper share of goodwill, “even though I’d stated on several occasions that it was my wish to remain working in the practice and for the benefit of the practice”.
On 20 June 2000 Mr Feingold sent a memorandum some three pages long to the respondent, although it is not entirely clear whether a further meeting of the other partners was held for that purpose. The memorandum noted the respondent’s proposal that he be employed after his retirement on 30 June and set out the proposals which I have outlined in paragraph [40]. The memorandum noted his dissatisfaction with the lack of particularity as to his employment but then made a detailed proposal in the form of two “scenarios”. The first of these was very detailed but was headed “Mark’s Trial Employment … Until 31 December 2000”. He was then offered again a total salary package of $120,000 per annum, put forward on the presumption of billings of $360,000 per annum at least, or alternatively he was offered a salary equivalent to 30% of his billings. This was to be accompanied by quarterly payments of his interest in the former partnership practice. The proposal continued by saying that the respondent on his side and the remaining partners, on the other, would then “ascertain whether [the respondent’s] employment is a workable and appropriate relationship to continue after 31 December 2000”. It stated that, if it were then desired to continue his employment, the salary and quarterly payments on account of his interest would continue over three to four years and his interest in the partnership would be calculated to reflect the net working capital due to him, “together with his share of the goodwill as at 30 June 2000 less any allowance for contingent liabilities …”. In addition it said that the respondent “would covenant by appropriate restraint, in the event of termination of employment, not to act for any person or entity that had previously been a client of Feingold Partners Pty. Ltd. … for a period of say four years after ceasing employment …”. In this scenario an alternative was based on his employment not continuing beyond 31 December 2000, in which case he would receive the balance of his interest in the partnership within six months and would have the right to take with him, after payment of all accounts on work in progress in respect of current files, “such current files of clients of Mark who wish to retain him as their solicitor together with all other clients who wish to retain Mark as their solicitor in full and complete satisfaction of Mark’s share of the goodwill …”. The other “scenario” put forward was described as “Retirement from the partnership with no employment agreed to effective from 30 June 2000”. That proposed that the respondent would receive payment of his working capital account within six months of 30 June and that he would likewise take current files of his clients, together with all other clients who wished to retain him, “in full and complete satisfaction” of his share of the goodwill.
This memorandum prompted an almost equally long memorandum from the respondent dated 22 June 2000. It commenced by seeking again to explain why he had taken the course of resigning and seeking to work as an employee, referring to the satisfying period he had spent with the firm and continuing:
“I would not have made such a suggestion if I had thought that remaining in the practice as an employee would result in discord or even acrimony between us. My intention was to continue working in and contributing to the practice and being treated in a fair and equitable manner.”
He complained that each of the two “scenarios” in the memorandum of 20 June would result in his being “deprived of either earning a living or having the benefit of my capital”, which he complained was “not fair to me”, and doubting that it was the result that they intended. He further complained that in the memorandum goodwill had been treated as if it were exactly equivalent to his own client base, namely those who might follow him should he leave the practice. He said that his equity was in “the total goodwill of the practice”, asserting that he had no proprietary interest in any clients. As to any restraint, he would grant one “only to the extent necessary to prevent you from incurring any loss”. In other words, if he left to continue in private practice, he “would undertake to compensate you in respect of any clients of the practice that might follow me”. As to employment he believed that it would be “unfair to treat me in precisely the same way as every other employed solicitor, particularly in our practice which has only one genuinely senior employee solicitor”. He reiterated his position in the firm, as being currently head of the litigation department and responsible for continuing legal education. He asserted that there had been “substantial cross pollination of work from clients introduced by me in all areas of the practice except for the mortgage practice”. Accordingly, he believed that his “remuneration should be calculated at not less than 50% of the billings” rendered by him. The firm would thereby profit more by having him on that basis than by not having him at all. He believed his contribution to the firm’s net profit would be in the vicinity of 20% in addition to profit resulting from work generated or supervised by him. He concluded by saying that retirement from the partnership should not be seen as retirement from the practice, but that he would like all matters resolved by 30 June 2000. If they could not reach a concluded agreement by then, he said that “I must retain my equity in the practice until such time as we do reach a concluded agreement”.
This appeared to generate an even longer memorandum dated 26 June 2000 written by Mr Feingold and approved by the other remaining partners. Observing that it was unfortunate that they had been unable to confront the issues on a face to face basis but only by formal memoranda, it suggested a meeting as soon as possible to resolve outstanding problems. The memorandum denied that employment of the respondent did “not necessarily raise only positive implications”, for it complained that, without prior discussion and giving only 23 days’ notice of retirement, “you are now … suggesting an employment remuneration basis of 50% of billings …”. Although it accepted that the respondent’s intention was not to create discord, “your expectations are clearly not in the best interests of the remaining partners”. As to their earlier proposals, the remaining partners said that they “do not understand how the scenarios that we have submitted to you deprive you from earning a living or deprive you of the benefit of your capital”. They wanted to know whether his retirement would affect their relationship with the clients of the firm and that was one of the reasons why they had proposed a six months’ trial period. It was intended to enable each side to determine whether they would derive benefits from his becoming an employee. They asserted that there were three essential matters requiring resolution, the first being the timing of the payment of his share of the working capital. Importantly the second was stated to be “whether it is desirable to offer employment on a basis other than already submitted or at all” (emphasis added). The third question was whether the remaining partners wished to acquire the respondent’s interest in the goodwill of the firm and, if so, the manner of its calculation and payment. They emphasised that “the fact that your employment … [should not] … be regarded as a foregone conclusion”, as the respondent seemed to have already concluded. They agreed in part about the concept of goodwill, as explained by the respondent, but they would not consider an acquisition of that goodwill unless it was on the basis of his giving a clear covenant protecting the firm as far as possible. Returning then to the question of employment the memorandum stated that, although his past contributions should not be underestimated, the other partners “would not be interested in engaging you on the basis of the remuneration package outlined in your memorandum”, and they pointed out that the net earning rate on gross fees was less than 30%. As to his apparent threat to withdraw his retirement, the remaining partners said that his intention was plain from his first memorandum and that they would treat his trust interest in the partnership as ceasing on 30 June. However they agreed that it all had to be placed beyond doubt before 1 July. They concluded by saying that, notwithstanding his wishes, “your expectations in our view are both unrealistic and unreasonable and … resulting in anxiety and uncertainty”.
As a result the parties agreed to have a final meeting on the last but one working day of the financial year, Thursday 29 June 2000, with a representative of their accountants, one Grant, also present. It seems that the respondent, having received advice from counsel, stated early and in unambiguous terms that he was retiring from the partnership with effect from midnight 30 June 2000. After much discussion all parties agreed on minutes which reflected the decisions made on that day by each of the partners as representing their family trusts and which was confirmed by them all in minutes dated 30 June. Those minutes stated that the purpose of the meeting was “to further consider the retirement” of the respondent from the partnership and “the employment of Mark Fagenblat with Feingold Partners Pty. Ltd.”. Two matters were then stated to have been agreed: in the first place that the respondent’s trust had retired from the partnership with effect from 30 June 2000, and he “thereafter will have no equity in the partnership and/or Feingold Partners Pty. Ltd. but retaining an entitlement to be paid his share …”; and secondly, that the continuing partners should be entitled to use all the assets of the partnership notwithstanding the respondent’s retirement and the non-receipt of his share. The following matters were then stated as “still to be agreed upon”[61]: first, the value of the respondent’s trust share in the partnership as at 30 June “including the method of valuation”; second, the terms of payment of the respondent’s share “including the issue of a restraint”; and third, “whether to employ Mark Fagenblat by Feingold Partners Pty. Ltd. and if so on what terms and on what remuneration” (emphases added). The following paragraph completed the minutes: “Notwithstanding the above it was agreed that Mark would attend Feingold Partners Pty. Ltd. as from Monday 3 July 2000 as an employee pending resolution of matters with the notation that Mark would not require a pay packet in the week commencing 3 July 2000 but on the understanding that the matters of remuneration from 3 July 2000 would be finalised as quickly as possible.”
[61]Emphasis added.
This was the position as at 30 June 2000 which was said to be the date at which the likelihood of the respondent’s remaining with the firm as an employee should be resolved. One may note that very little, if anything, of the negotiations as to the respondent’s future employment were set out in the judge’s summary of the facts, although his Honour returned to a few of them at para.[20] in justifying his conclusion that Mr Borsky was not wrong in assuming that the respondent would remain in the practice. However, since it was also argued that subsequent events might provide evidence of what the parties’ intentions were at the relevant date, it is necessary to summarise what occurred thereafter.
After 30 June there were, for a short time, no direct negotiations between the parties but Mr Borsky, also a partner of the firm which acted as the partnership’s accountants tried, “of his own initiative” to bring about a resolution of the dispute between the parties. There were a considerable number of emails and some memoranda in a relatively short time but I shall not examine them in detail because, at a relatively early stage, it was seen, at least by the appellant’s interests, that Mr Borsky was not truly independent and, whatever he had hoped to do by way of mediation, he was seen more and more as representing the respondent. A long email proposing relatively generous remuneration for the respondent dated 20 July received a relatively brusque response later that day from Mr Feingold who said he was in agreement with neither the assertions nor the conclusions in Mr Borsky’s first email. Again Mr Borsky was asked whether he was purporting to represent the respondent and, although he replied that he had intervened for the benefit of all parties, he said he would withdraw if there were any dispute.[62]
[62]See an email of 24 July 2000.
Then on 27 July 2000 Mr Feingold replied in detail by letter, though asserting that he did not view Mr Borsky as “fully independent”. The letter is otherwise critical not only of Mr Borsky’s proposals but of the respondent personally. His conclusions were that the remuneration already offered to the respondent was the maximum that should be offered, subject to appropriate restraints, and that: “It would be better in the short to medium term interests of the firm if Mark was not employed by the firm.” He reiterated, however, that they were still prepared to engage the respondent as a senior consultant at $120,000 per annum with a bonus of 40% on fees recovered in excess of $360,000 but that if this were not acceptable then it was best that they should part company as soon as practicable. By the end of the day Mr Borsky sent an email saying that he could no longer assist all parties, having regard to Mr Feingold’s view that it would be better if the respondent ceased employment, an observation on which he made this comment: “This preconception is evident in your entire analysis.”
The respondent accepted that from 27 July Mr Borsky could no longer mediate, although he pointed out that Mr Borsky’s negotiations had taken place on his own initiative. Mr Feingold, in turn, said that he had no preconceived notion but reiterated that there were considerable differences between them. The respondent himself resumed negotiations on 1 August 2000, asking that the other partners put a “comprehensive proposal “ to him saying that it was his “continuing wish to remain working in and for the practice”. That merely drew a response from Mr Feingold requesting the respondent to advise them “the terms on which you seek to remain in the employment of the firm”. The following day the respondent reiterated that it was for the other partners to put a proposal to him.
On 3 August 2000 Mr Feingold asserted that the respondent was not prepared, by that time, to accept the remuneration proposal in the last paragraph of his letter of 27 July and the rest of the memorandum dealt with the need to agree on the basis for calculating the value of goodwill. By 8 August the respondent had replied saying that it seemed that the other partners’ “proposal for the calculation and payment of my entitlements upon retirement and remuneration for continuing employment is based on assertions and assumptions with which I cannot agree and produces a result which is not reasonable or fair to me”. The letter continued to complain about that unreasonableness and unfairness. It seems that his claim for drawings increased to $150,000 per annum but that was to be adjusted to the equivalent of 50% of recovered billings on all files in which he had an input. Whether or not there were further direct negotiations in the meantime, by 14 August 2000 the other partners replied to the respondent by saying that they were “unable to agree with the propositions which you submit”. They could not accept the substantive proposals submitted by him as being reasonable or fair and in particular thought the salary basis excessive. There was a detailed response as to the calculation of the value of the respondent’s interests, but as to his salary requirements they concluded that they were “of the strong view that the firm is unable to accommodate you in respect of these requirements”, and that there was little point in reiterating their position. They concluded by saying that “in all the circumstances … we are now of the considered opinion that our respective interests would be best served if your engagement by the firm (such as it is) be terminated at the earliest opportunity”. They invited him to nominate an appropriate early date for an agreed cessation of his engagement and for the vacating of their offices. In a reply sent on 21 August the respondent nominated 31 August as the date when his engagement would cease and that was in fact carried out. In essence therefore the negotiations between the parties as to his further employment had run little more than six weeks from the date when his retirement from the partnership took effect and he worked as an employee for only two months.
The present proceedings were threatened and issued in due course. A short time later the respondent set up his own practice taking with him (without complaint) a number of the clients whom he had served in his years at the appellant’s firm. In the course of the hearing it appeared that the respondent in his new practice wrote a considerable volume of business with these old clients, in the order of $500,000 in the first year, which was variously estimated to represent one-sixth to one-fifth of the partnership’s turnover in the preceding year.
(b) Trial and judgment
After a long trial which involved the presentation of exhaustive evidence surrounding the demise of the partnership, the learned judge reserved his decision. Shortly thereafter his Honour delivered judgment concluding that the plaintiff should succeed on the basis that Mr Borsky’s expert evidence was to be accepted, so that judgment was given in the sum of $375,399 together with interest, the counterclaim being dismissed. For present purposes the essential issue was the proper method for valuing the retiring partner’s interest in the partnership. It was not disputed that the respondent was entitled to be paid an appropriate share of the partnership assets and it was not disputed on this appeal that his share of the assets, other than goodwill, was $129,797, although some minor adjustments to this figure were rejected by the trial judge. The extent of the partnership’s goodwill and the proper method for its valuation as at 30 June 2000 were and remain the central issues in the dispute. One may add that there was no provision in the partnership agreement as such for the payment of any sum with respect to goodwill, but it was agreed in the memorandum of 30 June 2000 that he should be paid some share, although the method of valuation was then treated as a matter yet to be agreed upon.
The expert evidence called at the trial had not been entirely satisfactory. Mr Borsky had been called, naturally enough, on behalf of the respondent but, apart from the issues now to be considered, it had also been subjected to considerable criticism on grounds akin to those dealt with in the first part of this judgment and which arose primarily from his relationship to the respondent and, in particular, the latter’s wife, who was his sister. A second expert called on behalf of the respondent, Geoffrey Ronald Sincock, also a chartered accountant, had given evidence which in substance supported the conclusions and most of the methodology adopted by Mr Borsky, with one exception to which it will be necessary to return, but he had not made an independent valuation of the practice and the respondent’s interest in it. On behalf of the appellant one Mark Russell Lipson, a certified practising accountant, had given evidence of a valuation. Again it seems the witness had not independently examined the information, but had relied on that provided by Mr Borsky’s firm. Mr Lipson had made certain calculations based on the capitalisation of future maintainable earnings but had concluded that the practice had “insufficient future maintainable earnings to generate a value to incorporate goodwill”, so that nothing was added for this purpose to the value of the other items in the balance sheet, albeit that he concluded that those figures produced a slightly higher figure for them than that described above, fixing on the respondent’s interest as amounting to $154,296.
In giving judgment the learned judge in substance accepted Mr Borsky’s methodology and his conclusions as to the value of the practice and the respondent’s interest in it. Mr Borsky had formed an opinion as to the future maintainable earnings of the practice calculated as at 30 June 2000 by using an average of the profits derived in the previous three years, adjusted for certain items. That produced a figure of $294,723 as the future maintainable earnings or profits to which he applied a capitalisation rate of 30%. The goodwill as at 30 June 2000 was therefore valued at $982,410, with the result that the respondent’s 25% share was valued at $245,602. One of the assumptions which Mr Borsky made for this purpose, which was described by him in evidence and by the appellant as “basic”, though thought to be of somewhat less significance by the respondent, was that the respondent would remain with the practice as an employed consultant or as a mere employee solicitor. This was said by Mr Borsky to be a factor which would affect the capitalisation rate but might not affect his assessment of maintainable earnings. A subsidiary question, but not one which Mr Borsky would countenance, was the extent to which any valuation as at 30 June 2000 could have regard to subsequent events and in particular the respondent’s negotiations thereafter with the firm and his early departure on 31 August of that year. Mr Borsky in part explained this by commenting at the end of his statement, in terms not discussed in the judgment, that, although the value of goodwill should not take account of the value of fees later earned by the firm, “the taking of fees by [the respondent] is a form of payment of a portion of his entitlements, and a fair value should therefore be ascribed to the fees taken, in order to determine how much of his entitlements have been taken, and how much remains to be paid” (emphasis added). Mr Sincock saw no basis for making any such reduction and the judge did not give effect to that aspect of Mr Borksy’s opinion.
As to these matters, which formed a large proportion of the dispute at trial and essentially the whole dispute on appeal, the learned judge said that he accepted Mr Borsky’s evidence as to the proper method of valuation and in particular his assumption that the respondent would stay on with the firm as an employee. His Honour also, after a brief discussion of authority, accepted that both the valuer and the Court might have regard to events after the date for valuation “insofar as they illuminate the value of the thing as at” the relevant date, so that the question was whether the subsequent events truly reflected or indicated the value at the relevant date. His Honour, however, did not think the facts in this case should have led either the valuer or the Court to a different conclusion as to either the respondent’s position as an employee or as to the proper valuation of the practice as at 30 June 2000.
It is necessary to look at some of the factors which his Honour thought were significant to his conclusions. After observing that the valuation of goodwill is “complex and is peculiarly within the domain of experts”, he said it was essential that the valuer should understand the business fully, referring, as his Honour did throughout his judgment, to various passages in Wayne Lonergan, The Valuation of Business, of Shares and Other Equity (3rd ed., 1998). His Honour readily concluded that in this case “the expert who was best placed to form a reliable view about the goodwill of the practice was Mr Borsky”, notwithstanding that he had a personal relationship with the respondent and his wife which, though he held it to be relevant, did not ultimately lead to the conclusion that his methods were inappropriate. Consequently his Honour accepted his evidence, supported to that extent by Mr Sincock, that the methodology adopted by Mr Borsky was an acceptable method for valuation of the goodwill.
His Honour recognised, however, that Mr Borsky’s adoption of the capitalisation rate of 30%, was, at least in part, affected by his conclusion that the respondent would stay as an employee with the firm.[63]
[63]The appellant contended not merely that this conclusion affected the capitalisation rate but ought also to have led to a reduction in his estimate of future maintainable earnings.
The learned judge in fact held that “one of the basic assumptions that Mr Borsky made in determining the goodwill of the legal practice was that Mr Fagenblat would continue to remain in the firm as a consultant employee”. This, the judge said, was “more than an assumption”, for “it was from his point of view the status quo as at 30 June 2000”. So he held that Mr Borsky could not be said to have failed to consider the respondent’s continuing involvement with the firm as a consultant as being relevant to the issue of the value of goodwill. His Honour then returned to the question whether one might take into account subsequent events, observing that a departure of the kind under consideration might be due to another subsequent event which could not reasonably be taken into account as a reliable contingency at the relevant date. So he held that a valuation which took into account the actual departure of the respondent “may have the effect” of producing a valuation of a “fundamentally different legal practice”.
“The basal principle is that what an expert gives is an opinion based on fact. Because of that, the expert must either prove by admissible means the facts on which the opinion is based, or state explicitly the assumptions as to fact on which the opinion is based. … One of the reasons why the facts proved must correlate to some degree with
those assumed is that the expert’s conclusion must have some rational relationship with the facts proved.”
Although much of the evidence may have been revealed in the course of the trial, it would be quite wrong for a trial judge to give special weight to particular factual knowledge of an expert merely because he was an expert or because he chanced to be involved in relevant negotiations. Those facts had to be proved in the ordinary way and no expertise could give the expert’s conclusions greater weight for that specific purpose. I appreciate that his Honour expressed himself satisfied otherwise on the materials as to the likelihood of the respondent continuing as an employee, but I have very real concerns as to the so frequently expressed significance given Mr Borsky’s evidence for this purpose. Mr Borsky was not exactly an outsider in this dispute and, despite the fact that the judge felt that his expert opinion was not infected by his relationship to the respondent and his wife, the very factual issue here in dispute is one about which one should be especially cautious in accepting the conclusions of a witness of this kind, whatever may fairly be said about the reliability of his professional opinion. But, in any event, Mr Borsky’s impressions were simply not relevant.
The essential question, however, is whether the judge was right in finding that the respondent would as at 30 June 2000 be remaining for an indefinite time in the legal practice as a consultant employee. Both the judge and, I believe, Mr Borsky appeared to accept that the fact that the respondent was likely to stay with the firm for only a short period after his retirement was not sufficient for present purposes. So the judge said that there was “much evidence to support the conclusion that it was probable that the respondent would stay with the firm, for at least a sufficient period as would allow an orderly departure …” so as to preserve the “entirety” of its goodwill. That is an important qualification, for it is the value of the goodwill which is in question. It may not, at least in Mr Borsky’s opinion, have affected the calculation of future maintainable earnings, because the actual earnings after the date of retirement may be affected by a wide variety of factors, most unconnected with the departure of the partner. It is, perhaps, unnecessary to examine the validity of that proposition, although it may be argued that the very expression “future maintainable earnings” connotes an estimate of what the firm might expect to earn in the future, using figures from a number of years preceding the date of retirement (three in this case) as a means, as accurate as possible, of establishing what a not too willing purchaser would pay for the retiring partner’s interest which, hypothetically, would be what the purchaser hoped to earn from his newly acquired interest after the date of valuation and purchase. Support for a broader view may be found in Lonergan’s textbook[72] to the effect that the “technically correct answer” is to ascertain that level “which (on average) the business can expect to maintain in real terms, notwithstanding the vagaries of the economic cycle” (emphasis added), but it is perhaps preferable to conclude that the judge was entitled to accept Mr Borsky’s expert view that it ought not to affect the future maintainable earnings calculation so much as the rate of capitalisation, which he conceded was based on the assumption that the respondent would remain as an employee. That this approach is at least appropriate, from a valuation point of view, is again stated generally by Lonergan[73] where he states:
“The maintainable earnings figure should reflect an ‘average’ of the expected earnings with variability around this average built into the capitalisation rate. Although earnings in the future are expected to vary, this does not make the maintainable earnings figure inappropriate. The variability (risk) is normally reflected in the capitalisation rate. The higher the degree of variability, the higher the risk and thus the lower the [price earnings ratio] and the lower the value.”
[72]At p.33.
[73]At p.41.
Nevertheless, whatever be the appropriate way of reflecting the likelihood of a former partner staying as a consultant/employee after retirement, for the employment to be of significance there must ordinarily be some probability that it will be for a reasonably extended period. Again, if one were not concerned with the paying out of a retiring partner, but with the acquisition of the interest by a new partner, that person would want some assurance that the level of earnings would be maintained to some extent into the future, especially as the chosen capitalisation rate of 30% in this case reflected in broad terms three years earnings. Much weight was placed by Mr Borsky and the judge on an assumed orderly departure by the retiring partner which it was said could be assured by his remaining with the firm as an employee. I have already referred (in fn.64) to the inapposite analogy taken from Mr Lipson’s evidence about a retiring partner who had moved to Israel. In the present case the respondent was accepted as being anxious to work as a solicitor and as being young enough to set up a practice on his own, whatever his initial hesitations. Of course, while the retired partner stayed on with the firm in such circumstances, there could be no question of that consultant/employee being legally able to deal with former clients in any new practice, but the propositions accepted by the judge do not answer the question what would happen when the former partner did decide to set up in practice. As I have said, in the absence of a covenant he would be free to deal with former clients of the firm, so that the firm’s supposed assurance of protection from competition would be no longer than the time he spent as an employee with the firm. In consequence the relevant probability, which the respondent had to make out, must have been, not merely that he would stay on in some capacity for some period of time, but that the respondent would stay on for a significant period, such as might assure to the partnership the retention of most of that business until, to take the present kind of case, a new litigation partner could be installed in circumstances where that person would be likely to retain most of the former partner’s business after his departure at the end of his employment.
One of the causes leading to a misapprehension, as I perceive it, of the parties’ likely relationship after 30 June 2000, was the judge’s placing inordinate emphasis on the wishes of the respondent. He pointed out that, although Mr Fagenblat wished to retire from the partnership as such, he still wanted to practise as a solicitor, so he characterised the letter of resignation of 7 June as expressing “an honest intention, and an achievable goal, of continuing with the firm …”. But in asserting that it would be wrong to assume that the respondent would be dismissed, his Honour again seemed to lay great store on the fact that he was “eager to keep his employment”. Of course one may accept the finding that the respondent was eager to continue to work as a solicitor for he was, even by modern standards, not yet at retirement stage and he was clearly fit and eager to work. But his position in practical terms was clearly going to be quite different after 30 June from that which applied when he was an equal partner in the firm. Whereas it was essentially his own decision whether to stay as a partner, he would be dependent after that date on the willingness of his former partners to engage him. Unless he had previously secured such employment (which he had not), any contract for employment required their agreement and he would have no real bargaining power, other than that which flowed from his ability and experience with the firm. He also faced one partner who was clearly antagonistic towards him, though prepared to accept him as an employee on the partnership’s own terms. One might observe that, although the two other partners appeared, at least at first, to harbour no such dislike, Mr Feingold was a dominant character, who had founded the firm and assumed the role of spokesman for the continuing partners, in which role the remaining two partners appeared to acquiesce. In my opinion, if one has regard to the whole of the correspondence, the relevant parts of which I have tried to set out above, there was throughout on the part of the continuing partners (largely in the form of Mr Feingold’s correspondence) what appeared to be, if not an air of hostility, at least an air of scepticism and an unwillingness to concede more than was absolutely necessary and what might be seen to be in their own interests. Nor should that seem surprising, for they were dealing with a partner who for personal reasons was giving up that responsibility and choosing a lesser role in circumstances where it cannot be said that that had been forced on him by ill-health or the like.
Moreover one may detect an air of resistance in the correspondence to the proposals which the respondent was seeking to force upon his former partners after retirement. Early in June 2000 the respondent had reacted, arguably impetuously, to a further perceived slight by Mr Feingold, but in a way which suggested that, although he could have nothing to do with Mr Feingold as a partner, he should nevertheless remain as an employee solicitor in a relatively small firm in which there were but two other partners with whom he might deal more easily. Even then, as noted above, his first letter spoke of terms and conditions “to be agreed between us providing … you are willing to employ me”. Their first meeting shortly afterwards provided little information as to the respondent’s motives, but it seems he was asked not to notify others including the staff. Despite that, the next day he had sent a memorandum to all the staff asserting that he would remain with the firm on a full-time basis “in the position of senior consultant”.
One should immediately notice that this action appeared to provoke a somewhat colder tone. Certainly the first written response by the continuing partners was to the effect that the respondent might be “employed on a trial basis for six months”, on a basis yet to be agreed, but which it was suggested should be at the rate of $10,000 a month. It is perhaps unnecessary to follow through all of the negotiations in the latter part of June, but the respondent first complained that he was not satisfied that the full terms of his retirement had been clarified and at the same time he stated that he was “extremely unhappy” with the negotiations to that stage. That produced the long memorandum of 20 June from Mr Feingold which suggested two scenarios, one of which was retirement without employment and the other with employment, but still confined to $120,000 per annum or 30% of his billings. His response was to bemoan the fact that his suggestion appeared to have resulted “in discord and even acrimony between us”. His alternative remuneration then proposed to the partners was 50% of his billings, which in turn produced effectively a flat rejection of that level of earnings and an assertion that, having given only 23 days’ notice, his expectations were “clearly not in the best interests of the remaining partners”. It was again in this letter that Mr Feingold, with the agreement of the other two partners, stated that his employment should not be regarded as a “foregone conclusion”.
The result was the final meeting of the partners minuted the next day in the document of 30 June. What is significant is that only two matters were truly agreed, his retirement on the basis that he had no right other than an entitlement to be paid his share and the right of the continuing partners to use all the assets of the partnership thereafter. One of the matters said to be still to be agreed upon included the question whether to employ the respondent “and if so on what terms and on what remuneration”. To that it was added, almost as an afterthought but as an attempt perhaps to see if some compromise could be reached, that the respondent might “attend” the firm as an employee “pending resolution” of the matter, but on the basis the respondent would not even require a pay packet in that first week, although it was understood that his remuneration would be “finalised” as soon as practicable.
Virtually none of these important matters were set out in the judge’s description of the facts, nor in his analysis of the parties’ relationship. To my way of thinking they threw a considerable light on the attitude of the parties and, in particular, upon the enthusiasm or otherwise of the remaining partners to engage the respondent. Of course these were experienced solicitors who doubtless were skilled in the art of hard negotiation, so that apparently intransigent positions might, at least in other circumstances, have given way to reason and final agreement. But at the time there was certainly no agreement to engage the respondent for more than a few weeks, at best for six months, and even then on approval. None of the terms of that employment had been worked out, not even his starting salary, upon which quite different positions had been taken. The likelihood of their reaching agreement was, on this material, remote and, even if some agreement was thereafter to be reached, it was by no means clear for how long they would agree that the respondent should remain or indeed how long in fact he would remain as an employee with the firm.
In short there was no reason to be sanguine about the respondent’s prospects of continued employment with the firm. There was not even truly a status quo as at 30 June 2000, as Mr Borsky had asserted was the basis for his valuation and which the judge appeared also to accept. There was technically no employment for the respondent immediately following on his retirement, that is, one effective from 1 July, in that he was being allowed merely to attend on Monday 3 July as a temporarily unpaid employee. The question whether he would be employed on any other, more permanent basis was specifically left unsettled, as were the terms and remuneration of any such employment. Again it is no answer to this plight in which the respondent found himself to say that he was anxious or merely wished to become an employee of the firm. His wishes at that stage did not coincide, so far as one best may gather from the evidence, with those of the remaining partners for, even if one were to ignore Mr Feingold’s apparent hostility, it had not yet been agreed whether he should be employed and it was certainly not agreed that he would be employed for any extensive period. To deduce from the arrangements of 29-30 June that it was probable that he would remain in the practice as a consultant or employee solicitor was, I would respectfully suggest, wishful thinking, perhaps of the kind which only the respondent and his brother-in-law Mr Borsky could honestly espouse. Nor was there anything in the evidence to suggest that the respondent would stay as an employee with the firm “for at least a sufficient period of time as would allow an orderly departure by him in the future”, for little had been said on that subject, save that there had been various proposals as to covenants in restraint which might be sought, and possibly given, if the respondent were to stay for a limited time or were to depart immediately. So far as one can gather, nothing had been agreed which would have prevented the respondent taking with him as many of the former clients with whom he had dealt as wished to follow him into any new practice he chose to set up.
That is the nub of the respondent’s difficulties in this case. The whole point of its argument about his prospective employment was an assumption that, if he were employed long enough and on sufficiently suitable terms, somehow the risk of loss of clients would disappear and thereby the capitalisation rate would remain appropriate to the hypothesis upon which Mr Borsky had made his valuation. That hypothesis was not accurate in any relevant sense, for there was no likelihood that, if say the respondent had left at the end of the year (perhaps an optimistic view of the likelihood of employment), the practice’s position would have been protected and its goodwill preserved against the legitimate activities of the respondent in a new practice.
On this primary question of fact there remains the issue whether evidence of the subsequent events could have been or should have been used by the trial judge in reaching conclusions as to the valuation to be made as at 30 June 2000. Arguably, although the judge expressed considerable scepticism about the value of any such evidence, he in fact used it to support his conclusions and in particular to justify Mr Borsky’s approach in treating it as probable that the respondent would remain as an employee consultant into the indefinite future. On the other hand, his Honour rejected the appellant’s contentions based on the known but subsequent facts that the negotiations between the parties ceased by 14 August and the respondent finished working as an employee at the end of that month. Because the valuation had to be made as at 30 June, so it was asserted and largely accepted, these events could not go to the probabilities of the respondent remaining as an employee consultant. It was said that there were so many other acts, which could equally have affected the probabilities, that it would be unwise to rely on the particular events as showing that it was unlikely that the respondent would remain as an employee. So his Honour concluded, relying on cases such as Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd. v. Pontypridd Waterworks Co.[74]; Kizbeau Pty. Ltd. v. W.G. & B. Pty. Ltd.[75]; and M.T. Associates Pty. Ltd. v. Aqua-Max Pty. Ltd. (No. 2)[76], that the law has long permitted “regard … to events after the date for valuation ‘insofar as they illuminate the value of the thing as at’ the date for valuation”, but that it was equally plain, as conceded by senior counsel for the appellant at the trial, that “not every event subsequent to the valuation date may be taken into account in the valuation”: see the judgment at para.[12]. In the end, however, his Honour held that “hindsight is not always beneficial and does not always bring enlightenment”, so that he would not permit the substitution of the fact that the respondent actually left the appellant’s employment for the hypothetical possibilities of that event as seen at 30 June 2000. Clearly Mr Borsky had not altered the basis for his valuation to accord with those facts, but his Honour was satisfied that he was right to ignore them.
[74][1903] A.C. 426.
[75](1995) 184 C.L.R. 281.
[76][2000] VSC 78 esp. at paras.[211]-[221].
Both Mr Borsky’s approach and the judge’s findings appear to overstate the risks of using this form of retrospectant evidence, as it has been described by Wigmore and others. I ignore for the present an argument that an estimate of future events and the probabilities thereof may be said to be always better informed by proof of the actual facts, as appears to be well settled in the law of damages. I would therefore concentrate on what fairly could be said to be the probabilities as at 30 June. As to that I have already expressed a conclusion, but the additional facts were by no means unimportant or irrelevant. Retrospectant evidence, even in criminal trials, for example, where consciousness of guilt is relied upon, may often illuminate events in the past, so long as it is a reasonable inference to argue back from the later events to a particular earlier event.
The difficulty in the present case is that the learned judge chose to ignore the actual events which later occurred, and yet he not only relied on certain evidence which could relate only to a period after 30 June but indeed placed heavy store on it. That evidence was the evidence of Mr Borsky and what the judge described as his “special factual knowledge”. Mr Borsky had in fact been party to negotiations between the respondent and the remaining partners during the month of July 2000 and it was from this participation that he appeared to have drawn the conclusion that it was probable that the respondent would stay as an employee of the firm. But the evidence was clear that he had not, at least to any significant extent, participated in any negotiations up to 30 June, for it was in fact his partner Mr Grant who had attended the last meeting of the partnership. Mr Borsky’s knowledge, or at least most of the material which formed the basis for it, arose from those later negotiations which I have summarised and which it would be fair to say seemed to place Mr Borsky in a position where he appeared to take a very optimistic view of his brother-in-law’s chances of remaining in employment and thereby make a number of totally unacceptable demands on his behalf for that purpose. It is clear that within a relatively short time and certainly by the end of July Mr Feingold, with whom one would assume the other partners agreed, felt that Mr Borsky was simply advocating the respondent’s position and not acting as a true mediator. The conclusion of those negotiations in early August, which led the respondent to believe that the proposals made to him at that time were unfair and unreasonable, led very quickly to the letter of 14 August which said that the other partners were unable to agree and that it would be in their best interests if his engagement was terminated as soon as possible. Now one may concede that Mr Borsky saw at least some of the earlier correspondence, but it would have been impossible for him not to have reached conclusions without having some regard to his actual negotiations on behalf of the respondent and it seems, to put it not unkindly, that he had a view of his brother-in-law’s chances of employment which was far removed from reality, at least by that time. It is difficult therefore to know why it was that the judge sought to place such weight on Mr Borsky’s “special knowledge” arising from those very negotiations, for if one looked at them objectively, there was simply nothing in them which made it more likely that the respondent would stay on as an employee. In any event, whatever conclusions were or were not properly drawn, and whatever inferences Mr Borsky may have drawn from that special knowledge, the judge was thereby relying in part on evidence as to subsequent events. Perhaps Mr Borsky at one stage was correct (though I doubt it), but one cannot use part of the evidence as to later events to support the case as to probabilities and ignore the rest of the subsequent evidence, most of which related to events which occurred within a few days of the end of Mr Borsky’s negotiations and which in practical terms had finished within less than a month thereafter. Either all those matters were relevant or they were not.
For myself I would prefer to rest my conclusion on an objective consideration of the matters which took place up to 30 June. I would use the later materials only in this way. If it be suggested that what had occurred was merely hard bargaining and that suddenly there would be light at the end of the tunnel, with a happy outcome and with all parties satisfied as to the terms for extended employment of Mr Fagenblat, then one could have used the evidence of the later events to show that conclusions of that kind were ill-informed as to that negotiating position. It is more than clear, however, that the attitude of the remaining partners here remained equally tough, equally intransigent at least in the case of Mr Feingold, and the negotiations continued to their end substantially in the way that they had begun and continued through to 30 June. There was indeed no real probability that the respondent would be employed as a solicitor for any substantial length of time after 30 June 2000.
Having reached a conclusion as to the fundamental weakness of Mr Borsky’s opinion, and the judge’s conclusions based on it, it is unnecessary to examine the further issue raised about that valuation, namely, that the judge was wrong to accept it because it was vitiated by Mr Borsky’s opinion that the respondent’s entitlement should be reduced by the amount of fees later earned by him from clients of the former practice, as it were by way of self-help. I would say only that it seemed a curious conclusion to reach and certainly in the opinion of the respondent’s other expert, Mr Sincock, it was an irrelevant consideration.
I have considered the other reasons put forward on behalf of the respondent for accepting Mr Borsky’s valuation and for supporting the judge’s findings as to the value of the respondent’s interest in the practice as at 30 June 2000. Most of the matters raised have already been dealt with in what must seem to be far too extensive reasons, but none are sufficient to justify the figure accepted as the proper valuation of the respondent’s interest. It is necessary to mention only the contention that the judge’s acceptance of the assumption adopted by him and Mr Borsky depended, at least in part, on his evaluation of Mr Fagenblat as a witness of credit. The relevant finding relied upon was to the effect that he was at all times expressing “an honest intention, and an achievable goal, of continuing with the firm as a consultant employee”. There is no reason to doubt that conclusion, but the issue is, as I have sought to emphasise, not what Mr Fagenblat wanted or expected, but what objectively was the likely outcome of the parties’ dealings, viewed as at 30 June. His intentions could not force the continuing partners to accept him as a consultant, nor in practical terms was he thereafter in a significant bargaining position. Whatever power he had up to that date of making his retirement conditional upon the offer of an appropriate position as a consultant, was ended by his retirement as at the relevant date with no agreed basis for employment other than the temporary engagement noted in the proviso to the minutes. Nor is there any question of justifying the conclusion by reference to the judge’s finding that Mr Borsky’s assessment of the position was correct. The conclusion here reached is, whatever be the honesty of Mr Borsky’s belief as to the respondent’s future employment, that the objective facts did not support that conclusion. Finally, although reliance was placed on the evidence of the other valuer, Mr Sincock, called by the respondent, it seems abundantly clear that he acted upon the same assumption, so that his conclusions are similarly vitiated if the assumption has been shown to be incorrect.
(d) Conclusions
It follows that the judgment given below must be set aside. The figures relied upon by the judge cannot otherwise be justified, but the difficult question remains as to what order should be made in its place and whether a substituted judgment can be given in favour of the respondent. The difficulty arises entirely from the unsatisfactory nature of the expert evidence. As I would understand it, neither Mr Borsky nor Mr Sincock put forward alternative calculations or valuations based on an assumption other than that the respondent would remain with the practice as a consultant/employee for some time. Except in general terms and in the course of cross-examination, they did not consider what value should be placed on the respondent’s share on the basis that he was at liberty to set up practice on his own and the partnership was at risk of losing some proportion of its business thereby. Even if by a series of ingenious calculations some such figures might be extracted, I do not have sufficient confidence in the methods adopted by the valuers for the purpose of this case to reach a conclusion as to the proper value of the respondent’s share of the practice. In the first part of this judgment I have pointed out the risks taken by parties who call expert witnesses who have a close connection with one of the parties. Without seeing Mr Borsky in the witness box giving the relevant evidence, I would prefer not to reach any conclusions as to matters not specifically found by the trial judge. His Honour accepted Mr Borsky’s assumption, but chose not to make any alternative findings in a case where there was vigorous cross-examination on a wide range of matters. Nor do I believe that I could make any findings based on Mr Sincock’s evidence, since that was somewhat more limited in its scope and depended on the same assumption.
There remains the issue whether the Court can reach conclusions and give judgment based on the evidence given on behalf of the appellant. Certainly Mr Lipson gave evidence upon a quite different assumption from that relied on by Mr Borsky, but the question is whether his evidence was satisfactory. The judge made no findings whatsoever in relation to his evidence and in particular as to his reliability. In the circumstances I would not wish to be overly critical, but the matters to which we were taken in the course of argument, which appeared from his own evidence, suggest that this Court should not rely on his valuation. In the first place he made the diametrically opposite assumption, namely, that not only was the respondent ceasing to be a partner as at 30 June, but also that he was not to be employed at all. In the end I do not believe this criticism to be fundamental, certainly in the light of the conclusion I have expressed above, but the witness seemed to be surprised at discovering the possibility of some future connection of the respondent and it is not clear what conclusion he would have reached ultimately on that basis. Secondly, and seemingly more importantly, he was effectively cross-examined as to the use of geared and ungeared models for valuation of a solicitor’s practice, which seemed to leave him in a good deal of confusion. Finally, in choosing an average value for future maintainable earnings he effectively discounted a conventionally calculated average of $231,030 per annum down to $200,000 per annum, without giving any logically acceptable justification for that calculation of what he described as the partnership’s “sustainable historical earnings before income tax”. In the circumstances it was not evidence upon which this Court should rely in assessing an alternative figure for the value of the respondent’s interest in the practice.
There is therefore only one conclusion which can fairly be reached in the circumstances, which was one of the alternative orders put to us on behalf of the appellant, presumably because it saw that there would be difficulties in the Court’s making appropriate findings on the material before it. It asked that there should be an order for a retrial, in those circumstances, limited at the question of how much, if anything, the respondent is entitled to be paid in respect of his interest in the value of goodwill of the partnership calculated as at 30 June 2000. It is regrettable that in a case of this kind, where there has been so much time devoted to both the factual and technical issues concerning a proper valuation, that one should have to direct a retrial of any aspect of the case. If there be a retrial, further expert evidence will have to be given (one may hope after appropriate directions), but it is perhaps undesirable to limit it only to the issue of goodwill, albeit that at present there is no dispute as to the other items which at present both sides seem to accept as amounting to $129,797. If it remains an agreed factor, then no great harm can arise, but it is preferable where there is a retrial as to damages or as to value, that the experts should give their opinions as to the whole of the matters relevant to value without limitation.
In the circumstances, therefore, I consider that the appeal should be allowed, that the judgment given on 17 December 2001 should be set aside (other than the judgment relating to the counterclaim) and that a retrial should be ordered as to the value of the plaintiff’s interest in the partnership, as raised by the statement of claim.
CHERNOV, J.A:
I have had the considerable advantage of reading in draft form the detailed judgment of Ormiston, J.A. in this matter. For the reasons given by his Honour, I agree that the appeal should be allowed and a new trial ordered on the terms proposed by him.
As his Honour says, it is unfortunate that the matter should be litigated again, but there was really no alternative to this course, particularly given the conclusions
reached in relation to the expert evidence of the respondent’s brother in law, Mr. Borsky, as to the value of his share in the firm. For the reasons given by Ormiston, J.A., however unwise it may have been for the respondent to call Mr. Borsky as his expert witness given his position of perceived bias, his evidence was not inadmissible. Hence, the learned trial judge did not err in that regard. But I do consider that, as Ormiston, J.A. has shown, both the learned trial judge and Mr. Borsky erred in their respective conclusions that the respondent would remain with the firm as employee or consultant after 30 June 2000 for a period which was not insignificant. This assumption was an important, if not a fundamental, plank in Mr. Borsky’s determination of the capitalisation rate which he applied to the future maintainable earnings of the firm in order to value the respondent’s share in it. In light of the relationship that existed between the respondent and his former partners during the relevant period, including their somewhat belligerent attitude towards him and their refusal to commit themselves to employing him, there was no objective foundation for Mr. Borsky’s critical assumption, and his Honour should have so held. This error on Mr. Borsky’s part vitiated his valuation and, in the circumstances, the matter has to be re-litigated, at least to the extent proposed by Ormiston, J.A.
EAMES, J.A.:
For the reasons stated by Ormiston, J.A. I agree that the appeal should be allowed and a new trial be ordered on the terms suggested by his Honour.
This was not a case where the outcome in the trial depended on findings as to the credibility of witnesses. This, then, is not an instance where the trial judge, by virtue of having seen the witnesses, had a significant advantage over the judges in the appellate court in making findings of fact. As Ormiston, J.A. makes clear in his detailed analysis of the evidence, the relevant questions of fact as to the valuation of the partnership primarily fell to be resolved by the drawing of inferences from documentary evidence, and did not turn on assessments of credibility. Indeed, the
learned judge did not suggest otherwise, and his one reference to the honesty of the respondent’s evidence related to his assertion as to his intention, as at one relevant time, to remain with the firm as a consultant employee. That evidence, even if accepted as honest, in the face of challenge, did not preclude a finding that, objectively, it was not likely that he would do so for a substantial time after 30 June 2000. For the reasons stated by Ormiston, J.A., the conclusion reached by the learned trial judge as to that issue was flawed by significant errors in his analysis of the evidence.
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