Funtastic Ltd v Madman Film and Media Pty Ltd

[2016] VSC 708

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL COURT – ALMOND J

S ECI 2015 000359

FUNTASTIC LTD (ACN 063 886 199)	Plaintiff
v
MADMAN FILM AND MEDIA PTY LTD (ACN 600 441 549)	Defendant

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JUDGE:	ALMOND J
WHERE HELD:	Melbourne
DATES OF HEARING:	31 August, 1 September 2016
DATE OF JUDGMENT:	29 November 2016
CASE MAY BE CITED AS:	Funtastic Ltd v Madman Film and Media Pty Ltd
MEDIUM NEUTRAL CITATION:	[2016] VSC 708

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CONTRACT – Share sale agreement – Dispute resolution clause – Expert accountant appointed by the parties to calculate an adjustment amount – Whether expert complied with the terms of the agreement – Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 applied – Scope of expert’s broad discretion under agreement – Whether the expert made a ‘manifest error’ in determining the accounting treatment of two items – General principles regarding ‘manifest error’ – Consequences of a finding of ‘manifest error’ – Whether whole determination vitiated – One issue referred to expert for re-determination.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	M H O’Bryan QC with B K Holmes	Arnold Bloch Leibler
For the Defendant	M J Collins QC with J C Hooper	Gilbert + Tobin

HIS HONOUR:

Introduction

1. This proceeding concerns the enforceability of an expert determination made by an independent accountant (‘Independent Accountant’) engaged by the parties under dispute resolution provisions of a share sale agreement (‘SSA’).[1]  The decision of the Independent Accountant has the effect of reducing the consideration payable for the shares by the buyer, Madman Film and Media Pty Ltd (’MFM’), to the seller, Funtastic Ltd (‘Funtastic’), under the terms of the SSA.  The plaintiff, Funtastic, seeks declarations that the Independent Accountant made ‘manifest errors’ by:

   [1]Share Sale Agreement between Funtastic Limited and Madman Film and Media Pty Ltd, 31 July 2014, CB 100–243.

(a)        including liabilities of $2,258,282.94 on account of Conditional MG Payments;[2] and

(b)        excluding assets (receivables) of $268,666.33 on account of MPC Revenue,[3]

for the purposes of determining amendments to the draft Completion Accounts.

[2]Conditional MG Payments are described in detail in [18]–[21] below. 

[3]MPC Revenue is described in detail in [22]–[23] below.

1. Funtastic also seeks consequential declaratory relief to the effect that the determination of the Independent Accountant with respect to the disputed items is not conclusive or binding on the parties for the purposes of determining amendments to the draft Completion Accounts, and that other amounts for Completion Working Capital and the Adjustment Amount (as those terms are defined in the SSA) should be substituted for those determined by the Independent Accountant.

1. The defendant, MFM, denies that the Independent Accountant made ‘manifest errors’ as alleged, and rejects the proposition that the determination of the Independent Accountant is not conclusive or binding on the parties or that adjustments should otherwise be made to the calculation of the Completion Working Capital or the Adjustment Amount.

Background

The parties and the SSA

1. Until 31 July 2014, Funtastic owned all of the issued shares in each of Madman Entertainment Pty Ltd, Madman Production Company Pty Ltd, The AV Channel Pty Ltd, Madman Interactive Pty Ltd and Madman NZ Ltd (‘Madman Group’).[4]  The Madman Group operated an Australian home entertainment, distribution and rights management business, specialising in the wholesale distribution of DVD and blu-ray products throughout Australia and New Zealand.[5]

   [4]Statement of Agreed Facts, 1 February 2016, [1], CB 29.

   [5]Ibid [2], CB 29.

1. On 31 July 2014, Funtastic entered into the SSA with MFM, under which MFM agreed to acquire all of Funtastic’s shares in the Madman Group.[6]

   [6]Statement of Agreed Facts [3], CB 29; SSA, CB 100–243.

1. The relevant definitions under the SSA are as follows:[7]

   [7]SSA, [1.1], CB 105–15.

Accounting Principles means, at any time:

(a)       the requirements of the Corporations Act about the preparation and contents of financial reports;

(b)       the accounting standards approved under the Corporations Act; and

(c)       generally accepted accounting principles, policies, practices and procedures in Australia to the extent not inconsistent with the accounting standards described in paragraph (b) above.

Accounts means the unaudited half-yearly financial reports of the Company Group for the 6 month period ended on the Accounts Date as set out in Annexure A.[8]

[8]The term ‘Half-Year Accounts’ is used by the Independent Accountant in preference to ‘Accounts’.

Accounts Date means 31 January 2014.

Adjustment Amount means the amount (if any) by which the Completion Working Capital exceeds or is less than the Target Working Capital, as set out in the Completion Accounts.

Completion Accounts means the balance sheet for the Company Group in the form set out in Section A of Schedule 4 as at the Effective Time prepared and agreed in accordance with clause 7.

Completion Amount means $21,500,000.

Completion Working Capital means the working capital of the Company Group as at the Effective Time calculated in accordance with the notes and principles set out in Section A of Schedule 4 and as set out in the Completion Accounts.

Effective Time means:

(a)       if the Completion Date is 31 July 2014, as at the close of business on 31 July 2014;

…

Target Working Capital means $14,143,000.

1. Clause 4 of the SSA provides that the consideration payable for the shares will be an amount equal to the Completion Amount plus or minus (as applicable) the Adjustment Amount payable under clause 7.7 (if any).[9]

   [9]SSA, cl 4, CB 118–9.

1. Clause 7 of the SSA deals with relevant aspects of preparation of the Completion Accounts and the ascertainment of any Adjustment Amount, and includes dispute resolution provisions in respect of those matters.[10]

   [10]Ibid cl 7, CB 126–8.

1. Clause 7 relevantly provides:

Preparation of Completion Accounts7.2      

Within 50 Business Days after Completion, the Seller must prepare and deliver to the Buyer:

(a)       the draft Completion Accounts in the form set out, and in accordance with the notes and principles, in Section A of Schedule 4; and

(b)       the draft statement of the Adjustment Amount in the form set out, and in accordance with the notes and principles, in Section B of Schedule 4.

7.4      Review by Buyer

(a)       The Buyer has 10 Business Days from the date it is provided with the documents referred to in clause 7.2 to agree or dispute the draft Completion Accounts and Adjustment Amount.  If the Buyer does not dispute the draft Completion Accounts or Adjustment Amount within that period, the Buyer will be deemed to have accepted and agreed the draft Completion Accounts and Adjustment Amount.

…

7.5      Dispute Notice

(a)       Subject to clause 7.5(b), if the Buyer wishes to dispute the draft Completion Accounts or Adjustment Amount, it must deliver a notice (Dispute Notice) to the Seller within the period specified in clause 7.4(a) specifying in detail the items it disputes, the reason it disputes those items and the adjustments it considers ought to be made to the draft Completion Accounts and Adjustment Amount to correct the disputed items.

(b)       The Buyer is not entitled to dispute any item in the draft Completion Accounts unless the aggregate amount of all disputed items is greater than $50,000.

7.6Dispute resolution      

(a)       If the Buyer delivers a Dispute Notice in accordance with clause 7.5, the parties must, in good faith and for a period of 10 Business Days after the Buyer served the Dispute Notice, attempt to negotiate a resolution to the dispute and agree upon each item in the Dispute Notice.

(b)       If the parties fail to reach agreement in accordance with clause 7.6(a), then either the Buyer or the Seller may refer the disagreement to the Independent Accountant.  For the avoidance of doubt, the Buyer and the Seller acknowledge and agree that the only matters which may be referred to the Independent Accountant for determination are those specified in the Dispute Notice.

(c)       The Independent Accountant must be instructed to make a decision on the disagreement as soon as practicable after receiving any submissions from the parties (which must be provided no later than 5 Business Days after the appointment of the Independent Accountant) and, in any event, no later than 10 Business Days after those submissions are received.

(d)      In making a determination, the Independent Accountant must apply the same notes and principles required by clause 7.2 and Schedule 4 to be used to prepare the draft Completion Accounts and calculate the Adjustment Amount.

(e)       The parties must provide (and the Buyer must ensure that each Group Company and the Employees provide) all reasonable assistance that is requested by the Independent Accountant, including access to the documents described in clause 7.3 and 7.4(b).

(f)       The decision of the Independent Accountant is, in the absence of manifest error, conclusive and binding on the parties for the purpose of determining amendments to the draft Completion Accounts.  The parties agree to each pay the Independent Accountant’s costs and expenses in accordance with the determination of the Independent Accountant.  In the absence of such a decision, the Seller and the Buyer will each pay for half of the Independent Accountant’s costs and expenses.  The Independent Accountant will be appointed as an expert and not as an arbitrator.  The procedures for determination of any dispute concerning the draft Completion Accounts are to be decided by the Independent Accountant in his or her absolute discretion.

7.7Payment of Adjustment Amount      

(a)       If the Completion Working Capital exceeds the Target Working Capital, the Buyer must pay to the Seller in Immediately Available Funds, an amount equal to the Adjustment Amount within 5 Business Days after the day on which the Completion Accounts and Adjustment Amount are finally agreed by the parties or determined in accordance with clauses 7.5 and 7.6.

(b)       If the Completion Working Capital is less than the Target Working Capital, the Seller must pay to the Buyer in Immediately Available Funds, an amount equal to the Adjustment Amount within 5 Business Days after the day on which the Completion Accounts and Adjustment Amount are finally agreed by the parties or determined in accordance with clauses 7.5 and 7.6…

(c)       If the Completion Working Capital is equal to the Target Working Capital, no amounts are payable by the Seller or the Buyer under this clause 7.

1. Clauses 7.2(a) and 7.6(d) each cross-reference ‘notes and principles’ in Schedule 4 of the SSA, which are required to be applied by the seller (Funtastic) in preparing the draft Completion Accounts and draft statement of the Adjustment Amount (if any) and by the Independent Accountant in making a determination on any disagreement referred to him under the dispute resolution provisions. 

1. Relevantly, Section A of Schedule 4 of the SSA is arranged as a four-tier hierarchy as follows:[11]

   [11]Ibid sch 4: Completion Accounts, [1.1], CB 187.

The Completion Accounts must be prepared in accordance with:

1.          notes 1 to 7 as set out in the Due Diligence Materials identified by index number 01.20.03 (the Madman Working Capital Balances) with the specific balances to be included in the Completion Working Capital as at the Effective Time;

2.          to the extent that the treatment of any item is not dealt with in the principles referred to in paragraph 1 above, the specific accounting principles set out in the Due Diligence Materials identified by index number 01.20.01;

3.          to the extent that the treatment of any item is not dealt with in the principles referred to in paragraph 1 or paragraph 2 above, in a consistent manner to the preparation of the Accounts; and

4.          to the extent that the treatment of any item is not dealt with in the principles referred to in paragraph 1, paragraph 2 or paragraph 3 above, the Accounting Principles in force as at the Effective Time…

1. To the extent that the treatment of an item in the draft Completion Accounts is not dealt with by reference to first-tier principles, it must be dealt with by reference to second-tier principles and, if necessary, by third- or fourth-tier principles as the case may be.[12]

   [12]Ibid.  For convenience, the parties refer to the requirements in the hierarchy as ‘principles’.

1. The specific accounting principles referred to in the second-tier of the hierarchy (‘Specific Accounting Principles’) were prepared for the parties by Deloitte Touche Tomatsu for the purpose of the sale of the Madman Group business.[13]  For present purposes, there are two relevant Specific Accounting Principles:[14]

   [13]Letter from Marise Maltman to Grant Mackenzie, 27 June 2014, CB 381–92.

   [14]Ibid Appendix A, CB 386, 390.

Item	Components	Account numbers	Description
3.3(b)	Sundry debtors	7281	Sundry debtors represents un-invoiced film hire income accrued for on the basis of sales reports as downloaded from the box office on a daily basis.  This represents a timing difference between invoice date and reporting date.
3.4(a)	Accrued expenses	9140	Expense accruals are recognised for goods and services received as at the balance date but yet for which invoices have not been received.  The accrual is made based on the best estimate of the cost of the goods and services.

Completion and dispute under the SSA

1. Completion under the SSA took place on 31 July 2014.  At this time, MFM paid to Funtastic the Completion Amount of $21,500,000 and became the ultimate owner of all of the shares in the Madman Group companies.[15]

   [15]Statement of Agreed Facts, [7]–[9], CB 30.

1. On or about 16 September 2014, in accordance with clause 7.2 of the SSA, Funtastic delivered to MFM the draft Completion Accounts and a draft statement of the Adjustment Amount.[16]  The draft Completion Accounts recorded the Completion Working Capital as at close of business on 31 July 2014 as $17,920,000, which exceeded the Target Working Capital of $14,143,000 and resulted in a draft statement of the Adjustment Amount of $3,777,000 in favour of Funtastic.[17]

   [16]Statement of Agreed Facts [10], CB 30; Draft Completion Accounts and draft statement of Adjustment Amount, CB 244–9.

   [17]Draft Completion Accounts, CB 244.

1. On or about 29 September 2014, in accordance with clause 7.5(a) of the SSA, MFM served a Dispute Notice on Funtastic in which MFM disputed the draft Completion Accounts and the draft statement of the Adjustment Amount.[18]

   [18]Statement of Agreed Facts [11], CB 30; Share Sale Agreement dated 31 July 2014 – Dispute Notice, 29 September 2014, CB 250–67 (‘MFM Dispute Notice’).

1. The MFM Dispute Notice detailed numerous items in dispute in relation to Funtastic’s calculation of the Completion Working Capital.[19]  Only two items remain in dispute for present purposes, namely:

(a)        an amount of $4,316,811.24 in ledger account 9052 (Creditors Trade – Local) for ‘Minimum Guarantee payments’ pursuant to contracts entered into by companies within the Madman Group (‘MG Contracts’) prior to 31 July 2014, which Funtastic did not include in the draft Completion Accounts; and

(b)        an amount of $268,666.33 in ledger account 7281 (Sundry Debtors) in respect of ‘MPC Revenue not yet invoiced’ (‘MPC Revenue’) which Funtastic did include in the draft Completion Accounts.[20]

[19]The MFM Dispute Notice detailed eight items in dispute and stated that the Completion Working Capital should be $6,556,000 (rather than $17,920,000), resulting in an Adjustment Amount of $7,587,000 in favour of MFM, CB 253.

[20]List of Issues in Dispute, 11 March 2016, [2], CB 34.

MG Contracts and Conditional MG Payments

1. The MG Contracts were agreements between Madman Group companies and various film producers which granted the relevant Madman Group company a license to distribute films in exchange for various payments.

1. Each of the MG contracts included a ‘Minimum Guarantee’ clause which provided that in consideration of the rights and privileges granted under the contract (i.e. the license), the relevant Madman Group company shall pay to the film producer a ‘Minimum Guarantee’ of a specified dollar amount on the terms set out in each MG Contract (‘Minimum Guarantee Payment’).[21]

   [21]Statement of Agreed Facts [13], CB 30–1.

1. The MG Contracts generally provided that the Minimum Guarantee Payment is payable by:

(a)        an upfront payment of a specified amount due on execution of the MG Contract or on a certain date following execution; and

(b)        a further instalment or instalments, being specified amounts due on a specified date or upon the happening of a specified event.[22]

[22]Ibid [14], CB 31.

1. There is no dispute between the parties regarding the treatment of upfront payments in the Completion Accounts.  The dispute relates only to the treatment of the instalment payments (‘Conditional MG Payments’).

MPC Revenue

1. Madman Production Company Pty Ltd (‘MPC’) is the in-house film production division of the Madman Group and one of the five companies whose issued shares were sold by Funtastic to MFM under the SSA. 

1. As characterised by Funtastic, MPC Revenue represents MPC ‘revenue earned but not yet invoiced, which is earned over the course of the production of the particular film production so as to match the expenditure being incurred’.[23]

   [23]‘Project Tango Total Receivables’, [3.02], CB 330 (‘Funtastic submission to the Independent Accountant’); Originating Process, 6 October 2016, [36], CB 9.

Engagement of the Independent Accountant and the determination

1. On 29 January 2015, in accordance with clause 7.6(b) of the SSA, the parties jointly appointed Mr Greg Meredith of Ferrier Hodgson as the Independent Accountant to determine the items in dispute in the MFM Dispute Notice.[24]  Mr Meredith provided the parties with a letter of engagement which enclosed the ‘Ferrier Hodgson Terms and Conditions of Business’ (‘FH Terms’) and requested an acknowledgment of acceptance of the engagement letter and the FH Terms.[25]  Each party subsequently provided the requested acknowledgements.[26]

   [24]Statement of Agreed Facts, [17], CB 31.

   [25]Letter from Greg Meredith to Tony Symons and Peter Nankivell, 29 January 2015, CB 813–22.

   [26]FH Terms, signed by Peter Nankivell, CB 816 (MFM); FH Terms, signed by Tony Symons, CB 826 (Funtastic).

1. Relevantly, clause 3 of the FH Terms provided:

3.        Information

The quality of our services will depend on full and timely instructions from you.  We will rely on the accuracy and completeness of information you provide to us.  We will not independently verify information, unless requested to do so as a term of our engagement.

…

1. The engagement letter proposed a timetable with indicative dates as follows:[27]

   [27]CB 817.

Deliverable	Responsibility	Indicative Date
Provision of documents required and submissions	Parties	2 February 2015
Submissions in response (if any)	Parties	9 February 2015
Expected final request for documents	Ferrier Hodgson	16 February 2015
Draft report	Ferrier Hodgson	9 March 2014 (sic)
Review for factual accuracy	Parties	16 March 2015
Final report	Ferrier Hodgson	23 March 2015

1. On or about 2 February 2015, Funtastic and MFM each provided written submissions to the Independent Accountant in respect of the draft Completion Accounts.[28]

   [28]Statement of Agreed Facts, [18], CB 31; Funtastic submission to the Independent Accountant, CB 330–6; Letter from PKF Lawler to MFM, ‘Financial Review Report – Draft Completion Accounts and Adjustment Amount’, CB 337–77 (‘MFM submission to Independent Accountant’).

1. On or about 4 February 2015, the Independent Accountant wrote to the parties with  queries regarding the items in dispute.[29]

   [29]Letter from Greg Meredith to Tony Symons and Peter Nankivell, 4 February 2015, CB 491–5.

1. On or about 9 February 2015, Funtastic and MFM each provided further written submissions to the Independent Accountant.[30]

   [30]Statement of Agreed Facts, [19], CB 31; Letter from Tony Symonds to Greg Meredith, 9 February 2015, CB 499–505 (‘Funtastic reply submission’); Letter from PKF Lawler to Peter Nankivell, 9 February 2015, CB 508–15 (‘MFM reply submission’).

1. On or about 19 March 2015, the Independent Accountant issued a draft report and invited comments from the parties.[31]

   [31]Statement of Agreed Facts, [20], CB 32; Greg Meredith, ‘Project Tango, Independent Accountant’s Report’, 9 February 2015, CB 521–610.

1. On or about 30 March 2015, Funtastic and MFM each provided submissions to the Independent Accountant in respect of factual issues identified in the draft report.[32]

   [32]Statement of Agreed Facts, [21]–[22], CB 32;  Email from Alexandra Gleed to Greg Meredith, 30 March 2015, attaching Funtastic submissions and spreadsheet, CB 614, 615.1–615.6, (‘Funtastic submission on the draft report’), and 617 (‘Funtastic spreadsheet’); Email from Peter Nankivell to Greg Meredith, attaching PKF Lawler spreadsheet, 30 March 2015, CB 683–99 (‘MFM submission on the draft report’).

1. On or about 13 April 2015, the Independent Accountant issued his final report (‘Expert Report’) which included a determination of the Completion Working Capital and Adjustment Amount under the SSA.[33]

   [33]Statement of Agreed Facts, [24], CB 32; Greg Meredith, ‘Project Tango, Independent Accountant’s Report’, 13 April 2015, CB 700–1225.

Determinations of the Independent Accountant

Conditional MG Payments

1. In the MFM Dispute Notice, MFM asserted that Conditional MG Payments totalling $4,468,207.92 ought to be included in the Completion Accounts (in ledger accounts 9052/3) as liabilities, as they were current obligations ‘where the relevant condition had been satisfied’.[34]

   [34]MFM Dispute Notice, CB 267.  The Conditional MG Payments comprised three discrete amounts: $617,848.50, $1,891,962.74 (for MG Contracts generally) and $1,958,396.68 (for a contract signed with SBS) – in aggregate, $4,468,207.92.

1. The Independent Accountant disagreed with MFM in relation to the appropriateness of these ledger accounts for this item.  According to the Independent Accountant, the appropriate ledger account for the Conditional MG Payments was the ledger account for accrued expenses (9140) not the ledger account for trade creditors (9052) as the payments were for instalment amounts that relate to the delivery of masters, materials or other requirements, which were goods and services that satisfied the Specific Accounting Principle for ledger account 9140.[35]

   [35]Expert Report, [289], CB 771.

1. The Independent Accountant identified payments totalling $2,258,282.94 that appeared to relate to the delivery of goods provided (such as masters) or services delivered (such as dubbing) by 31 July 2014, and that amounts totalling $2,258,282.94 were therefore payable by the Madman Group and should be included as a liability in the Completion Accounts.[36]  The Independent Accountant stated ‘[f]or the sake of clarity, we have included only those payments where it appears that the condition of payment has been met’.[37]  The effect of the Independent Accountant’s decision was to reduce the purchase price payable for the shares by $2,258,282.94.

   [36]Ibid [289]–[293], CB 771–2.

   [37]Ibid [291], CB 772.

1. The relevant paragraphs of the Expert Report are as follows:[38]

   [38]Ibid [289]–[293], CB 771–2.

MG Contract Payments[39]

[39]MG Contract Payments are synonymous with Conditional MG Payments.

289.     As set out in paragraph 379 below, with respect to the MG contract payments that MFM allege should be included in account 9052 – Trade creditors local, with respect to the Specific Accounting Principles, in my view:

(a)       It would be appropriate to include the following in account 9140 as these items are unambiguously goods or services:

(i)        Instalment amounts that relate to the delivery of masters, materials or other requirements such as a voice track; and

(ii)       Payments for released products where the contract remains unsigned;

…  

(c)       It does not appear to be appropriate to include deferred payments in account 9140 that are unrelated to the delivery of goods, services or rights.

290.     With respect to (a)(i) and (c) above, PKF has included both of these items in a single schedule.  Accordingly, at Annexure M, we have:

(a)       Reviewed the analysis performed by PKF against the contracts provided; and

(b)       Identified which of the MG contract payments relate to the delivery of goods and services.

291.     As shown at Annexure M we have identified payments of $2,258,282.94 that appear to relate to the delivery of goods provided (such as masters) or services delivered (such as dubbing).  For the sake of clarity, we have included only those payments where it appears that the conditions of payment have been met.

292.     I note that in its response to my draft report, Funtastic provided an additional document, which they submit clarifies that some of the items I have included as received were not in fact received prior to 31 July 2014.  In this respect, I note:

(a)       The document is dated 14 July 2014, and so cannot include receipts of the relevant goods/services that occurred between 15 July and 31 July; and

(b)       It is not clear to me how the document provides any clarity about the receipt or otherwise of the relevant items.

293.     On this basis, doing the best I can on the available documents, it appears that goods or services had been provided by 31 July 2014, in respect of which amounts totalling $2,258,282.94 were payable.

1. Annexure M referred to in the above paragraphs of the Expert Report is a modified version of a spreadsheet known as Appendix TP2,[40] which was provided to the Independent Accountant by PKF Lawler on behalf of MFM.  Annexure M listed each relevant MG Contract, the ‘true-up’ value (that is, the value of each Conditional MG Payment in Australian dollars) and the relevant conditions for payment.[41]

   [40]T 52.

   [41]‘Instalments – Amount Due’, annexed to MFM’s submission to the Independent Accountant,  CB 486.1–486.6 (‘PKF Lawler spreadsheet’).

1. The main modification made by the Independent Accountant to the PKF Lawler spreadsheet was the addition of a column entitled ‘FH Analysis: Goods or Services delivered?’, in which the Independent Accountant recorded whether the goods and services relating to each MG Contract had been delivered, delivered in part or not delivered by 31 July 2014.[42]

   [42]Expert Report, Annexure M: Analysis of Instalment Payments, CB 611–3.

1. The Independent Accountant did not provide a detailed explanation as to how he reached his conclusions regarding the delivery of the relevant goods and services save that he stated ‘…doing the best I can on the available documents, it appears that goods or services had been provided by 31 July 2014, in respect of which amounts totalling $2,258,282.94 were payable’.[43]

   [43]Ibid [293], CB 772.

MPC Revenue

1. In the draft Completion Accounts, Funtastic included MPC Revenue as a receivable in ledger account 7281 – Sundry debtors.[44]  MFM disputed the inclusion of this item on the basis that it ‘represents a period end adjustment for income that is earned monthly and accordingly does not meet the definition of agreed Sundry Debtors per 3.3(b)’.[45]

   [44]Ibid [186], CB 748 citing Table 18: Parties’ calculation of Total Receivables.

   [45]MFM Dispute Notice, CB 263.

1. The Independent Accountant determined that:

(a)        MPC Revenue described by Funtastic as ‘the revenue recognised to match the film production expenditure that is progressively being recognised over the course of producing each phase’ did not fit the description of item 3.3(b) of the Specific Accounting Principles, namely ‘un-invoiced film hire income accrued for on the basis of sales reports as downloaded from the box office on a daily basis’;[46]

(b)        it was not necessary for him to consider the Half-Year Accounts[47] because he had been able to make a determination excluding this item by reference to the Specific Accounting Principles;[48] and

(c)        even if the Half-Year Accounts were required to be considered, this item would still not be classified as a receivable as no amount was recorded in respect of MPC Revenue in the Half-Year Accounts.[49]

[46]Expert Report, [206], CB 752.

[47]Refer to Footnote 9.

[48]Expert Report, [209], CB 752.

[49]Ibid [209(b)], CB 752.

1. The relevant paragraphs of the Expert Report are as follows:[50]

   [50]Ibid [205]–[206] and [209], CB 752–3.

Step 2: Specific Accounting Principles

…

MPC Revenue not yet invoiced

205.     As described by Funtastic, MPC Revenue not yet invoiced is “The revenue recognised to match the film production expenditure that is progressively being recognised over the course of producing each phase”.           

206.     Based on the above description, these costs do not meet the definition of sundry receivables above as they are not film hire income.  Accordingly, in my view, ‘MPC Revenue not yet invoiced’ should not be included in the balance of sundry debtors and the balance should be reduced by $268,666.33.

…

Step 3: Treatment in Half Year Accounts

209.     As I have been able to make a determination in respect of account 7281 by reference to the Specific Accounting Principles, it is not necessary to consider the Half Year accounts.  For completeness, I was provided with a schedule of sundry debtors, which we have reconciled to the Half Year Accounts.  Based on that schedule:

…

(b)       No amount appears to have been included in respect of ‘MPC Revenue not yet invoiced’.  Our reconciliation of the Half Year Accounts showed no sundry debtors recorded in MPC’s trial balance.

…

Response to Draft Report

212.     In respect of the above, in response to my draft report, Funtastic submitted that ‘MPC Revenue not yet invoiced’ should be included on the basis of ‘substance over form’.

213.     In respect of the above, I do not disagree that applying a principle of ‘substance over form’ would result in the inclusion of ‘MPC Revenue not yet invoiced’ in the calculation of Working Capital.  The ‘hierarchy’ in Schedule 4 of the Share Sale Agreement, however, does not provide that I can divert from the application of the Specific Accounting Principles on the basis of ‘substance over form’.  Accordingly, as ‘MPC Revenue not yet invoiced’ does not fit the description of this account, in my view, it should not be included.

1. In light of the above, the Independent Accountant determined the Completion Working Capital to be $14,475,000, leading to an Adjustment Amount of $332,000 payable by MFM to Funtastic.[51]  The Independent Accountant also determined that the parties each bear 50 per cent of the costs of the Independent Accountant.[52]

   [51]Ibid [9], CB 704.

   [52]Statement of Agreed Facts, [26], CB 30; Email from Greg Meredith to Tony Symons and Peter Nankivell, 20 April 2015, CB 1226–7.

1. On 20 April 2015, MFM delivered a bank cheque to Funtastic in the amount of $332,000 in satisfaction of the Adjustment Amount as determined by the Independent Accountant in the Expert Report.[53]  On 21 April 2015, Funtastic returned the bank cheque to MFM.[54]

   [53]Statement of Agreed Facts, [27], CB 33; Exhibit P2, Letter from Peter Nankivell to Tony Symons, 20 April 2015.

   [54]Statement of Agreed Facts, [28], CB 33; Exhibit P3, Letter from Tony Symons to Peter Nankivell, 21 April 2015.

1. Subsequently, Funtastic issued this proceeding seeking declaratory relief to the effect that there were manifest errors in the Expert Report with respect to the disputed items.

Applicable principles

Review of an expert determination

1. In Legal & General Life of Australia Ltd v A Hudson Pty Ltd, in the context of an expert valuation of leased premises, McHugh JA stated:

In my opinion the question whether a valuation is binding on the parties depends in the first instance upon the terms of the contract, express or implied.  This was pointed out by Sir David Cairns in the Court of Appeal in Baber v Kenwood Manufacturing Co Ltd (at 181).  A valuation obtained by fraud or collusion can usually be disregarded even in an action at law.  For in a case of fraud or collusion the correct conclusion to be drawn will almost certainly be that there has been no valuation in accordance with the terms of the contract.  As Sir David Cairns pointed out, it is easy to imply a term that a valuation must be made honestly and impartially.  It will be difficult, and usually impossible, however to imply a term that a valuation can be set aside on the ground of the valuer’s mistake or because the valuation is unreasonable.  The terms of the contract usually provide, as the lease in the present case does, that the decision of the valuer is ”final and binding on the parties”.  By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation.  They rely on his skill and judgment and agree to be bound by his decision.

…

While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless the mistake may be of the kind which shows that the valuation is not in accordance with the contract.[55]

[55](1985) 1 NSWLR 314, 335D-G (McHugh JA) (‘Legal & General Life of Australia’).

1. In AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd, in the context of an expert determination of an unaccounted for gas reconciliation amount, Nettle JA (Maxwell P and Bongiorno AJA agreeing) stated:

whether it is open to review an expert determination on the ground of error is in the first place to be decided according to whether the determination answers the contractual description of what the expert was required to determine… [T]he question of whether an error in determination deprives the determination of compliance with the contractual description of what the expert was required to determine is in the first place to be answered according to whether the error occurred in respect of a task which the contract entrusted to the expert.[56]

[56][2006] VSCA 173, [51] (Nettle JA) (‘AGL’).

1. In Beevers v Port Phillip Sea Pilots Pty Ltd, which concerned an auditor’s valuation of shares for the purposes of a share transfer,  Dodds-Streeton J observed:

An expert’s determination on discretionary matters is not ipso facto immune from review, but where, by the contract, such matters are entrusted to the expert without the prescription of criteria or restrictions, whether express or implied, it has frequently been inferred that the parties intended to be bound by the expert’s bona fide judgment, even if it is in some way erroneous.[57]

[57][2007] VSC 556, [295] (‘Beevers’).

1. Recently, in Adnow Pty Ltd (as Trustee for the Adnow Pension Fund) v Greenwells Wollert Pty Ltd, the Court of Appeal reiterated that the applicable legal principles in the context of a valuation produced pursuant to an agreement to refer a question of value to a valuer are as follows:

In short, a court will only set aside such a valuation if it has not been made in accordance with the terms of the contract. Ordinarily, in the absence of fraud or collusion, a mere error in the production of the valuation will not constitute a departure by the valuer from the terms of the contract. In the case of fraud or collusion, it may be concluded that the valuation has not been made in accordance with the terms of the contract. However, otherwise, mistake or error by the valuer is not sufficient to invalidate the valuation, unless the error is of such a kind as to demonstrate that the valuation has not been made in accordance with the terms of the contract.[58]

[58][2016] VSCA 282, [40] (Tate JA, Ferguson JA and Kaye JJA).

1. All of these authorities emphasise that the authority of an expert derives from the parties’ bargain.[59]  Thus, whether the determination embodied in the Expert Report in this case is binding will depend on whether it was made in accordance with the terms of the SSA in the course of performance of the task entrusted to the Independent Accountant under the SSA.

   [59]See, eg, Legal & General Life of Australia (1985) 1 NSWLR 314, 335–6 (McHugh JA); see generally Vale Belvedere Pty Ltd v BD Coal Pty Ltd [2012] QCA 77, [14] (Fraser JA) (‘Vale Belvedere’); TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4, [18] (Brereton J).

1. Relevantly, clause 7.6 of the SSA deals with dispute resolution.  Clause 7.6(f) provides that the Independent Accountant is appointed as an expert and not as an arbitrator, and that the decision of the Independent Accountant is conclusive and binding on the parties for the purposes of determining amendments to the draft Completion Accounts in the absence of ‘manifest error’.  The SSA confers on the Independent Accountant ‘absolute discretion’ in deciding upon the procedures for determination of any matter in dispute concerning the draft Completion Accounts.[60]

   [60]SSA, cl 7.6(f), CB 127–8.

Manifest error

1. The term ‘manifest error’ is not defined in the SSA.  Its meaning is to be determined following established principles of contractual interpretation.  In the present context, the term must be given its ordinary commercial meaning, shaped by reference to what a reasonable businessperson would understand it to mean, having regard to the background, context and commercial purpose or objects of the contract.[61] 

   [61]See specifically, Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 116–7 [46]–[52] (French CJ, Nettle and Gordon JJ). See also Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656–7 [35] (French CJ, Hayne, Crennan and Kiefel JJ).

1. The Oxford English Dictionary defines ‘manifest’ as ‘clear or obvious to the eye or mind’.[62]  The Macquarie Dictionary similarly defines ‘manifest’ as ‘readily perceived by the eye or the understanding; evident; obvious; apparent; plain’.[63]  A ‘manifest error’ in the context of arbitral awards liable to be set aside for ‘manifest error of law on the face of the award’ has been variously described as an error that is ‘apparent to the understanding of the reader’,[64] ‘obvious rather than arguable’,[65] ‘easily demonstrable without extensive investigation’,[66] ‘an oversight [or] blunder so obvious as to admit no difference in opinion’[67] or ‘apparent to the judge upon a mere perusal of the reasoned award’.[68]  It is clear that an error that is ‘abstruse, obscure or inconsequential’ will not fall within the definition of ‘manifest error’.[69]

   [62]J Pearsall (ed), Concise Oxford English Dictionary (Oxford University Press, 10^th revised ed, 2002) 867.

   [63]A Delbridge et al (eds), The Macquarie Dictionary (Macquarie University NSW, 3^rd ed, 1997) 1310.

   [64]Westport Insurance Corporation v Gordian Runoff Ltd (2011) 244 CLR 239, 267–8 (French CJ, Gummow, Crennan and Bell JJ).

   [65]Promenade Investments Pty Ltd v NSW (1992) 26 NSWLR 203, 225F (Sheller JA).

   [66]State Bank of NSW v Chia (2000) 50 NSWLR 587, 608 [249] (Einstein J) (‘Chia’).

   [67]711 Hogben Pty Ltd v Tadros [2016] NSWSC 697, [50] (Stevenson J), citing Walton Homes Ltd v Staffordshire County Council [2013] EWHC 2554 (Ch) (Peter Smith J).

   [68]Ibid citing Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724, 742H (Diplock LJ).

   [69]Chia (2000) 50 NSWLR 587, 608 [249] (Einstein J).

1. The object and context of the Independent Accountant’s appointment also informs the meaning of ‘manifest error’.[70]  Here, the Independent Accountant was appointed as an expert, not an arbitrator,[71] in order to provide an expeditious and cost-effective means of resolving disagreements with respect to the draft Completion Accounts.[72]  For this confined purpose, the parties eschewed the more formal rules and procedures of arbitration or curial process.  Instead, they agreed to rely on the expertise and skill of the Independent Accountant, a highly experienced person in the field.  The parties granted to the Independent Accountant a wide discretion to decide matters of procedure for determination of the draft Completion Accounts and were required to give all reasonable assistance requested by the Independent Accountant.[73]  The SSA contained a tight timetable for the provision of submissions and preparation of the Independent Accountant’s report.[74]  The parties were required to instruct the Independent Accountant to make a decision on the disagreement as soon as practicable after receiving any submissions from the parties.[75]  It is evident that there was an emphasis on expedition and prompt resolution of disagreements regarding the draft Completion Accounts.  I am satisfied that in the present context, having regard to the evident objectives and the limited subject matter to be addressed by the Independent Accountant, ‘manifest error’ in the SSA is confined to clear and obvious errors.

   [70]See, eg, Strategic Publishing Group Pty Ltd v John Fairfax Publications Pty Ltd [2003] NSWSC 1134, [20] (Einstein J); Glenvill Projects Pty Ltd v North North Melbourne Pty Ltd [2013] VSC 717, [56] (Vickery J).

   [71]SSA, cl 7.6(f), CB 127.

   [72]See generally Zeke Services Pty Ltd v Traffic Technologies Ltd [2005] 2 Qd R 563, 570 [27] (Chesterman J), cited in Shoalhaven City Council v Firedam Civil Engineering Pty Ltd (2011) 244 CLR 305, 314–5 [25] (French CJ, Crennan and Kiefel JJ).

   [73]SSA, cl 7.6(e), CB 127.

   [74]Ibid cl 7.6(c), CB 127.

   [75]Ibid.

1. It was common ground that the material which could be examined in order to decide whether there were manifest errors in the Expert Report consisted of the Expert Report itself, the written submissions made to the Independent Accountant and the documents referred to in those submissions.[76]  The hearing proceeded on that basis.

   [76]T 83.23–31; 102.16–20; 106.3–7.  Cf Invensys Plc v Automotive Sealing Systems Ltd [2002] 1 All ER (Comm) 222 (Thomas J).

Did the Independent Accountant make a ‘manifest error’ by determining that Conditional MG Payments should not be included as a liability in the calculation of the Completion Working Capital in the Completion Accounts?

Funtastic’s submissions

1. Funtastic contended that there was no evidentiary basis on which to conclude that the goods and services the subject of Conditional MG Payments had been delivered to the Madman Group by 31 July 2014,[77] so the conclusion of the Independent Accountant that the goods and services had been delivered was a ‘manifest error’ under the SSA.[78]

   [77]As required by item 3.4(a) of the Specific Accounting Principles.  See Letter from Marise Maltman to Grant Mackenzie, 27 June 2014, Appendix A, item 3.4(a), CB 390.

   [78]Plaintiff’s Outline Submissions, 12 August 2016, [20], [23] (‘Funtastic opening submissions’).

1. Funtastic submitted that the only documents produced to the Independent Accountant by MFM were the MG Contracts, and that those contracts could not evidence satisfaction of obligations that arose within them.[79]  Funtastic says further that no notices of delivery, invoices or other materials had been provided to the Independent Accountant that could lead to the decision that goods and services had been delivered.[80]

   [79]T 177.9–13.

   [80]T 52.12–53.10; 61.1–12; 68.22–8.

1. In elaboration of this argument, Funtastic noted that after receiving the parties’ submissions, the Independent Accountant raised queries with the parties which included the following question for MFM:

13.You have identified $5.3 million of creditors which you allege should have been included as payables as at 31 July 2014 (MFM Submissions, p 37).  In respect of these creditors:

(a)       for those relating to ‘MG Payments’, please provide;

(i)For each creditor or type of creditor, the corresponding debit entry;

(ii)A copy of each of the contracts under which these amounts were payable;

(iii)For each of those contracts entered into prior to 31 May 2014, how those contracts were treated in the target working capital calculation; and

(iv)In respect of conditional MG Payments where the conditions were satisfied, relevant supporting documents; and

…

1. In response to the Independent Accountant’s request, MFM responded as follows:

(iv)The MFM Original Submission referred to ‘conditional MG Payments’ at Section 8.2.1 on page 37.  We acknowledge this phrase is poorly expressed in defining these contract liabilities.  The amounts referred to are detailed in Appendix TP2 to the MFM Original Submission and are more accurately described as Instalment/Deferred liabilities, with payment dates (both variable and fixed) set out in the original MG contract.

Appendix TP2 to the MFM Original Submission has been reproduced as Appendix G to this document for ease of reference.  Appendix G includes a brief description of the terms of instalment/deferment set out in each relevant MG contract, under the heading Payment Schedule (as per contract).  The unrecorded liabilities listed in Appendix G include those instalment/deferred liabilities for which the payment obligation set in the MG contract, have become due.  Accordingly, the supporting documents for those liabilities are the contracts themselves.  We have included these contracts on the enclosed USB as well.[81]

[81]MFM reply submission, CB 514.

1. Based on this correspondence, Funtastic submitted that it is evident that the information requested by the Independent Accountant was never provided by MFM; that at the time that the Independent Accountant requested that information (and at all times until the Expert Report was issued) MFM’s argument was to the effect that the liability arose from the time of execution of the MG Contracts;[82] and that this was exemplified by a submission made by MFM to the Independent Accountant on 17 March 2015, where MFM stated as follows:

MFM, in reviewing the relevant Distribution contracts, determined amounts that were payable for the rights that accrued to the company.  The rights were created as a consequence of the company and counterparties entering into the Distribution contracts.  The Distribution contracts both factually and legally created a presently existing liability, that was fixed and for a sum certain.  Applying accounting principles to a contractually defined liability requires the liability be appropriately recorded in account 9052 Trade Creditors on the basis that the liability was both specific and certain.  MFM is contractually bound by the terms of each Distribution contract upon execution and accordingly, these liabilities were not merely expected or contingent but rather properly incurred in accordance with those Distribution contracts.[83]

[82]T 59.10–23.  See email from Peter Nankivell to Greg Meredith and Tony Simons, 17 March 2015, Item 13, CB 1224–5.

[83]Email from Peter Nankivell to Greg Meredith and Tony Simons, 17 March 2015, Item 13, CB 1225.

1. Funtastic submitted that the question of fact of whether the condition had been met as at 31 July 2014 was not contested by MFM[84] or established by the provision of materials to the Independent Accountant, and that the ‘existing liability’ approach adopted by MFM precluded the need for the provision to the Independent Accountant of any supporting documents other than the MG Contracts.[85]

   [84]T 61.2–22.

   [85]T 59.10–23; Funtastic opening submissions, [18].

1. Funtastic submitted that the ‘existing liability’ approach was ultimately rejected by the Independent Accountant in the Expert Report,[86] and the question then shifted to whether or not the goods and services had in fact been delivered. Funtastic submitted that, even after the question had shifted, MFM failed to provide the Independent Accountant with evidence in support of delivery, and the Independent Accountant therefore did not have any information before him that would enable him to conclude that the goods and services in question had in fact been delivered.[87]

   [86]See, eg, Expert Report, [295], [297], CB 772–3; T 67.15–20.

   [87]T 61.1–12.

1. Funtastic conceded that it was in a similar position to MFM in that Funtastic did not provide the Independent Accountant with any documents to substantiate the contrary proposition, namely that the goods and services had not been delivered by 31 July 2014.[88]  Funtastic did provide the Independent Accountant with a spreadsheet (similar to Appendix TP2) that included a column ‘Condition met as 31-7-2014’, in which it asserted that goods and services had not been delivered in respect of all but four of the MG Contracts.[89]

   [88]T 180.30–181.9.

   [89]          Funtastic spreadsheet, CB 617.

1. Funtastic submitted that the reason for the absence of evidence in support of its position (and the reason why that absence ought not be fatal) was that at the time the Independent Accountant was engaged, Funtastic was no longer in possession of the books and records of the Madman Group, having provided them to MFM as part of the share sale.[90]  In light of this, and in light of the fact that MFM was the party that sought to include the new liability in the Completion Accounts, Funtastic submitted that the obligation was on MFM to substantiate its position and provide evidence supporting its spreadsheet.[91]  Funtastic submitted that the failure by MFM to do so meant there was a complete absence of evidence on the issue, with the consequence that the Independent Accountant was unable to properly make a determination under the SSA.[92]

   [90]T 58.21–59.9.

   [91]T 58.21–59.9; 65.18–66.8.

   [92]T 61.1–12; 65.18–66.8; 68.22–8; 181.20–7.

1. Finally, Funtastic submitted that the statement made by the Independent Accountant that Funtastic’s spreadsheet was dated 14 July 2014 and therefore could not include receipts of the relevant goods or services occurring between 15 and 31 July 2014[93] was incorrect, made without evidence and also constituted a manifest error under the SSA.[94]

   [93]Expert Report, [291], CB 772.

   [94]Funtastic opening submissions, [24]–[25]; T 64.13–31.

MFM’s submissions

1. MFM submitted that the determination in the Expert Report concerning both disputed amounts reveals an understanding of the contractual task allocated to the Independent Accountant by the SSA, including the standards by which that task was to be completed, and that the opinions of the Independent Accountant were formed in accordance with those standards and the materials that the parties put before him;[95] this was not a case where the Independent Accountant ‘misunderstood his role’ or ‘asked himself the wrong question’.[96]

   [95]Written Submissions of the Defendant, 12 August 2016, [2] (‘MFM opening submissions’).

   [96]T 142.17–28.  See AGL [2006] VSCA 173, [51]–[52] (Nettle JA) for a discussion on the analogy between the review of an expert determination and judicial review of administrative error; see also Beeevers, ibid [251]-[252].

1. In particular, MFM made two inter-related submissions:

(a)        that there were submissions and material before the Independent Accountant to support the conclusion that he reached, in the form in which he expressed, in the Expert Report, to the effect that the goods and services in question had been delivered prior to 31 July 2014;[97] and

[97]T 110.21–3, 111.4–7.

(b)        that there can be no manifest error in circumstances where the failure on the part of the Independent Accountant to require the parties to provide further independent verification of matters put to him by way of submission fell within:

(i)       the scope of his discretion in clause 7.6(f) of the SSA, which states that matters of procedure are matters for the Independent Accountant; and

(ii)      clause 3 of the FH Terms, which states that the Independent Accountant would not independently verify information unless requested to do so as a term of his engagement.[98]

[98]SSA, cl 7.6(f), CB 127–8; FH Terms, cl 3, CB 818.

1. On the issue of material before the Independent Accountant to support the conclusions reached, MFM noted that MFM had previously made two assertions to the Independent Accountant to the effect that the conditions for payment had been met, namely:[99]

(a)        an initial assertion made by MFM in the MFM Dispute Notice that $4,316,811.24 ought to be included in respect of ‘[t]hose obligations where the relevant condition has been satisfied’;[100] and

(b)        a further assertion made by MFM in the MFM submission to the Independent Accountant that ‘[i]ncluded at Appendix TP2 is a list of instalment / deferred MG payments for which the relevant condition has been satisfied such that the liability is taken to be properly incurred’,[101] together with what is described as ‘a summary of the unrecorded MG contractual commitments’ which includes the item ‘Conditional MG Payments satisfied but unpaid $4,316,811,24’.

[99]T 110–4.

[100]MFM Dispute Notice, CB 267.

[101]MFM submission to Independent Accountant, CB 374–5.

1. Further, MFM pointed to some key dates in MG Contracts in support of its submission that inferences could reasonably be drawn that relevant materials had probably been delivered to the Madman Group by 31 July 2014.[102]  For example:

(a)        in the International Multiple Rights License Agreement for the film A Letter to Momo,[103] the specified release date in Japan is 21 April 2012 and the licensed rights are conferred for a term of 7 years commencing 1 March 2013.  Clause 7 of the agreement states ‘For mutual reference only IG expects to deliver Materials… approximately around June 2013’; and

(b)        in the International Multiple Rights License Agreement for the film 009 Re:Cyborg,[104] the specified release date in Japan is 27 October 2012 and the licensed rights are conferred for a term of 7 years commencing 1 March 2013.  Clause 7 of the agreement provides ‘For mutual reference only IG expects to deliver Materials… approximately around June 2013’.[105]

[102]T 123–9.

[103]A Letter to Momo International Multiple Rights Licence Agreement, 1 March 2013, CB 1228–54.

[104]Ibid CB 1255–81.

[105]MFM referred to licensing agreements for other films which were said to give a similar, if not the same, indication from which an inference could reasonably be drawn that the relevant materials had been delivered.

1. MFM also referred to the Madman Group physical inventory as at 31 July 2014,[106] which was included in a list of documents referred to by the Independent Accountant in preparing his report[107] and which contains miscellaneous documents that MFM submitted may evidence delivery of materials.[108]  The submission with respect to the inventory is elaborated upon below.

   [106]Exhibit D1, Document D002-F.

   [107]Expert Report, Annexure C: Documents Provided, CB 833.

   [108]Exhibit D2, Document H021-M; T 129–40.

Disposition: MG Contracts

1. Despite detailed written submissions being made by both parties with respect to the numerous items in dispute in the MFM Dispute Notice, no conclusive evidence was put before the Independent Accountant to establish whether or not the goods and services in respect of the relevant MG Contracts were, in fact, delivered to the Madman Group on or before 31 July 2014.

1. Both Funtastic and MFM provided the Independent Accountant with submissions (including spreadsheets) which contained assertions to the effect that the relevant goods and services had or had not been delivered.[109]  It would appear that MFM did not produce any other materials (such as notices of delivery, notices of availability, invoices or other documents) to corroborate its assertion that delivery had taken place by 31 July 2014.  Likewise, Funtastic did not produce any other materials (such as documents which show that delivery had occurred after 31 July 2014, or had not or could not have occurred on or before 31 July 2014) to corroborate its assertion that delivery had not taken place by 31 July 2014.

   [109]Funtastic spreadsheet, CB 617; PKF Lawler spreadsheet CB 486.1–486.6

1. This is not intended as a criticism of either party, but encapsulates the situation which confronted the Independent Accountant at the time he made his decision on the relevant items.

Significance of inventory

1. At trial, MFM referred to an inventory of physical items in the possession of Madman Group as at 30 September 2014.[110]  This document (D002-F) has columns which, among other things, appear to identify specific movie titles and items of stock referable to those titles.  This inventory, in the form of a spreadsheet, was provided to the Independent Accountant by Funtastic apparently on 2 February 2015[111] and document D002-F was one of the documents that the Independent Accountant listed as a document he had relied upon in preparing the Expert Report.[112]

   [110]Expert Report, Annexure C: Documents Provided, CB 833-4; see specifically D002F: Madman 03 Stock on Hand (Grant M) Reassessed provision; see also Exhibit D1, Document D002-F.

   [111]Ibid CB 833.

   [112]Expert Report, Annexure D: Documents Relied Upon, CB 835; see specifically D002-F Madman 03 Stock on Hand.

1. MFM submitted that it was open to the Independent Accountant to draw an inference that as at 31 July 2014 there was stock on hand concerning movies which were the subject of MG Contracts, and that the goods and services the subject of those contracts had been provided by that date.[113]  The submission was to the effect that if there was stock in the possession of Funtastic concerning a movie which was the subject of a MG Contract, one could infer that the goods and services the subject of the contract had been provided by that time.[114] 

   [113]T 131.

   [114]Ibid.

1. The possibility that such inferences could be drawn cannot be excluded, given the Independent Accountant’s generic reference to all documents (‘doing the best I can on the available documents’).[115]  However, I do not find this argument attractive for the following reasons:

   [115]Expert Report, [293], CB 772.

(a)        The inventory and documents referred to in the inventory were not referred to by MFM or Funtastic in their submissions to the Independent Accountant about the Conditional MG Payment issue.  In circumstances where neither party has drawn the attention of the Independent Accountant to the documents in the relevant context, it is unlikely that the Independent Accountant would have done so of his own volition.  Neither the inventory nor the documents referred to in the inventory were referred to by the Independent Accountant when asking questions of the parties about the items that are the subject of challenge.

(b)        Neither the inventory nor the documents referred to in the inventory were referred to by the Independent Accountant in his decision about Conditional MG Payments.  Indeed, they appear to have been used for the purposes of identifying the inventory balances at the Completion Date of 31 July 2014.[116]

(c)        The itemised amounts in the inventory are generally of very small amounts and bear no obvious relationship to the instalment amounts in the MG Contracts.  As I understood the submissions by MFM, it was not contended that the items in the inventory directly related to the amounts in dispute. Rather, the presence of items in the inventory was put forward as an indicator from which one might infer that the relevant goods and services have been delivered.

(d)       The items in the inventory seem to be of a nondescript type and are (generally) of insignificant monetary value.  Viewed objectively, they are unlikely to lead to an inference that the goods and services the subject of the relevant contract must have been delivered.

[116]Ibid [285]–[288], CB 770–1.

1. In my view, the argument concerning possible reference to the inventory by the Independent Accountant for the purpose of deciding whether the goods and services were delivered is highly speculative and can be given no significant weight.

No conclusive evidence of delivery

1. The absence of any conclusive evidence of delivery of the goods and services in circumstances where the parties had made contradictory assertions as to the satisfaction of the relevant condition raises the curious issue of whether the Independent Accountant, under the scope of his authority, was justified in coming to any conclusion regarding the delivery of materials.

1. As previously noted, the Independent Accountant’s powers are derived from and governed by the terms of the parties’ bargain.[117]  Included within this bargain are the terms of engagement of the Independent Accountant (namely, the FH Terms).[118]

   [117]Legal & General Life of Australia (1985) 1 NSWLR 314, 335–6 (McHugh JA); Vale Belvedere [2012] QCA 77 (Sheller JA).

   [118]FH Terms, signed by Peter Nankivell, CB 813–6 (MFM); FH Terms, signed by Tony Symons, CB 823–6 (Funtastic).

1. Clause 3 of the FH Terms provides that the Independent Accountant will rely on the accuracy and completeness of information provided by the parties and will not independently verify that information.[119]  This reflects commercial pragmatism given the tight timeframe prescribed under the SSA for the Independent Accountant to provide his determination[120] and the fees payable.  Presumably, the fees would have been higher had the parties required the Independent Accountant to independently verify information provided by them rather than accept that information at face value.  It also reflects and emphasises the less formal non-curial dispute resolution process of expert determination chosen by the parties.

   [119]FH Terms, CB 818.

   [120]See, eg, SSA, cl 7.6(c), CB 126.

1. In my view, the permissive operation of clause 3 of the FH Terms, in conjunction with the right of the Independent Accountant to exercise absolute discretion in respect of procedural matters, presents an insurmountable obstacle to Funtastic’s claims on this issue.

1. The parties specifically agreed that the Independent Accountant was to act as an expert and not as an arbitrator.[121]  The Independent Accountant was entitled to rely on the parties’ submissions and the documents, records and accounts of each Madman Group company to which he had access.[122]  The parties granted to the Independent Accountant a wide discretion to make a decision on disputed items unconstrained by any formal requirement to give reasons, disclose a path of reasoning or expose the methodology underlying any decision.  The only significant restriction was the requirement, when making a determination on disagreements referred to him, to apply the notes and principles which had been used to prepare the draft Completion Accounts and calculate the draft Adjustment Amount.[123]

   [121]SSA, cl 7.6(f), CB 127–8.

   [122]SSA cls 7.3, 7.4(b) and 7.6(e), CB 126–7.

   [123]SSA, cls 7.2, 7.6(c), CB 126–7;  sch 4: Completion Accounts, CB 187.

1. Had the Independent Accountant required more information, he was at liberty to ask for it or not ask for it as he saw fit.  He retained the discretion to evaluate the merits of any submissions and to make a decision based not only on the materials made available to him, but also on his experience and professional judgment.  In circumstances where the Independent Accountant had been given largely untrammelled scope for decision making, a disappointed party cannot later complain that the Independent Accountant made a decision based on what that party now perceives was incomplete or insufficient evidence.

1. In my view, there is also a fundamental problem with Funtastic’s claim that the Independent Accountant made a ’manifest error’.  Neither party provided proof that delivery had occurred before or after 31 July 2014, or had not occurred at all.  In effect, the parties made contrary assertions in their submissions, one to the effect that the goods and services had been delivered and the other (put at its highest) to the effect that the goods and services had not been delivered.  In the absence of demonstrable proof of either assertion in the materials provided to the Independent Accountant it is difficult to conclude the Independent Accountant was ‘manifestly wrong’.  He may have been right or he may have been wrong in the conclusion reached.  Moreover, acting on the unverified assertions of one of the parties is not manifestly erroneous when the contract permits that course.

1. It is also clear that the Independent Accountant asked himself the right question with respect to the Specific Accounting Principles for account 9140, which required consideration of whether the goods and services have been received as at 31 July 2014.  This is reflected by the Independent Accountant’s Annexure M ‘Analysis of Instalment Payments’ document, which includes a column headed ‘Goods and Services Delivered?’

1. It is not so clear that Funtastic asked itself the right question when responding to the Independent Accountant following receipt of the draft report.  In Funtastic’s comments and submissions in respect of this item, Funtastic stated:

For all MG contracts that have been signed, the terms are explicit that the future payments are contingent on a future event (eg Notice of Delivery) which as at 31 July had not occurred.  In particular Annexure M of the draft expert reports records that goods or services were delivered (in the column ‘goods or services delivered’).  Fantastic respectfully submits this is incorrect as the condition of NOD has not occurred.[124]

[124]Funtastic submission on the draft report, CB 615.1–615.6 (emphasis added).

1. On one reading after an initial general reference, Funtastic appears to contest the issue of delivery of goods or services on the more limited basis that ‘the condition of NOD has not occurred’.

1. In its supporting table, Funtastic included columns ‘NOD’ and ‘Condition met at 31-7-2014’ which appear to indicate whether or not a notice of delivery had been received, but does not necessarily indicate whether goods or services had been received or delivered.[125]

   [125]Funtastic spreadsheet, CB 617.

1. Funtastic’s spreadsheet tends to suggest that Conditional MG Payments for each contract were contingent upon the giving of a notice of delivery (from the licensor to the licensee, a Madman Group company).  However, this is potentially misleading.  Not all of the MG Contracts made instalments payable on receipt of a notice of delivery.  In some circumstances a notice of delivery was deemed to be delivered[126] or an instalment was made payable on a notice of availability and certain box office targets,[127] and in others no notice of delivery was contemplated as a pre-condition to payment.[128]

   [126]See, eg, A Letter to Momo International Multiple Rights Licence Agreement, 1 March 2013, cl 7, CB 1230; 009 Re:Cyborg International Multiple Rights Licence Agreement, 1 March 2013, cl 7, CB 1257.

   [127]Monsters: The Dark Continent Distribution Agreement, 16 April 2013, cl 1.5, CB 1284.

   [128]See, eg, My Teenage Romantic Comedy Snafu Licence Agreement, 1 April 2013, CB 1302; Rozenmaiden Licence Agreement, 1 July 2013, CB 1320; Stella Women’s Academy, High School Division Class 3 – School Girl’s Survivor Game Licence Agreement, 1 July 2013, CB 1362; Ghost in the Shell Arise Sublicence Agreement, 1 June 2013, CB 1380.

1. Further, the release dates listed in Funtastic’s spreadsheet[129] do not appear to bear any resemblance to the release dates set out in the MG Contracts.  The release dates, where specified in Funtastic’s spreadsheet, refer either to the years 2014 or 2015.  Although there may be an explanation for the differences with the Japanese release dates in the MG Contracts (for example, the release dates in Australia may post-date those in Japan by some years), no such explanation was put to the Independent Accountant by Funtastic prior to the time he made his decision.

   [129]Funtastic spreadsheet, CB 617.

1. In some instances, the issue is further clouded by statements of expectation in contracts to the effect that the producer expected to deliver the relevant materials by particular approximate dates (for example, in the case of A Letter to Momo and 009 Re:Cyborg in ‘approximately around June 2013’).[130]

   [130]A Letter to Momo International Multiple Rights Licence Agreement, 1 March 2013, CB 1230; 009 Re: Cyborg International Multiple Rights Licence Agreement, 1 March 2013, CB 1257.

1. Given these considerations, there is much objective material to support the Independent Accountant’s expressed view that it was not clear to him how Funtastic’s spreadsheet ‘provides any clarity about the receipt or otherwise of the relevant items’.[131]  He may, in the circumstances, have preferred to rely on the assertions in MFM’s material.

   [131]Expert Report, [292(b)], CB 772.

1. I have been unable to determine how the Independent Accountant concluded that Funtastic’s spreadsheet was dated 14 July 2014.[132]  It is probable that this statement was made in error, and that the spreadsheet was created and provided to the Independent Account on or about 30 March 2015.[133]  That said, even if the Independent Accountant had identified the correct date, his conclusion that the spreadsheet did not provide any clarity ‘about the receipt or otherwise of the relevant items’ stands.  In my view, the error is inconsequential and does not vitiate the Independent Accountant’s determination. [134]

   [132]Ibid [292(a)], CB 772.

   [133]Additionally, that it was enclosed with Funtastic’s submissions of that same date, CB 615.1–615.6.

   [134]See Chia (2000) 50 NSWLR 587, 608 (Einstein J).

No manifest error

1. It is useful to refer to some of the introductory statements made by the Independent Accountant in the Expert Report which reflect the dilemma with which the Independent Accountant was faced in relation to this disputed item:

As noted above, I provided the parties with a copy of my draft report to enable them to consider and respond to the factual claims made in this report.  Particularly in relation to the treatment of liabilities arising from MG contracts, both parties have submitted that I have made ‘factual error’, but for diametrically opposed reasons, acceptance of which would result in fundamentally different outcomes.  For example, in relation to MG liabilities, Funtastic submit that those I have included should be excluded on a factual basis, and MFM submit that those I have not included should also be included on a factual basis.  The fact that the parties disagree as to factual matters to such an extent further complicates my determination.  I note, however, that it seems to me that a number of submissions made by the parties in this regard are largely matters of opinion and professional judgment rather than fact.[135]

[135]Expert Report, [38], CB 712 (citations omitted).

1. It can be seen from this passage that the Independent Accountant was aware that the issue was contentious.  In the end, he made a robust choice between competing submissions.  This was precisely the kind of exercise the Independent Accountant was engaged to undertake by the parties under the SSA.  The Independent Accountant expressed the opinion that a number of submissions made by the parties on the MG Contracts issue were matters of opinion and professional judgment rather than matters of fact.  Drawing on his expertise and experience, the Independent Accountant appears to have preferred one party’s position to the other party’s position.  In doing so, he did what he was retained to do, which was to cut through the conflict and make a decision by engaging his own professional judgment.  To adopt his words, he did the best he could on the available documents.  In my view, the Independent Accountant’s determination on the issue is not obviously wrong or obviously right.  Accordingly, it falls short of being manifestly erroneous.  In the circumstances, I conclude that no manifest error was made by the Independent Accountant by including $2,258,282.94 as a liability in ledger account 9140.

Did the Independent Accountant make a ‘manifest error’ by determining that MPC Revenue should not be included as a receivable in the calculation of the Completion Working Capital in the Completion Accounts?

Funtastic’s submissions

1. Funtastic challenged the determination of the Independent Accountant in respect of MPC Revenue in several respects.

1. Funtastic submitted that the Independent Accountant made a manifest error in concluding that MPC Revenue did not answer the description under the Specific Accounting Principle for account 7281, namely, ‘un-invoiced film hire income’.  In its written submissions to the Independent Accountant, Funtastic provided an explanation of Sundry debtors account 7281 as follows:

3 Sundry debtors (7281)

…

2.This account is used to recognise Madman production company revenue earned but not yet invoiced, which is earned over the course of the production of the particular film production so as to match the expenditure being incurred.  This reflects the key historical approach employed by the Company which is the matching of revenue with expenses.

…

10.The revenue … is … recognised to match the film production expenditure that is progressively being recognised over the course of producing each phase… [136]

[136]Funtastic submission to the Independent Accountant, [3], CB 330–1. 

1. In its written submission dated 30 March 2015, Funtastic submitted:

(ii)‘MPC Revenue not yet invoiced’ does meet the definition of ‘Sundry Receivables’ (or receivables) and accordingly, should be included in account 7281.[137]

[137]Funtastic submission on the draft report, CB 615.2.

1. At trial, Funtastic submitted that MPC Revenue was a receivable,[138] that account 7281 was the most appropriate account to record it, and that this was consistent with past accounting practice, as shown by the general ledger reconciliation of account 7281 as at 30 November 2013 and other general ledger transactions for the relevant period.[139] 

   [138]Funtastic opening submissions, [29].

   [139]Funtastic Ltd General Ledger Account Reconciliation, CB 676, 677 and Excel file ‘GL trans 20000007281 27 March 2015.xlsx’, CB 678.

1. Funtastic further submitted that MFM’s submissions to the Independent Accountant in respect of MPC Revenue related to timing and not definition issues.[140]  In this regard, Funtastic referred to MFM’s 2 February 2015 submissions to the Independent Accountant, where MFM stated as follows:

Item 5 ‘MPC revenue not yet invoiced’ represents an adjustment entered into the Pronto accounting system at period end, to record income of MPC earned that has not been invoiced at year end. This income is distinguished from the discussion in relation to Items 1 and 7 above as it is earned on a month by month basis and accordingly the adjustment made to record this amount as a Sundry Debtor at 31 July 2014 does not represent a timing difference referable to the period from 31 May 2014 to the Effective Time but rather relates to the whole of the 2014 financial year. Management represented to us that usual procedure would be to match the income accruals to a timing schedule determined by MPC employees to ensure income was recorded in the correct monthly period. This procedure was not consistently followed throughout the 2014 financial year and as a result an annual adjustment was made to Sundry Debtors for the full year’s income. We consider this item therefore to be conceptually different to the agreed description of Sundry Debtors per the Specific Accounting Principles and accordingly have recorded an adjustment to exclude this amount from the CWC calculation.[141]

[140]T 30.12–31; 48.22–6.

[141]MFM submission to Independent Accountant, CB 360.

1. Funtastic submitted that it was manifestly erroneous for the Independent Accountant not to treat the MPC Revenue item as un-invoiced film hire income in circumstances where Funtastic described it that way and where Funtastic’s explanation of the character of the item was not contradicted by MFM, who approached the issue differently.[142]

   [142]T 44.3–19; 48.8–49.4; 73.14–8; 74.1–4.

1. Alternatively, Funtastic submitted that if the Independent Accountant was correct in his conclusion that MPC Revenue did not meet the definition of ‘film hire income’ for the purposes of account 7281,[143] he should have determined that the treatment of MPC Revenue was ‘not dealt with’ by the second-tier Specific Accounting Principles and determined the issue using third-tier principles, namely ‘in a consistent manner to the preparation of the Half-Year Accounts’.[144]

   [143]See Expert Report, [206], CB 752.

   [144]T 44.19–46.17.

1. According to Funtastic, at the time the Half-Year Accounts were prepared this item had a $nil balance, however the general ledger reconciliation of account 7281 provided by Funtastic to the Independent Accountant showed that accruals for MPC Revenue had been posted to that account during that half-year.[145]  Funtastic submitted that the fact the Half-Year Accounts as at the balance date of 31 January 2014 showed a $nil balance was not determinative, and the Independent Accountant should have considered the manner in which the Half-Year Accounts had been prepared.[146]  Funtastic submitted that the approach taken by the Independent Accountant would have the consequence that it would never be necessary to consider the Half-Year Accounts.[147] 

   [145]Funtastic opening submissions, [32(b)];  Funtastic Ltd General Ledger Account Reconciliation, CB 676; Excel file ‘GL trans 20000007281 27 March 2015.xlsx’, CB 678; T 70.15–71.7; 71.1–18.

   [146]See Funtastic opening submissions, [32(a)]; T 47.1–16; T 49.5–13; T 74.21–29.

   [147]T 45.24–5; 74.4–20; 45.22–5.

MFM’s submissions

1. MFM denied that the Independent Accountant made a manifest error in his treatment of MPC Revenue in the Completion Accounts.[148]  MFM contended that the conclusion reached by the Independent Accountant as to the classification of MPC Revenue was correct, and that he was right to conclude that MPC Revenue was ‘conceptually different’ and did not fall within item 3.3(b) of the Specific Accounting Principles.[149]  MFM submitted that the description of account 7281 is in respect of sales which have occurred at the box office but which were not yet invoiced, and that such income can only accrue from films which have been completed and are available for hire.  MFM said that Funtastic’s description relates to income received prior to completion of production of a film, and that production pre-dates the availability of a film for hire and subsequent box office receipts.[150]  MFM submitted that at best, the Independent Accountant’s conclusion reflects an exercise of judgment or opinion about which reasonable minds might differ, but which could not be said to be manifestly wrong.[151]

   [148]MFM opening submissions, [16].

   [149]Ibid.

   [150]T 149.4–17; 150.4–22.

   [151]T 150.18–22.

1. Further, MFM contended that having arrived at that conclusion, no question of going to the Half-Year Accounts arose because the Independent Accountant was able to ‘deal’ with the item in question by reference to the contractually agreed definition.[152]  Again, MFM submitted that this conclusion involved an interpretation of the agreed hierarchy which was within the judgment or discretion of the Independent Accountant.[153]  MFM submitted that the third tier of the hierarchy would have work do where there is uncertainty or ambiguity about whether an item fits within a description in the Specific Accounting Principles (i.e. the second tier), but not where an item is clearly excluded.[154]

   [152]T 152.27–153.1.

   [153]T 152.15–26.

   [154]T 153.2–11.

Disposition: MPC Revenue

1. In my view, the Independent Accountant did not make a manifest error in concluding that MPC Revenue did not fall within item 3.3(b) of the Specific Accounting Principles.

1. The description of sundry debtors in item 3.3(b) is clear:

Sundry debtors represents un-invoiced film hire income accrued for on the basis of sales reports as downloaded from the box office on a daily basis.  This represents a timing difference between invoice date and reporting date.[155]

[155]Letter from Marise Maltman to Grant Mackenzie, 27 June 2014, Appendix A, item 3.3(b), CB 386.

1. The description of MPC Revenue provided by Funtastic to the Independent Accountant[156] does not align with the item 3.3(b) description.  In its submission, Funtastic characterised MPC Revenue as ‘revenue earned but not yet invoiced’ and ‘recognised to match the film production expenditure that is progressively being recognised over the course of producing each phase’.[157]  On a plain and objective reading, this characterisation does not meet the description ‘un-invoiced film hire income based on sales reports… from the box office’.  Logically, box office receipts can only accrue after completion of the production phase.  Funtastic did not reconcile this difference, save for submitting that Funtastic’s description was not contested by MFM and therefore ought to be binding on the Independent Accountant.

   [156]Funtastic submission to the Independent Accountant, [3.2]–[3.10], CB 330–1.

   [157]Ibid [3.2] and [3.10], CB 330–1.

1. The fact that MFM made submissions to the Independent Accountant based on a timing issue and that Funtastic made uncontradicted submissions (assuming that to be the fact) as to the appropriate treatment of the item does not undermine the Independent Accountant’s determination regarding whether MPC Revenue meets the description in item 3.3(b) of the Specific Accounting Principles.  To hold otherwise would be to confine the wide discretion given to the Independent Accountant under clause 7.6(f) and the necessary exercise by the Independent Accountant of his professional judgment.

1. In any event, in my view the Independent Accountant was justified in concluding that MPC Revenue did not fit the description of item 3.3(b) of the Specific Accounting Principles.  Funtastic’s description was markedly different to the item 3.3(b) description.

1. Turning now to Funtastic’s alternative submission, it will be recalled that the Independent Accountant was required by the SSA to apply the hierarchy of notes and principles in making a determination on any disagreement between the parties.  Relevantly, to the extent that the treatment of any item was ‘not dealt with’ under first-tier principles (notes 1–7, as set out in the due diligence materials) or second-tier principles (the Specific Accounting Principles), the item must be treated under third-tier principles, that is, in a consistent manner to the preparation of the Half-Year Accounts.[158]  Third-tier principles engage only ‘to the extent that the treatment of any item is not dealt with’ by first- or second-tier principles.

   [158]SSA, sch 4: Completion Accounts, CB 187.

1. The Independent Accountant made his determination that MPC Revenue should not be included in the balance of sundry debtors by applying second-tier principles (Specific Accounting Principles), and stated that it was not necessary for him to go further.

1. In support of this position, MFM contended that having been able to deal with the item in question by reference to the contractually agreed definition in the Specific Accounting Principles, the question had been ‘dealt with’, and no question of going to third-tier principles arises.[159]  MFM submitted that that was a matter within the judgment or discretion of the Independent Accountant and, even if reasonable minds might differ about the conclusion, one could not say that this was manifestly wrong.[160]

   [159]T 152.27–153.1.

   [160]T 152.21–26.

1. The contrary view advanced by Funtastic was that an item is ‘not dealt with’ in the Specific Accounting Principles (second-tier principles) if it does not fit within the description of any category in the Specific Accounting Principles.[161]

   [161]T 44.19–46.17.

1. In my opinion, it is not a complete answer in this context for MFM to say that the Independent Accountant’s interpretation of the agreed hierarchy was within the judgment or discretion of the Independent Accountant and was a matter about which reasonable minds might differ.

1. In Australian Vintage Ltd v Belvino Investments No.2 Pty Ltd,[162] an expert was required to make a determination in relation to the reduction in production or production capacity of vineyards due to frost damage.  This task involved a question of construction of a clause in a lease.  In the principal judgment, Bathurst CJ (with whom Beazley P and McColl JA agreed) said:

There will be cases, such as the present case, where the expert, for the purpose of performing his or her task, will be required to consider objective matters, including the construction of a contract. As was pointed out by Allsop P (as his Honour then was) in Onesteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd… the objective analysis required by the process of contractual construction can only produce one meaning.

It is correct, as Allsop P pointed out in the passage referred to above, that the fact that there is one true meaning does not detract from what his Honour described as “the pervasive reality that a contract will often have potentially more than one meaning ... and that reasonable minds often differ about what is the true meaning”. That does not mean that the ascertainment of that meaning was necessarily left to the expert, such that the expert’s determination was immune from review by the Court.

…

It is correct that the expert also needed to make a decision as to the manner in which the formula operated. However, that did not mean that the parties agreed to be bound by the expert’s determination of that issue.[163]

[162](2015) NSWLR 367 (Bathurst CJ, Beazley P and McColl JA).

[163]Ibid 385-386 [77]–[78], [81] (Bathurst CJ).

1. These observations are apposite in the present case.  Naturally, as part of his task the Independent Accountant was required to consider and apply the hierarchy which involved, among other things, construction of the expression ‘not dealt with’.  It does not follow that the parties agreed to be bound by the Independent Accountant’s determination of the meaning of those words such that it is immune from review by the Court.

1. I can discern nothing in the SSA which would suggest that the Independent Accountant’s mandate extends to determination of the proper construction of the SSA.  In any event, the decision of the Independent Accountant is only conclusive and binding on the parties in the absence of manifest error.

1. In my opinion, properly construed, an item is ‘not dealt with’ if it does not fall within a description of the items defined under the Specific Accounting Principles.  This is consistent with the ordinary meaning of the words and with the scheme of the hierarchy.  It is not suggested that the words or the phrase ‘not dealt with’ involve any term of art.  It can be seen that the hierarchy moves from the specific to the general in descending order starting with inclusion of specific balances (first tier), Specific Accounting Principles (second tier), consistency with preparation of the Half-Year Accounts (third tier) and generally accepted accounting principles (fourth tier).  If an item does not fit within the more specific categories, it falls for consideration in the more general categories.  In my view, this construction is more likely to produce a commercial outcome and avoid a capricious outcome.[164]  I reject MFM’s submission that the third tier and the fourth tier in the hierarchy would have work to do only in a case where there is ambiguity or uncertainty about whether an item falls within the Specific Accounting Principles.  There is no sound basis to imply a qualification to that effect.

   [164]See Electricity Generation Corporation (2014) 251 CLR 640, 657 [35] (French CJ, Hayne, Crennan and Kiefel JJ).

1. It was therefore incumbent on the Independent Accountant to consider MPC Revenue under third-tier principles.  In my view, it was manifestly erroneous for the Independent Accountant to conclude that it was not necessary to consider the Half-Year Accounts.[165]  As there was a manifest error, it follows that the Independent Accountant’s decision with respect to the MPC Revenue item is not conclusive or binding on the parties.[166]

   [165]Expert Report, [209], CB 752.

   [166]SSA, cl 7.6f, CB 127–8.

Remedy

1. Funtastic submitted that in the event that the Court found there was a manifest error, the Court should determine the matter for itself or, alternatively, refer the matter back to the Independent Accountant to be re-determined on a proper basis.[167]

   [167]T 9.20–10.12.

1. MFM submitted that the appropriate remedy would be a declaration limited to a finding that the Expert Report as a whole is vitiated by the existence of manifest error and is therefore not conclusive and binding on the parties, and that it would be inappropriate for the Court to determine the matter for itself or refer the matter to the Independent Accountant for re-determination.[168]

   [168]T 98.9–99.25.

1. I reject the submission that the Expert Report as a whole is vitiated by manifest error found with respect to one of the items in dispute.  I accept Funtastic’s submission that that would be an uncommercial and strained interpretation of the expression ‘the decision’ in clause 7.6(f) of the SSA.  Clause 7.6(f) relevantly states, ‘The decision of the Independent Accountant is, in the absence of manifest error, conclusive and binding on the parties’.

1. In my view, the words ‘the decision’ in that context mean each relevant decision.  The dispute resolution regime allowed for the buyer (MFM) to deliver a Dispute Notice specifying in detail the items it disputes.[169]  Clause 7.6(a) required the parties ‘[t]o attempt to negotiate a resolution to the dispute and agree upon each item in the Dispute Notice’.[170]  Failing agreement, either party may refer the disagreement to the Independent Accountant (clause 7.6(b)).  The Independent Accountant must be instructed to make a decision on the disagreement (clause 7.6(c)).[171]  The disagreement for this purpose is the failure of the parties to reach agreement in accordance with clauses 7.6(a) and 7.6(b).[172]  It is significant that particular attention is drawn to agreement upon each item.  In this context, ‘disagreement’ is necessarily a disagreement upon each item, and the instructions to the Independent Accountant to make a decision on the disagreement carry the notion of a decision being made upon each disputed item.  For completeness, it is noted that clause 1.2 of the SSA contains a standard interpretation clause which says that words importing the singular include the plural and vice versa. 

   [169]SSA, cl 7.5(a), CB 127.

   [170]Ibid cl 7.6(a), CB 127 (emphasis added).

   [171]SSA, cl 7.6(c), CB 127.

   [172]Ibid cl 7.6(b), CB 127.

1. This construction of the dispute resolution clause applies business common sense.  The notion that the whole of the Independent Accountant’s work in resolving the numerous disputes referred to him should be jettisoned by reason of manifest error with respect to the decision made on one of those disputed items is so inexpedient and unpragmatic that it cannot be countenanced.  It would have the effect of wasting time, energy and expense and would cause inconvenience and delay.  There is no reason to suppose that a reasonable business person would be presumed to have intended that outcome.

Re-determination by Independent Accountant

1. For the following reasons, the Court is unable to determine the MPC Revenue issue.

1. At trial, Funtastic submitted that historical entries in a general ledger account reconciliation of account 7281 for November 2013 and a general ledger for the financial year ended 31 July 2014 demonstrate that the Independent Accountant’s decision to exclude MPC Revenue was manifestly erroneous as such items had been included in the sundry debtors account historically.[173]

   [173]Funtastic opening submissions, [31].

1. The general ledger account reconciliation for November 2013 for sundry debtors includes an item ‘MPC – funds to be recovered’, and the general ledger dated 27 March 2015 contains references relied on by Funtastic as follows:[174]

   [174]Funtastic Ltd General Ledger Account Reconciliation, CB 677, and Excel file ‘GL trans 20000007281 27 March 2015.xlsx’, CB 678.

Reference	Details
MPC FY13	MPC Enterprise investment
MPC FY13	MPC Enterprise investment
MPC FY13	MPC Ent Investment 0307-1896
ACCR REV	Wastelander production billing Mar-Jun14
ACCR REV	MPC Grant Funding 5th instal Jan-Jun14
ACCR REV	Wastelander production billing Jul14
MPC FY14	MPC Enterprise Investment receivable

1. It is not possible to tell whether these entries on their face meet the description ‘MPC Revenue not yet invoiced’, and I express no view on the question.[175]

   [175]For completeness, I note that the witness statement of Grant Mackenzie dated 6 June 2016, CB 35–56 is of no assistance on this question.

1. The issue now is whether the Court should remit the MPC Revenue item issue to the Independent Accountant for re-determination.

1. In this case, no question arises as to the Independent Accountant’s suitability to re-determine the issue.  There is no question of lack of competence or incapacity.  There is no reason to suppose that the Independent Accountant would not approach the task honestly, impartially and diligently in light of the reasons of the Court.

1. Finally, I note that despite the Independent Accountant’s opinion that it was not necessary to consider the Half-Year Accounts, he did nevertheless make some contextual references to reconciliation of sundry debtors in the Half-Year Accounts.[176]  This, in my view does not remedy the consequence of making a manifest error of construction.  Further, the treatment of this item for this purpose is likely to have lacked the focus which would have been brought to bear to the task had the Independent Accountant realised it was necessary for him to consider the item by reference to third-tier principles.[177]

   [176]Expert Report, CB 752.

   [177]Expert Report, sch 4: Completion Accounts, [1.1.3], CB 187.

Conclusion

1. In my view, the Independent Accountant did not make a manifest error in the Expert Report with respect to his determination of the Conditional MG Payments issue.

1. In my view, the Independent Accountant did make a manifest error with respect to his determination of the MPC Revenue issue.  There will be a declaration to that effect together with an order referring the MPC Revenue dispute to the Independent Accountant for re-determination.