Geoffrey Andrew Smith v Robert Gould

[2014] VSCA 138

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2012 0215

GEOFFREY ANDREW SMITH	Appellant
	v
ROBERT GOULD	Respondent

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JUDGES	WARREN CJ, OSBORN and BEACH JJA
WHERE HELD	MELBOURNE
DATE OF HEARING	27 and 28 May 2014
DATE OF JUDGMENT	27 June 2014
MEDIUM NEUTRAL CITATION	[2014] VSCA 138
JUDGMENT APPEALED FROM	Smith v Gould [2012] VSC 461 (Dixon J) Smith v Gould (No 2) [2012] VSC 541 (Dixon J)

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PROPERTY – Former de facto partners – Adjustment of property interests pursuant to s 285 of the Property Law Act 1958 – Financial and welfare contributions by both parties – Divisible pool of assets – Contributions – Valuation – Adjustments – Costs – Armory v Delamirie (1722) 1 Str 505; 93 ER 664 considered.

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Mr R Kendall QC with Dr P Vout	Slater & Gordon Limited
For the Respondent	Mr S Wilson QC with Mr P Herzfeld	HWL Ebsworth Lawyers

WARREN CJ:
OSBORN JA:
BEACH JA:

Introduction

1. Between April 1990 and June 2004, Mr Geoffrey Smith and Mr Robert Gould  were domestic partners in a domestic relationship within the meaning of the now repealed provisions of pt IX of the Property Law Act 1958 (‘the Act’).

1. In the proceeding below, Mr Smith (as plaintiff) sought an order adjusting the interests of Mr Smith and Mr Gould pursuant to the provisions of the now repealed s 285 of the Act. Section 285 relevantly provided:

285     Order for adjustment

(1)A court may make an order adjusting the interests of the domestic partners in the property of one or both of them that seems just and equitable to it having regard to—

(a)the financial and non-financial contributions made directly or indirectly by or on behalf of the domestic partners to the acquisition, conservation or improvement of any of the property or to the financial resources of one or both of the partners; and

(b)the contributions, including any contributions made in the capacity of homemaker or parent, made by either of the domestic partners to the welfare of the other domestic partner or to the welfare of the family constituted by the partners and one or more of the following—

(i)        a child of the partners;

(ii)a child accepted by one or both of the partners into their household, whether or not the child is a child of either of the partners; and

(c)any written agreement entered into by the domestic partners.

1. Following a 27 day trial, a judge of the Trial Division held that the value of the pool of assets to be divided between the parties was $22,827,416.  The judge then fixed Mr Smith’s share of the divisible pool of assets at $3 million, and declared that the value of the adjustments in the divisible property of the relationship since the parties separated was $2,956,989.  In the result, the judge ordered Mr Gould to pay Mr Smith the sum of $43,011.

1. Following further argument, the trial judge made costs orders as follows:

   1.The [appellant] pay the [respondent’s] costs of and incidental to the applications for the interlocutory injunction[1] to be taxed as between party and party. 

   2.The [appellant] pay the [respondent’s] costs of the proceeding, other than the costs subject to prior costs orders and the costs of the injunction, such costs to be taxed on a party and party basis, limited to 50% of the taxed costs up to and including 12 April 2012 and thereafter limited to 75% of the taxed costs.

   [1]An interlocutory injunction was first made by consent by Habersberger J on 1 February 2006.  This injunction affected 23 named art works that were the subject of the proceeding below.  Additionally, although Habersberger J’s order was expressed to operate until further order, an order in the same terms was again made by consent on 16 May 2006 (this time by Kellam J, as his Honour then was).

   The proceedings before this Court

1. By his second further amended notice of appeal, Mr Smith appeals the judge’s orders valuing Mr Smith’s entitlement to an adjustment of the divisible property of the relationship in the amount of $3 million and valuing the adjustments in the divisible property of the relationship since separation in the sum of $2,956,989.  In the 28 grounds of appeal ultimately pursued before us,[2] Mr Smith variously makes complaints about the judge’s conclusions concerning:

   [2]Grounds 13, 21 and 21A were abandoned at the hearing of the appeal.

(a)       assets that were held not included in the total divisible pool;

(b)      the valuation of assets in the total divisible pool;

(c)       Mr Smith’s contribution to the relationship and the parties’ assets;

(d)      the proportion of the asset pool to which the judge found Mr Smith was entitled;  and

(e)       the value of adjustments made in the divisible property since the relationship ended.

1. In addition to his appeal against the orders of the trial judge determining the substantive dispute between the parties, Mr Smith, by summons filed 11 February 2013, seeks leave to appeal against the costs orders made by the judge.  There are seven proposed grounds of appeal:  five of them (proposed grounds 1, 2, 5, 6 and 7) concern issues about the prolongation of the trial;  and two of them (proposed grounds 3 and 4) concern a Calderbank offer made on 11 April 2012 (some thirteen days before the trial commenced) by Mr Gould to Mr Smith.

1. Finally, by summons filed 20 December 2012, Mr Gould seeks leave to appeal from paragraph 2 of the costs orders made by the judge.  In lieu of paragraph 2 of the judge’s costs order, Mr Gould (if given leave) would seek an order in the same terms as the order made by the judge, but (based upon his Calderbank offer of 11 April 2011) replacing the words ‘limited to 75% of the taxed costs’ with the words ‘on an indemnity basis’. 

Facts not in dispute

1. The facts not in dispute between the parties may be briefly summarised as follows. The parties met on 5 April 1990. They commenced a domestic relationship, within the meaning of the Act, shortly thereafter. The parties lived together in Park Street, South Yarra, from about September 1990 until the Queen’s Birthday weekend in June 2004.

1. At the commencement of the domestic relationship, Mr Smith worked part-time at a hotel and was undertaking his honours year in art history at the University of Melbourne.  At that time Mr Smith had assets worth about $20,000, comprising cash savings of about $11,000, a car, furnishings and glassware, and art works, including a work by each of John Brack, John Tenniel and Victor Mayzner.

1. At the commencement of the domestic relationship and at all times thereafter, Mr Gould worked in the business of Gould Galleries.  The business was operated by Edrob Nominees Pty Ltd (‘Edrob’) as trustee of the E&R Unit Trust, all of the units in which were owned by Dukville Pty Ltd (‘Dukville’).  Mr Gould owned half of the shares in Dukville until 1995, at which time he bought out his mother’s 50 per cent interest for $170,000 and became owner of all of the shares in Dukville.

1. At the commencement of the domestic relationship Mr Gould owned, in addition to his shares in Dukville, Park Street (purchased for $555,000 and renovated for $75,000 during 1990 by Mr Gould); a one-third interest in a property at Frankston (which the parties agreed was to be disregarded for the purposes of the proceeding); and artworks, comprising Intruder and Parrots by Albert Tucker, Sleeping Sailor by Donald Friend, Falling Figure by Larwill, Boy with Cat Looking Over Shoulder by John Perceval, and Fandango and Petrushka by Santhill.

1. In December 1990 Mr Smith was employed as the Curatorial Assistant to the Director of the National Gallery of Victoria (NGV), rising to the position of Curator of Australian Art (19^th Century — Early Modernism) in 2001.  Mr Smith remained employed at the NGV until 2006.

1. As at June 2004, the pool of assets included:

(a)        23 Park Street (title: respondent 100 per cent);

(b)        Potts Point (title:  respondent through Dukville 100 per cent);

(c)        3/31 Marne Street, South Yarra (title:  appellant 100 per cent);

(d)        3/29A Wallace Avenue, South Yarra (title:  appellant 100 per cent);

(e)12/33 Albany Road, Toorak (title: appellant 1/3;  respondent through Dukville 1/3);

(f)         14/63 Alexandra Avenue, South Yarra (title:  appellant 2/3);

(g)2/128 Toorak Road West, South Yarra (title:  appellant 36 per cent;  his sister 64 per cent);

(h)4/16 Millswyn Street, South Yarra (title: appellant 1/4;  respondent through Me Me Me Pty Ltd 1/4);

(i)3/35 Marne Street, South Yarra (title:  appellant 1/3;  respondent through Me Me Me Pty Ltd 1/3)

(j)4/35 Marne Street, South Yarra (title:  respondent through Me Me Me Pty Ltd 1/3);

(k)        ‘Scotsford’ Elizabeth Bay, New South Wales (Title:  appellant 1/2);

(l)59 Smith Street, Fitzroy (title:  respondent through Keelboat Pty Ltd 100 per cent);

(m)artwork at Park Street in June 2004 owned by one or other of the parties (i.e. not owned by Gould Galleries);

(n)shares in Dukville and Edrob (respondent 100 per cent);

(o)superannuation balances of $47,709 (appellant) and $394,792 (respondent);

(p)bank account balances of $70,256 and $5,321 (respondent) and $504,080 (respondent through Edrob).

1. Discussions took place between the parties in June and July 2004 concerning an adjustment of assets between them and various purchases and transfers of property occurred. At trial, Mr Smith contended and Mr Gould ultimately accepted that no legally binding agreement was reached.  However, Mr Gould contended that an arrangement was reached that was relevant to an assessment of the parties’ contributions.

Relief sought

1. In finding that there was a divisible pool of assets valued at $22,827,416, and in awarding Mr Smith an adjustment of $3 million, the judge gave Mr Smith approximately 13 per cent of the pool as found and valued by him.  In his second further amended notice of appeal, Mr Smith seeks an order giving him an adjustment of 40 per cent of the divisible property.  Further, complaint is made by Mr Smith about the content and value of the divisible pool of assets.  In respect of the complaints about the content and value of the pool, Mr Smith does not identify with precision everything he contends should have been in the pool, or the precise amount that ought to have been held to have been the value of the divisible pool.  Rather, Mr Smith submits that this Court should:

(a)substitute its opinion regarding a just and equitable adjustment of interests for that of the trial judge [40% as contended for in the second further amended notice of appeal];  or (scil, and)

(b)if having determined what is an appropriate adjustment in percentage terms, and if the Court considers it appropriate, refer the determination of [Mr Gould’s] response to the list which is schedule 3B[3] to an associate justice for an enquiry to be made, after [Mr Smith] has first made full discovery of all records, including sales records, of the art works listed in schedule 3B;  or

(c)order a re-trial of the entire application.[4]

[3]Exhibit D59 at trial, described in the appeal books as:

Revised form of schedule 3B that is the work of both the [appellant] and [the respondent] in their respective columns as the transcript makes clear, comprising a spread sheet of 69 pages.

[4]Appellant’s amended outline of submissions dated 6 November 2013, paragraph 115.

The principles governing the application of s 285

1. Under pt IX of the Act the Court may adjust the interests of parties to a failed domestic relationship in property of one or both of them as appears to be just and equitable. There is no dispute that the trial judge correctly stated the statutory basis of his powers or that he did other than correctly elaborate the principles governing the proper overall approach to the exercise of his discretion.

1. As his Honour recorded, the Court needed to be satisfied of a series of preconditions to the exercise of its powers: 

9The court needs to be satisfied of certain conditions for making orders that are set out in ss 280–282 of the Act. These matters are that:

(a)one or both of the domestic partners lived in Victoria on the day on which the application was made;

(b)both partners have lived together in Victoria for at least one third of the period of their relationship;

(c)substantial contributions of the kind referred to in s 285(1)(a) or (b) have been made in Victoria by the partner making the application;

(d)the domestic partners have lived together in a domestic relationship for a period of at least two years; and,

(e)if domestic partners have ended their domestic relationship, the application for an order was made within two years after the day on which the relationship ended.[5] 

[5]Smith v Gould [2012] VSC 461 (‘Reasons’), [9].

1. These conditions were satisfied. 

1. In turn his Honour held that there were three main stages involved in the decision-making process which may justify the exercise of the jurisdiction.  In so holding he followed the approach stated by Brereton J (with whom Basten JA and Hunt AJA agreed) in Kardos v Sarbutt:[6]

[29]The exercise of jurisdiction under s 20[7] involves three main steps.  The first is the identification and valuation of the property of the parties, which determines the ‘divisible pool of property’ — that is, ‘the property of the parties to the relationship or either of them’ referred to in s 20 which may be the subject of an adjustive property order under that section.  The second is the evaluation and balancing of the respective contributions of the parties of the types referred to in s 20, and typically though not invariably results in an apportionment between the parties on a percentage basis of the overall contributions of the types referred to in s 20 of each of them, made to the date of hearing.  The third is the determination of what order is required sufficiently to recognise and compensate the applicant’s contributions, and typically results in an order which leaves the applicant with that percentage identified in the second step of the divisible property identified in the first step.  This is a simplification of the four-step approach first formulated by Powell J in D v McA.[8]

[6](2006) 34 Fam LR 550 (‘Kardos’), [29] (citations in original).

[7]Property (Relationships) Act 1984 (NSW).

[8](1986) 11 Fam LR 214; (1986) DFC 95-030. See also Roy v Sturgeon (1986) 11 NSWLR 454; 11 Fam LR 271; (1986) DFC 95-031; Wilcock v Sain (1986) 11 Fam LR 302; (1986) DFC 95-040; Evans v Marmont (1997) 42 NSWLR 70; 21 Fam LR 760; (1997) DFC 94-184; Jones v Grech (2001) 27 Fam LR 711; (2001) DFC 95-234; [2001] NSWCA 208.

1. This is the approach followed by this Court in Apostolidis v Kalenik.[9]

   [9][2011] VSCA 307 (Nettle, Ashley and Tate JJA).

1. The evaluation of the contributions of a party to the pool of property involves a holistic value judgment:[10]

[36]Third, in proceedings under s 20, the court is not required to undertake a reductionist process analogous to the taking of partnership accounts by examining every alleged ‘contribution’ of the kinds described in the section with a view to putting a monetary value on each in order to reach an accounting balance one way or the other, then to be eliminated by the requisite financial adjustment; rather, the court is required to make a holistic value judgment in the exercise of a discretionary power of a very general kind.[11] 

[37]Some contributions are readily capable of evaluation in monetary terms.  Others — such as those made in the capacity of homemaker and parent — are not.  Because some assets depreciate in value, and because parties incur living expenses, the pool of property available for division will usually be less than the sum of the financial contributions, and more so when allowance is made for the value of the non-financial contributions.  This means that the type of accounting approach which McLelland J discouraged in Davey v Lee runs the risk that, by focusing on the valuing of individual contributions item by item, not only will the overall picture be lost, but serious injustice can be done, particularly by devaluing those contributions which are not readily capable of evaluation in monetary terms.  On the other hand, the ‘fruits of a totality of efforts of wage earning, homemaking and mutual support’ referred to by Deane J in Mallet[12] do not usually encompass property which each party had before the relationship, or which either party introduced not by way of their mutual efforts at wage earning, homemaking and mutual support, but independently through gift or inheritance from third parties.

[10]Kardos [36]-[37] (citations in original).

[11]Davey v Lee (1990) 13 Fam LR 688; (1990) DFC 95-084 (McLelland J).

[12]Mallet v Mallet (1984) 156 CLR 605; 52 ALR 193; 9 Fam LR 449.

1. The relevant evaluation of contributions may be undertaken by way of an asset based approach or a global approach:[13] 

[51]The legislation does not dictate the employment of any particular method in the formulation of an appropriate order for the adjustment under s 20 of property interests, and it is not desirable to attempt to formulate principles or guidelines designed to constrain judicial discretion within a predetermined framework.[14]  Although, in the majority of cases, the global approach is likely to be more convenient than an asset-by-asset approach, the application of the asset-by-asset approach does not of itself amount to an error of law (Mason and Deane JJ).  In Norbis, Mason and Deane JJ cited with approval observations of Nygh J in G & G,[15] to the effect that (at 79,697) it cannot be required of the Family Court that it assesses contributions with mathematical precision with respect to each item, and (at 79,697) that while the Family Court was divided between those who favoured the so-called global approach and those who seek to achieve some degree of precision, both approaches were legitimate provided that those who take the global approach heed the warning that the origin and nature of the different assets ought to be considered, and that those who favour the more precise approach do not mistake the trees for the forest and add up their individual items without standing back at the end to review the overall result.

[52]In Lenehan v Lenehan,[16] the Full Court of the Family Court (Fogarty, Maxwell and Gun JJ) said:

The judgments of the High Court in In the Marriage ofNorbis[17] demonstrate the very wide discretion which a trial Judge has in the approach that he may adopt under s 79.  In particular the judgments in that case discuss the ‘global’ and the ‘asset by asset’ approaches, and demonstrate that this is largely a matter for the trial Judge to determine in the exercise of his discretion.  However Norbis’ case is not a carte blanche to adopt either view irrespective of the circumstances of the individual case.  There are cases where one approach or the other is clearly appropriate and a failure by the trial judge to adopt that approach may demonstrate error.  We think this is one such case.  His Honour’s initial approach of treating the parties’ contributions to the home as separate from their contributions to the other (largely business) assets was, we think, a proper approach in the circumstances.

[13]Kardos [51]-[52] (citations in original).

[14]Compare Norbis v Norbis (1986) 161 CLR 513; 65 ALR 12; 10 Fam LR 819; (1986) FLC 91-712 (Wilson and Dawson JJ).

[15](1984) 9 Fam LR 969; (1984) FLC 91-582.

[16](1987) 11 Fam LR 615; (1987) FLC 91-814 at Fam LR 626.

[17](1986) 10 Fam LR 819; (1986) FLC 91-712.

1. These observations have been applied in this Court in Giller v Procopets[18] and Apostolidis v Kalenik.[19] 

   [18](2008) 24 VR 1.

   [19][2011] VSCA 307.

1. In the present case the trial judge first assessed the value of sub-pools of assets and the contribution of the parties to them.  In so doing he sought to assess both direct and indirect contributions to the divisible pool of property and to further assess the welfare contributions of the parties. 

1. Material factors favouring this approach were findings that the pool of divisible assets was quite varied both in terms of the nature of the asset and the nature of the contribution of the parties to different assets.  Further the non-financial contributions alleged, both direct and indirect, related to particular types of assets rather than the whole pool.[20] 

   [20]Reasons [74]-[76].

1. The categories of sub-pools considered were:

(a)       properties that were used as residential, with no rent collected — Park Street, South Yarra, Potts Point, Sydney and 3/31 Marne Street, South Yarra;

(b)      investment properties — equity in, and profits earned on realised, property investments;

(c)       artworks, considering both the private collection alleged to be owned by both parties and Mr Gould’s shares in Dukville Pty Ltd; and,

(d)      remaining personal assets and liabilities.

1. His Honour further undertook a global assessment of what was fair and equitable as a check upon the outcome of the sub-pool analysis. 

1. Ultimately he fixed an apportionment of the divisible pool of assets by reference to the outcome of both approaches. 

1. It was not submitted by Mr Smith that his Honour erred in adopting the sub-pool approach, nor that in principle there was error in adopting a global analysis by way of an alternative check. 

1. Rather, it was submitted that his Honour erred at each stage of the three stage process which he adopted namely first in the ascertainment of the extent and value of the sub-pools; secondly, in the evaluation and apportionment of the contributions of the parties to the sub-pools; and thirdly, in the determination of the appropriate adjustment to be made to particular sub-pools. 

1. It is convenient to address the grounds of appeal by groups relating to these stages of the decision-making process.  The first two involve an appeal by way of rehearing with respect to aspects of the factual matrix forming the basis of the third aspect of the judge’s decision.  The grounds of appeal relating to this third aspect seek to impugn the ultimate exercise of the judge’s discretion. 

1. On an appeal by way of rehearing the Court is required to conduct a real re-evaluation of the evidence and of the judge’s reasons, although it must bear in mind that it has not seen or heard the witnesses.[21] 

   [21]Fox v Percy (2003) 214 CLR 118, 126-7 [25]-[26].

1. On the other hand, the ultimate exercise of a discretion, such as that here in issue, will not be interfered with on appeal unless it is vitiated by specific error in connection with it or the Court reaches the conclusion that it was not reasonably open in all the circumstances of the case.[22] 

   [22]House v R (1936) 55 CLR 499, 505.

1. The written submissions filed emphasise four principal alleged elements of error in the trial judge's decision which affect aspects of each level of the decision-making in issue. 

(1)       The finding that in respect of the domestic relationship which lasted 14 years, during which Mr Smith made contributions to the business of Gould Galleries and to the acquisition of real estate for investment purposes, Mr Smith was entitled to an adjustment of interest of approximately 13 per cent of the total divisible pool accepted by the trial judge.

As we apprehend it this goes to the reasonableness of the ultimate exercise of the discretion. 

(2) The alleged failure by the trial judge to properly construe and apply s 285(1) of the Act by treating the parties' domestic relationship as 'far more like a commercial partnership' and by requiring Mr Smith to establish that he had made direct, material contributions to Gould Galleries identifiable in monetary terms and to the improvement of the divisible pool of assets generally.

This goes to the ascertainment and apportionment of Mr Smith's contribution to the principal asset comprised in the divisible pool, namely the business of Gould Galleries. 

(3)       The trial judge's preference for an overwhelming acceptance of the evidence of Mr Gould. 

This issue goes to the evidence generally including matters bearing on the first stage of the enquiry ie the ascertainment of the pool and the second stage of the enquiry namely the evaluation and apportionment of contributions. 

(4)       The trial judge's alleged refusal to draw inferences from Mr Gould's failure to keep or produce proper records of stock (being artworks), his refusal to apply the principle in Armory v Delamirie,[23] and his decision to accept Mr Gould's oral evidence that he had sold all of the artworks comprised in a schedule prepared by the plaintiff ('Schedule 3B'). 

This issue goes to the first and second stages of the enquiry.

[23](1722) 1 Str 505; 93 ER 664 (‘Armory v Delamirie’). 

1. We shall deal with each of these principal complaints in the course of dealing separately with the grounds of appeal relating to each level of the trial judge’s decision. 

AThe judge’s approach to the identification and valuation of the art sub-pool

1. At trial the parties agreed to value Mr Gould’s interest in the business of Gould Galleries by reference to the current market value of the June 2004 closing stock.  In effect, they treated the value of the stock as a proxy for the value of the business.  As his Honour recorded, this approach did not accord with usual practices of business evaluation.  It produced substantial dispute as to what artworks were comprised in the stock of Gould Galleries at 30 June 2004 and as to the present market value of the stock.  It also led to some further dispute as to whether other assets were to be characterised as assets of the business (and hence notionally subsumed in the agreed method of valuation) or as personal assets of Mr Gould.  His Honour made a series of observations concerning the methodology adopted including the following:

145Unsurprisingly, Mr Smith and Mr Gould focussed on individual artworks.  Their legal representatives have run the trial on the basis that the value of Dukville is assessed by reference to the current market value of the June 2004 closing stock.  Further, stock is limited to the paintings that Gould Galleries owns, not paintings consigned to it for sale, notwithstanding that consignment of artwork to Gould Galleries was a significant profitable business activity.  Gould Galleries otherwise, it is agreed, has no goodwill.  The parties invited me to translate the value of the stock into the value of the units in the E&R Gould Unit Trust which in turn identifies the value of the shares in Dukville, leaving aside Dukville’s property interests.  In essence the parties have, without expressly acknowledging the fact, adopted a valuation method that appears to lie between a hypothetical liquidation valuation and a valuation of net tangible assets on a going concern basis, but which, in fact, is neither.

146     On these assumptions, the parties focussed the dispute on two issues:

(a)what comprised the stock of Gould Galleries at 30 June 2004; and

(b)       what is the present market value of that stock?

Despite my reservations about proceeding on this basis, I am effectively constrained to do so by the focus of the evidence presented at trial.  As it is not grounded in proper valuation principle, this approach has led to further areas of dispute between the parties.  In particular, what definition of value for an individual artwork is to be adopted, its cost no longer being appropriate, and ought there be any adjustment to, or discount from, the assessed value of stock to achieve a commercial value commensurate with the real value of the Dukville shares to Mr Gould?  What liabilities or other assets of Gould Galleries should be included in assessment of its value?[24]

[24]Reasons [145]-[146].

B        The extent of the art sub-pool

1. The judge valued the art sub-pool at $16,926,004.  He then made an adjustment in Mr Smith’s favour of 10 per cent of the value of the art sub-pool.  Mr Smith makes a number of complaints about these conclusions.  First, Mr Smith makes complaint generally about the rejection of his case as to the extent of the art sub-pool (ground 6).  Secondly, Mr Smith makes complaint about the judge’s preference for the evidence of Mr Gould (grounds 3, 4, and 4A).  Thirdly, Mr Smith makes complaint about the judge taking into account Mr Smith’s commencement of a relationship with Mr Singer prior to the end of the domestic partnership (ground 5).  Mr Smith submits that his relationship with Mr Singer was irrelevant, and taking it into account was prejudicial to his case.  Fourthly, Mr Smith makes complaint about the judge’s rejection of his Armory v Delamirie case (grounds 7, 8 and 9).  Fifthly, Mr Smith makes a complaint about the judge’s rejection of his case that there was a separate joint private art collection owned by the parties (ground 10).

1. Grounds 3, 4, 4A, 5, 6, 7, 8, 9 and 10 provide:

3The learned trial judge erred by preferring and giving weight to the respondent/defendant’s uncorroborated testimony concerning almost every issue in dispute (Reasons [26], [94]), notwithstanding that:

(a)he found that the respondent/defendant had twice deliberately and opportunistically lied under oath when responding to interrogatories (Reasons [298], [300]);

(b)he found that the respondent/defendant had undervalued the stock of Gould Galleries for tax purposes for years (Reasons [153] and [299]);

(c)he found that the respondent/defendant had purchased artwork under false names (Reasons [153], [298], [301]);

(d)he found that the respondent/defendant gave unsatisfactory evidence in relation to financial dealings with his brother, Gary Gould: Reasons [241]-[242];

(e)he found that the respondent/defendant presented as a witness whose conduct was of a kind that engenders deep suspicion of his commitment to the truth; Reasons [306];

(f)he found that the respondent/defendant failed to inform a client of Gould Galleries, Mrs Alice Rouse that he was the undisclosed purchaser of a painting which had been consigned to Gould Galleries for sale; Reasons [302]-[304];

(g)he found [the] several facts and matters about the respondent’s/defendant’s conduct described in his reasons at Reasons [153];

(h)he found that the respondent/defendant swore an affidavit in which the respondent/defendant explained that he had ‘inadvertently’ omitted sales of stock valued at about $940,000, when he had referred to stock in a prior affidavit.

4        Having concluded that:

(a)the respondent/defendant was not a credible witness on many issues (Reasons [26]);

(b)he was satisfied that the respondent/defendant twice deliberately lied when responding to interrogatories about the sale of Brett Whiteley’s Bather and Garden (at Reasons [300]);

(c)the respondent/defendant presented as a witness whose conduct out of court was of a kind that engenders deep suspicion of a witness’s commitment to the truth (at Reasons [306]); and

(d)having determined that careful assessment of the evidence of each of the parties about uncorroborated conversations and dealings must be undertaken to make certain findings of fact (at Reasons [26])

the learned trial judge erred by failing to carefully assess the evidence of each of the parties about uncorroborated conversations and dealings between them, but instead, in most instances, stated without more that he preferred the evidence of the defendant: e.g. Reasons [24], [49], [166], [196].

4AThe learned trial judge erred by preferring the evidence of the respondent/defendant when it conflicted with the evidence of the appellant/respondent about their private dealings without any independent corroboration and by saying that he did so because he held that the respondent/defendant’s evidence about the operation of Gould Galleries was broadly corroborated by other witnesses (Reasons [306]).

5The learned trial judge erred by finding and taking into consideration, irrelevantly and prejudicially to the appellant/plaintiff’s case, that the appellant/plaintiff commenced a relationship with Mr Singer prior to the end of the parties’ domestic partnership:  Reasons [24]-[29].

6The learned trial judge erred by characterising the appellant/plaintiff’s Schedule 3B as an ‘ambit claim’ (at Reasons [165]) rather than a bona fide attempt to reconstruct a stock list for Gould Galleries as at June 2004 having regard to:

(a)his finding that the respondent/defendant had been dishonest about his disposal of assets (Reasons [300]);

(b)his finding that the respondent/defendant had disposed of a computer hard drive containing records of Gould Galleries (Reasons [153]);  and

(c)his finding that the respondent/defendant had failed to discover databases listing stock of Gould Galleries:  Reasons [153], [163]-[168].

7The learned trial judge erred in ruling that the rule in Armory v Delamirie (Chimney Sweeper’s Case) (1722) 1 Str 505; 93 ER 664 had no application to the case: Reasons [160].

8The learned trial judge erred in ruling that the concept of ‘wrongdoing’ in the rule in Armory v Delamirie (Chimney Sweeper’s case) (1722) 1 Str 505; 93 ER 664 does not extend to a careless or intentional failure to keep proper records and accounts, perjury and disposal of evidence: Reasons [161].

9Having regard to:

(a)the respondent/defendant’s dishonest answers to interrogatories;

(b)the respondent’s disposal of a computer hard drive containing records of Gould Galleries;  and

(c)the respondent’s failure to discover databases listing stock of Gould Galleries: 

the learned trial judge erred by refusing to infer that artworks purchased by the respondent/defendant and Gould Galleries and for which there was no evidence of sale, remained in stock in the business of Gould Galleries, such that those artworks should have been included in the calculation of the divisible pool of assets:  Reasons:  [152]-[153];  [163]-[168].

10Having regard to the evidence that certain paintings at Park Street (including Andy Warhol’s Portrait of a Woman Red) have never been offered for sale since their purchase, the learned trial judge erred:

(a)by rejecting the appellant/plaintiff’s allegation that there was and is a private collection of art kept at their residence at 23 Park Street, South Yarra;  and

(b)thereby calculating any adjustment of interests in relation to such artworks by reference to the appellant/plaintiff’s contributions to the acquisition, conservation and improvement of the business of Gould Galleries rather than to the acquisition and improvement of the private collection or the individual artworks themselves:  Reasons [376], [412].

1. A feature of the proceeding below was an extensive discovery war conducted between the parties over the years leading up to trial.  The appeal books contain 35 letters about discovery.  Some of these letters were long and tendentious.  In argument, we were taken to additional correspondence concerning discovery.  A central plank of Mr Smith’s case was that Mr Gould’s discovery (particularly in respect of the art sub-pool) was, as Mr Smith’s counsel put it, manifestly deficient.  It was submitted that, because of this deficiency, Mr Smith’s ability to prove the extent of the art sub-pool at trial was severely compromised. 

1. In the circumstances, and prior to trial, Mr Smith developed two schedules of artwork.  These schedules were referred to throughout the trial as Schedule 3A and Schedule 3B.  Schedule 3A, described as Mr Gould’s version of the 30 June 2004 stock list, was compiled from discovery, answers to interrogatories, other interlocutory affidavits and like sources.  At the start of the trial, Schedule 3A comprised 209 artworks.  On the other hand, Schedule 3B was a stock list compiled by Mr Smith to show stock, additional to Schedule 3A, that was purchased by Gould Galleries prior to June 2004.  Mr Smith contended that, on the documentation discovered by Mr Gould, one could not be satisfied that the artwork referred to in Schedule 3B had been sold prior to that date.  Mr Smith therefore contended that the stock of Gould Galleries was the sum of the two schedules, although he recognised the possibility that Mr Gould might persuade the Court of sales of some of the stock referred to in Schedule 3B, or that some of this stock was on consignment.[25]

   [25]Reasons [147].

1. Schedule 3A was modified during trial, and finished up as a list of some 225 artworks.   Ultimately, the judge concluded that the stock of Gould Galleries as at June 2004 comprised 198 artworks identified from Schedule 3A, excluding 22 artworks that hung at Park Street and the works that were in Mr Smith’s possession following separation.[26]  The judge’s rejection of Mr Smith’s case concerning the artworks set out in Schedule 3B is one of Mr Smith’s primary complaints on this appeal.  The agreed or actual sale value for items in Schedule 3A (less the Park Street art) was $8,328,126 which the trial judge further adjusted.[27] 

   [26]Reasons [148] and [151].

   [27]See Reasons [186].

1. As the judge put it, Schedule 3B developed, essentially, from interlocutory procedural steps.  Schedule 3B contained in excess of 1,800 artworks together with various valuations.  Mr Smith invited the trial judge to draw two inferences:  first, that in the absence of satisfactory evidence that items listed in Schedule 3B were sold before June 2004, or were on consignment, ‘Schedule 3B is the best evidence of the stock of Gould Galleries as at June 2004’;  and secondly, that the value of the stock is the value attributed by Mr Smith’s art valuation expert as set out in Schedule 3B.[28] 

   [28]Reasons [152].

1. Mr Smith’s argument in support of this part of his case may be summarised as follows.  Mr Gould’s discovery was manifestly deficient.  This deficiency prevented the Court from being able to assess with any degree of confidence the extent and value of the art sub-pool.  The inadequacies of Mr Gould’s discovery made Mr Gould a wrongdoer for relevant purposes.  Accordingly, the principle in Armory v Delamarie was engaged.[29] 

   [29]See more recently, British American Tobacco Ltd v Cowell (2002) 7 VR 524, 584 [168]; Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388, 416 [74].

1. The judge rejected this line of reasoning.  In rejecting Schedule 3B, and describing it as being, on its face, ‘inherently improbable’ and ‘an ambit claim’, the judge said:

165Schedule 3B on its face, identified over 1,800 works of art, with a value in excess of $23 million as the total of the stock list at June 2004.  On its face this was inherently improbable, properly to be described as an ‘ambit claim’.  That consequence is hardly surprising given the assumptions made by Mr Smith when compiling it.  Further, there was evidence that the available space for art storage was limited to approximately 230 artworks in both Sydney (30) and Melbourne (200), that Mr Smith could not contradict.  There was not evidence that stockrooms were overflowing.  If Mr Smith’s evidence of the extent of his familiarity with the gallery is accepted, then he well understood that schedule 3B could not be a reasonable assessment of undeclared stock.  Another yardstick that is, perhaps, less subjective, is the insurance cover that was held by Gould Galleries for stock, which is discussed elsewhere.  Mr Smith’s evidence was that he checked the schedule, not that he compiled it, except for a sub-schedule of about 440 works that he compiled from his archive of auction catalogues.  By reference to its form and content, it is likely that schedule 3B was compiled by Mr Smith’s advisers.  It bears many hallmarks of a lawyer’s discovery analysis.  So much was stated by counsel when suggesting that it was a convenient aide for digesting a large volume of source material.  There was unnecessary duplication and repetition, perhaps a consequence of hurried preparation or perhaps a consequence of word processor convenience.

166Mr Gould worked through the list, comparing it not just with his computer and paper records, but also with the Australian Art Sales Digest website, and with his recollections.  He explained entries in the schedule where a value had been ascribed to an artwork.  Some explanations were conceded by Mr Smith.  Others were challenged, on a sample basis, by the cross-examiner.  Mr Gould’s explanations included:

·     Stock numbers could be duplicated when artworks, given a stock number by staff when initially acquired, received another when returned from the framer or restorer.

·     The artist gave the same name to similar paintings, which made the life of the stockist difficult.

·     The Tracker or Filemaker software programs showed either that the painting was on consignment or had been sold.  The cross-examiner’s attack on the examples chosen did not impugn the transaction, it challenged Mr Gould’s discovery.

·     Some artworks (mainly prints) had been donated to charity.

·     Some artworks were purchased at auctions for clients and not entered in the stock system.

·     Some artwork was donated to the NGV.

I accept Mr Gould’s explanations given in response to schedule 3B.

167More telling than the explanations offered is that there were items that Mr Smith knew should not have been included.  In particular, the more significant artworks fell under this explanation.  Mr Gould stated, and I accept, that he fed Mr Smith’s particular interest in compiling his archive by providing him with information about sales, including consignment sales, particularly with the artworks of significant artists like Boyd, Nolan, and Perceval.  In other examples, Mr Smith was involved in the sale transaction or he knew the consignor, vendor, or purchaser personally.  John Kelly’s Heads and Tails 1997-1998 was sold to Mrs Lisl Singer, with Mr Smith receiving a commission.  Nolan’s Kelly and Horse 1962, was on consignment for Ms Jinx Nolan.  Nolan’s Fitzroy River 1950, was purchased by Gary Singer, and Girl and Township 1962, was purchased by Lisl Singer. Nolan’s Kelly Stalked by a Trooper was purchased by a collector known to Mr Smith.

168For these reasons, I do not regard schedule 3B as establishing, on a prima facie basis, a stock list that established the true stock at June 2004 unless Mr Gould produced evidence to the contrary.  I am not satisfied that Mr Smith carefully checked and adopted this schedule in the form in which it was tendered.  Further, in accepting Mr Gould’s explanations, as I have, any evidentiary onus cast upon Mr Gould to explain the entries in schedule 3B is discharged.[30]

[30]Reasons [165]-[168].

1. Before proceeding further, it is necessary to say something about the credit of Mr Smith and Mr Gould.  Credit was a major issue at trial for both parties.  Matters of credit (both Mr Gould’s and Mr Smith’s) affected almost every issue at trial (including issues concerning the creation of, and use one might make of, Schedule 3B).

1. Mr Gould and Mr Smith were not model litigants.  They were both men who were shown, at trial, to possess the capacity to lie or dissemble at any time they thought they might get away with it.  The judge carefully, and in considerable detail, analysed the credit issues in his judgment.  All of the matters critical of Mr Gould, and that are set out in grounds 3, 4, 6 and 9, may be accepted.  But, as the judgment discloses, that is only the half of it.  The credit of Mr Smith was also substantially attacked at trial — and with considerable success. 

1. We have already referred to credit issues involving Mr Smith’s preparation of Schedule 3B.  It is not necessary to set out all of the credit matters, that the judge relied upon, relating to Mr Smith.  However, the following passage in his Honour’s reasons is illustrative:

301Mr Gould also admitted to a scheme, using false names to purchase art at auction and then paying for those purchases from the Hong Kong bank accounts.  It is probable that the purpose of this scheme was to repatriate funds that likely belonged to Edrob Nominees Pty Ltd from Hong Kong without declaring that income for taxation. Neither the evidence, nor the issues raised in the proceeding, permit me to make findings about the extent of this scheme, and who might have had knowledge of it, apart from Mr Smith who knew about the false name scheme and suggested artworks that might be purchased in that manner. In his evidence, Mr Smith denied knowledge of the scheme, choosing the inconsequential purchase of a Lloyd Rees painting at a Christie’s auction,[31] as his example.  I am satisfied that was a false denial.  It is probable that Mr Smith, who rarely put his hand in his own pocket, benefitted from overseas travel, and perhaps in other ways, funded from the Hong Kong accounts.

302In approximately 1997, Mr Smith was researching the life and art of Russell Drysdale, during the course of his employment at the NGV. He met Drysdale’s niece Mrs Alice Rouse.  Mrs Rouse owned Drysdale’s portrait of herself as a child named ‘Alice’.  In 2005, Mrs Rouse wished to sell the painting privately and sought Mr Smith’s opinion. Mr Smith recommended Gould Galleries, and Mrs Rouse duly consigned Alice with Mr Gould.

303Mrs Rouse required a minimum of $250,000 net for the painting. Sometime after consignment, Mrs Rouse sought to withdraw the painting for sale and Mr Gould informed her that he had a client who was willing to buy it but at a price which would return to her $220,000 net.  Mrs Rouse was not informed, ‘because of industry practice’, who the buyer was.  It is more likely that Mr Gould did not identify the buyer because it was Edrob Nominees Pty Ltd.

304Six months later, Gould Galleries on-sold Alice earning a profit of about $180,000 on the sale.  Mrs Rouse sued on learning of the subsequent sale and the dispute was settled before trial.  When questioned about his involvement with Mrs Rouse, Mr Gould claimed that Mrs Rouse was a ‘strange woman’ and that there had been a confusion between them, namely that he thought he was entitled to buy the painting himself under the terms of the consignment agreement that Gary Singer had drafted.  If this was so there would have been no need to tell Mrs Rouse that the buyer was an anonymous client.

305Although he denied it, Mr Smith received, via Goldcheck, a $12,000 commission for arranging the introduction of Mrs Rouse, an amount Mr Smith nominated.  It was in this context of post separation transactions and payments between them that the circumstances of the Alice consignment were revealed.  This commission was not reconciled to the transaction commercially.  The evidence constrains me to regard it as an isolated incident, and I do, but I am satisfied that Mr Smith was under no illusions about his commission.[32]

[31]Mr Smith knew what to look for in the records of Sotheby’s once they were his to examine and it was the purchase of artworks that he alleged formed part of the private collection that were his focus, not the Lloyd Rees.

[32]Reasons [301]-[305].

1. Notwithstanding the significant credit issues affecting both parties, the transcript reveals that, in giving evidence, Mr Gould was more forthright than Mr Smith.  Indeed, at times, Mr Gould appeared to be quite candid about prior episodes of dishonesty.  The same candour at trial does not appear from an examination of Mr Smith’s evidence.

1. The judge dealt with the resolution of credibility issues as follows:

306Despite the significance of these matters in evaluating the credibility of a witness, which I have carefully considered, I observed frankness in Mr Gould’s responses when questioned on his oath in the witness box about these matters. Mr Gould either made pre-emptive disclosure or readily confessed to this conduct when asked to explain it.  He did so, not just mindful of the prospect of my judgment, but in the glare of considerable media interest in his evidence and, I expect, some concern that his commercial interests might suffer in the future. Mr Gould presented as a witness whose conduct out of court was of a kind that engenders deep suspicion of a witness’s commitment to the truth.  However, as most of these matters had been flagged before he gave evidence I took particular note of his demeanour and of the consistencies and probabilities inherent in the circumstances about which he gave evidence.  I am satisfied that Mr Gould was more reliable when deposing to his dealings and relationship with Mr Smith than in, say, his dealings with regulatory authorities.  His version of those dealings, at least about the operation of the gallery, was broadly corroborated by other witnesses in a position to observe Mr Smith’s contribution to the gallery’s operation.  For these reasons, when, as often happened, the conflict in the evidence was between Mr Smith and Mr Gould about their private dealings without any independent corroboration, I largely prefer Mr Gould’s account of it.  In other circumstances, I prefer the evidence of the gallery employees to that of Mr Smith.

…

311Further, and generally, I formed the view that Mr Smith’s testimony carried a general flavour of exaggeration, enhancement of his role, and the fortuitous adoption of circumstance.  This tendency, evident in different ways that I will note when dealing with specific matters, caused me to prefer Mr Gould’s evidence.  Each man used the royal ‘we’ extensively and that usage was, of itself, the subject of comment on both sides in final addresses.  For example, Mr Smith stated that ‘Rob and I had a gallery’ in Sydney. A possessive sentiment, identifiable in many other aspects of his testimony by his use of ‘we’ and ‘our’, pushed his involvement in Gould Galleries well beyond what the employees of Gould Galleries contemporaneously witnessed. Mr Smith was on occasions demeaning of Mr Gould’s operation of the gallery, suggesting a want of competence on Mr Gould’s part in matters such as writing, administration, and record keeping and even suggesting plagiarism in the preparation of a magazine article.

312Another example was that Mr Smith, somewhat preciously, contended that he and Mr Gould were establishing a private collection of art that was known as the ‘Gould-Smith Collection’ and which was a significant collection because it did not just incorporate the masters of modern Australian art but included examples from the best of their artistic endeavour that demonstrated the artist’s standing.  Mr Smith suggested the collection displayed his scholarship and special skills, however no witnesses testified to the existence of such a named collection or corroborated Mr Smith’s intentions, nor did any document refer to such a collection.  There was no assessment that independently evaluated whether the collection was pre-eminent, or showed any scholarship or special skill in its selection.  Attempting to demonstrate his scholarship, Mr Smith often volunteered information that was not directed to answering the question asked of him, sometimes appearing to skite or boast.  In any event, I am satisfied that there was not a Gould-Smith Collection in this, or any other sense. I am also satisfied that Mr Smith had no role in Mr Gould’s buy-out of his mother.  Further examples are found in Mr Smith’s evidence of participation in specific art purchases and sales.

313The difficulty became that I could not identify concrete circumstances that support Mr Smith’s contentions, because lengthy speeches to expose his expertise to the court, gave little or no specific evidence of actual conversations with Mr Gould.  Mr Smith’s evidence was littered with phrases like ‘we discussed’ and ‘we agreed’ but rarely did Mr Smith recount the dialogue of any of these discussions or expose the basis of the agreement.  For this reason, Mr Smith’s evidence lacked a concrete basis for evaluation against conflicting evidence or the probabilities of human behaviour in many respects.  In contrast, Mr Gould attempted to give particular answers as to the degree of involvement of the plaintiff, frankly accepting those matters on which the plaintiff had provided assistance.[33]

[33]Reasons [306]-[311].

1. As the above passages disclose, the judge dealt with the credibility of Mr Smith and Mr Gould in some detail.  His Honour’s conclusion that, where there were relevant differences, Mr Gould’s evidence was to be accepted over Mr Smith’s evidence was no mere statement of a preference based on demeanour.[34]  The judge formed his conclusions by reference to the way in which each of Mr Gould and Mr Smith gave evidence, including the frank concessions made against interest by Mr Gould in the witness box (a position which the judge contrasted with the way in which Mr Smith gave evidence at trial).  The judge’s reasons were stated with evident care, and after a considerable analysis of the relevant matters affecting the credibility of each of the parties.  With respect, in our view, his Honour’s reasons and conclusions on the credibility of Mr Gould and Mr Smith are unimpeachable.  There is simply no basis upon which it might now be contended that his Honour erred in his assessment of, and conclusions about, the credibility of the evidence of Mr Gould and Mr Smith.  Grounds 3, 4 and 4A must be rejected.

   [34]Cf Fox v Percy (2003) 214 CLR 118, 128-9 [30] (Gleeson CJ, Gummow and Kirby JJ).

1. We turn now to Mr Smith’s Armory v Delamirie case.This case was premised upon Schedule 3B being akin to the socket from which the jewel had been removed in Armory v Delamirie.  However, the judge was not so persuaded.  The judge described Schedule 3B as, on its face, being ‘inherently improbable’ and ‘an ambit claim’ in his reasoning which we have set out above.[35]  Like his Honour’s conclusions about credit, we see no error in his Honour’s conclusions about, and description of, Schedule 3B.  For Mr Smith to put up a document containing more than 1,800 artworks, when available storage space in Sydney and Melbourne was limited to approximately 230 artworks, was, at the very least, ambitious.  In our view, the judge was correct, for the reasons he gave, to describe Schedule 3B in the terms in which he described it. 

   [35]Reasons [165]-[168].

1. The fact that Schedule 3B included artworks which Mr Smith knew should not have been included made Schedule 3B a document of almost no evidentiary value so far as attempting to determine the extent of the art sub-pool was concerned.  Moreover, as his Honour said, the fact Mr Smith was not the original author of the document and the evidence as to insurance cover also supported this conclusion.  The fact that Mr Gould might have been dishonest on prior occasions, or that he might have disposed of records, or failed to discover records, did not give Schedule 3B any greater evidentiary value.  Schedule 3B was, for the reasons given by the judge, a deeply flawed document which was of little (if any) assistance in assessing the extent of the art sub-pool.  Accordingly, ground 6 must be rejected.

1. Having found that Schedule 3B was not a document which could be relied upon for the purpose of assessing the extent of the art sub-pool, there was no real occasion to apply the reasoning process identified in Armory v Delamirie or like cases. 

1. In grounds 7, 8 and 9, Mr Smith makes complaint that the judge concluded that the ‘principle’ in Armory v Delamirie was not applicable.  However, Armory v Delamirie does not contain any ‘principle’.  Armory v Delamirie discloses a permissible path of reasoning that may be engaged in in an appropriate case.  Depending upon the view the judge took of the evidence, that process of reasoning may have been available in adjusting the parties’ interests in the present case.  However, the process of reasoning was not one that the Court was bound to engage in — even if the judge had accepted that Mr Smith’s compilation of Schedule 3B was an honest and genuine attempt to reconstruct the stock list of Gould Galleries as at 30 June 2004.

1. As part of his argument on grounds 7, 8 and 9, Mr Smith makes complaint that the trial judge did not apply the reasoning in Armory v Delamirie because Mr Gould was not a wrongdoer as described in that case.  Mr Smith contends that Mr Gould was relevantly a wrongdoer, and that, because of this fact, the so-called ‘principle’ in Armory v Delamirie had application in the present case. 

1. If the judge’s reasons were to be construed as meaning that the reasoning in Armory v Delamirie could not have application in cases other than cases involving wrongdoers of the kind identified in that case, then we would, with respect, disagree.  However, we do not understand his Honour to have so concluded.  In substance, his Honour was not persuaded to apply the reasoning process identified in Armory v Delamirie to a document which, as we have said, had little (if any) evidentiary value, and which document was, in any event, found by the judge to have been relevantly answered by Mr Gould.[36]

   [36]Reasons [166].

1. Mr Smith’s foundation for putting forward Schedule 3B was what he contended was the inadequacy of Mr Gould’s discovery.  As we have said, prior to trial, discovery fights pervaded this litigation.  On one view of the material, it would appear that not all of Mr Smith’s complaints about Mr Gould’s discovery had been resolved to Mr Smith’s satisfaction when the trial commenced.  However, Mr Smith made no application for an adjournment.  Further, Mr Smith made no submission that he was not in a position to proceed with the trial because of the inadequacies of Mr Gould’s discovery.  Nor did he seek an adjournment of the trial as the evidentiary complexion of the material upon which Mr Gould relied became clearer in the course of the hearing.  Instead, it appears that a tactical decision was made to compile and produce Schedule 3B, and then to rely upon what was said to be ‘the principle’ in Armory v Delamirie.  If Schedule 3B had not been such an inherently improbable document, and if Mr Smith had unsuccessfully sought to adjourn the trial to pursue his complaints about Mr Gould’s discovery, and if Mr Smith’s credit had not been so successfully attacked at trial, then there may have been some merit in this strategy.

1. However, Mr Smith’s strategy, as actually pursued at trial, involved considerable risk.  It was up to Mr Smith to prove the existence and extent of the art sub-pool for which he contended.  This he did not do.  Simply identifying deficiencies in an opponent’s discovery and then putting forward an inherently improbable document upon which it is said that findings supportive of one’s case should be made, is not ordinarily the way in which to prove one’s case.  Rather, as the judge put it:

the proper method for resolution of the issue of the valuation of a business is to receive expert opinion.  Inadequate record keeping by business entities is a fact for accountants and business valuers.  There are processes adopted, and principles applied, as matters of proper accounting for valuation practice and principle where the available information is inadequate.[37]

[37]Reasons [160].

1. Grounds 7, 8 and 9 must be rejected.

1. In ground 10, complaint is made concerning the trial judge’s finding that there was no private collection known as the ‘Gould-Smith Collection’.  As to Mr Smith’s case about the existence of a private collection, the judge said:

351The essence of Mr Smith’s contention about the existence of a private collection was that there was, by agreement between the two men, a joint private collection at Park Street, referred to as the ‘Gould-Smith Collection’, which was distinct from Gould Galleries stock.  It included works privately owned by each of them, which I have identified.  Mr Smith contended that the greater part of the joint private collection was artwork, which although acquired by Gould Galleries, hung at Park Street because Mr Gould agreed with Mr Smith that the works were significant examples by great modern Australian painters that would not be sold except to be replaced by a better example to improve the quality of the collection.  Mr Smith appeared to envisage that the significance of the works would be enhanced because [they were] chosen as part of their collection and, ultimately, would be donated to the NGV.

352The mutual agreement for a joint private collection was not directly identified by Mr Smith as arising from any particular conversation. It is a matter for inference.  The approach that is to be adopted in determining whether the ultimate fact, of which there is no direct evidence, can be inferred from other established facts, is to consider the combined or cumulative effect of all of the evidence, that is, aspects of the evidence are not examined in isolation but all of the established facts are viewed in their totality.[38]  I will note some more significant aspects of the evidence demonstrating why I prefer the view that there was not a joint private collection comprised of the works identified in the table at [193], but in reaching that conclusion I have had regard to the totality of the evidence, not just these matters.

[38]Nolan v Nolan [2004] VSCA 109, [119]–[121].

353I am satisfied that the concept of a jointly owned collection, called the ‘Gould-Smith Collection’, probably developed by Mr Smith after separation.

(a)Mr Smith does not allege that Mr Gould directly acknowledged to him in a conversation that all of the works identified earlier as the alleged private collection were not Gould Galleries stock.  Although some witnesses who had viewed the art hanging at Park Street referred to it as ‘a collection’, it was never acknowledged by either Mr Gould or Mr Smith as their private collection.  Not one witness, from five art collectors, an art dealer, five employees and two expert art valuers, including, in particular, Mrs Dita Gould and a long time gallery employee Ms Pamela Axe, gave evidence of knowing of a jointly owned private collection, or, irrespective of ownership, a collection known as the ‘Gould-Smith Collection’.  When used, the term ‘collection’ was used loosely.

(b)There is no reference in any document to a jointly owned collection, let alone one called the ‘Gould-Smith Collection’.  When compiling check lists for art books and exhibition catalogues, curators and authors note when works were, or had been, held in private collections.  For example, in his book, Russell Drysdale 1912-81, Mr Smith records, concerning the provenance of Tractor-face Jackson, its purchase by the ‘Agapitos Wilson Collection’. Messrs Agapitos and Wilson were known to both Mr Smith and Mr Gould.  Neither Mr Smith nor any other author has referred to the ‘Gould-Smith Collection’ in relation to any artwork said to be part of it.  That descriptive title was not used in any private document, prior to Mr Smith’s affidavit seeking an injunction in this proceeding.

(c)In particular, no document from Edrob Nominees Pty Ltd, Dukville, Gould Galleries, or the E&R Gould Unit Trust supports an assertion that artwork, which makes up approximately two thirds of the alleged collection, is no longer gallery stock.  On the other hand, the insurance records point to Edrob Nominees Pty Ltd claiming ownership, not just of the two thirds of the list that represents Gould Galleries stock, but to all of the artworks comprising the private collection. There may be other reasons for the impression created by the insurance records.

(d)The art at Park Street was Gould Gallery stock or owned by Mr Smith or Mr Gould personally.  What is absent is evidence of any agreement with, or conduct involving, the owner of individual artworks that altered proprietary rights.  As the analysis above demonstrates, based on the evidence in this proceeding, the art works that might be recovered by a liquidator of Dukville or a trustee in bankruptcy for either Mr Smith or Mr Gould are identifiable.

(e)Mr Smith suggested that particular paintings, for example Nolan’s Hartz Range, were purchased for the private collection, and never offered for sale but the evidence is otherwise.  Rape of Europa, Large Head, Bather & Garden, Swamp Grasses Kew Billabong, Jockeys Returning, Mounting, Intruder and Parrots, Antipodean Head, Wounded Bushranger, Outlaw, Fisherman’s Sights Williamstown are other examples.  Because the provenance of both Gould Gallery's stock records and Mr Smith’s schedule 3B is not reliable, no inference can safely be drawn from the fact that some but not all of the stock at Park Street was allocated a stock number.

(f)I prefer Mr Gould’s explanations for the retention of Gould Galleries stock at Park Street.  Mr Gould referred to the desirability of displaying in his home a collection of the best works available to excite the interest of collector clients.  It is nonsensical to think that museum quality artworks will languish in a stockroom.  Mr Gould referred to living with an artwork for a period to appreciate it fully.  That he does so is not evidence of an appropriation from Gould Galleries to Mr Gould.  I accept that there is a practice of resting artworks from the market after purchase at public auction or after unsuccessfully offering the work for sale at an exhibition.  There were a couple of occasions when Mr Gould told Mr Smith an artwork was ‘coming home, we are going to keep it’.  On the other hand, Mr Smith tried to explain away the stock concept by suggesting that individual artworks in the private collection would be ‘traded up’ by sale through the gallery from time to time.  While feasible, Mr Smith did not evidence this proposition in operation with specific decisions to trade up works.

(g)It is unsurprising that there was art at Park Street that was individually owned, or that Mr Gould’s art remained there after the separation date.  The explanation for Arkley’s OYO Flats remaining at Park Street was that it was too large to hang at 3/31 Marne Street.

(h)Much was made of the terms of the wills made by each of Mr Smith and Mr Gould.  By his 2001 will, which was his last will at the separation date, Mr Smith left the Arkley Triple Fronted to Mr Singer.  That gift is consistent with his ownership of the painting, but inconsistent with his assertion that his art works had, like Mr Gould’s artworks and the Gould Galleries stock, been donated into a jointly owned private collection.  Mr Gould’s last will at the separation date was made in December 2003.  Mr Smith was the executor and residual beneficiary. Annexed to the will was a schedule of 31 artworks and the will provided that Mr Gould could substitute another list of artworks for that schedule if he desired. The artworks in the schedule were given to Mr Smith for his life and on his death to the NGV. Mr Gould also directed that these works when displayed by the NGV carry the inscription ‘donated by Robert Gould and Geoffrey Smith’. The schedule included 13 art works that I have found were Mr Gould’s personal property, three artworks that are not said to be part of the private collection and were not explained in evidence, and 15 artworks that I have found were Gould Galleries stock. It represents about half of the works that Mr Smith contends makes up the private collection. In the witness box, Mr Gould explained that his will was made when he and Mr Smith ‘were still a couple’. Giving Mr Smith a life interest in those works would permit him to enjoy them through his life, but they would not be his to sell.  Mr Gould also stressed his opportunity to change the schedule as Gould Galleries stock was sold or acquired by him.  Possibly, as the residual beneficiary receiving Mr Gould’s shares in Dukville, Mr Smith may have been able to sell works belonging to Gould Galleries, which Mr Gould could not, in any event, gift as proposed.  What might be the correct position is not an issue I need pause to consider.  I do not think that this will evidences the joint private collection for which Mr Smith contends.  The will was drawn by Mr Singer and there was no mutual will made by Mr Smith. Mr Singer’s evidence about the life gift to Mr Smith would not, I infer, have helped Mr Smith.

(i)If a joint private collection had not been recognised in December 2003, it is unlikely to have been agreed to during the early part of 2004.  In fact, there was no mention of a private collection when as the relationship was crumbling, Mr Smith was seeking art to hang in Marne Street and acknowledgement of his contribution.  Yet later still, when the settlement arrangements were being discussed, there is no suggestion that Mr Smith ever raised any demand for his share of a private collection. The settlement agreement, in the sense that Mr Gould now contends for it, contradicts the existence of any private collection, jointly owned by the parties.

(j)Finally, as I have elsewhere explained, Gould Galleries, after the separation date, sold Whiteley, Bather & Garden, which is consistent with his assertion that the painting was stock.  Mr Smith sold Williams Swamp Grasses, Kew Billabong, which is inconsistent with his assertion that Mr Gould should be restrained from selling any artwork that was part of the joint private collection.

It is probable that the concept of the Gould-Smith Collection first developed shortly prior to and for the purposes of Mr Smith’s application for an injunction and the commencement of this proceeding.[39]

[39]Reasons [351]-[353].

1. With respect, we see no error in this reasoning or these conclusions.  In any event, there is no basis for any contention that the judge overlooked considering any artwork comprised in the alleged private collection when determining the extent and value of the art sub-pool.  Mr Smith’s complaint appears to be that he was entitled to a greater adjustment in respect of art in the private collection than in respect of art at Gould Galleries — art in the private collection truly being the product of the joint activities of both Mr Smith and Mr Gould.  However, the judge was not persuaded about the existence of such a separate pool of artwork — and we see no error in the judge’s conclusions.

1. Further, while Mr Smith might be able to establish that his contribution in respect of one painting or another painting was greater than 10 per cent, this does not gainsay the correctness of the judge’s ultimate conclusions.  The judge did not purport to value or assess Mr Smith’s contribution in respect of each individual artwork.  Rather, the judge assessed Mr Smith’s overall contribution to the art sub-pool at 10 per cent.  It is that finding that Mr Smith needs to overturn.  Ground 10 must be rejected.

1. Finally under this heading, complaint is made in ground 5 that the judge, prejudicially to Mr Smith’s case, took into account the irrelevant consideration that Mr Smith commenced a relationship with Mr Singer prior to the end of Mr Smith’s relationship with Mr Gould.  The short answer to ground 5 is that the issue was not irrelevant, but in any event the judge did not take the matter into account in a way unfairly prejudicial to the interests of Mr Smith.

1. As the parties conducted the case, the issue of the relationship between Mr Smith and Mr Singer was, at least, relevant to the question of Mr Smith’s credit.  However, it was also relevant as to the circumstances in which the relationship between Mr Gould and Mr Smith came to an end and as to whether there was a separation arrangement or agreement entered into between them in June 2004.  Having regard to the way in which the parties conducted the trial, it was necessary for the judge to make the finding about Mr Smith’s relationships with Mr Singer in 2004.  But in any event, the judge having done so, there is no basis for contending that that finding was somehow taken into account unfairly against Mr Smith.  Ground 5 must be rejected.

1. For the above reasons, we see no error in the judge’s conclusions about the extent and value of the art sub-pool.

C        Specific valuation issues – Ground 13A

1. Ultimately his Honour made the following findings about the value of the divisible pool.[40]

   [40]Ibid [247]-[254].

Residential real estate

247The net value of the real estate in this sub-pool of assets is $3,026,435. Although I have conveniently dealt with the personal contents of these properties, valued at $300,000 as part of this sub-pool, personal contents and possessions can fairly be excluded from further consideration.

Investment properties

248The total value of this sub-pool is $2,359,899, of which $1,110,363 is in Mr Gould’s hands and $1,249,535 is in Mr Smith’s hands.

The Art sub-pool

249     The total value of this sub-pool is $16,923,004.

Mr Gould’s shares in Dukville

250The assessed value of Dukville based on the reconstructed June 2004 stock, less the value of the business on initial contribution, is $11,914,704. Mr Gould holds all of the shares in Dukville.

Mr Smith’s artwork

251The assessed value of Mr Smith’s artwork is $950,750, which is in Mr Smith’s hands, apart from some seven paintings, including the Arkleys, which are in Mr Gould’s possession.

Mr Gould’s artwork

252The assessed value of Mr Gould’s artwork, less the artworks that he owned prior to the commencement of the relationship, is $4,057,550, which is in Mr Gould’s hands.

The remaining personal assets and liabilities sub-pool

253This sub-pool is assessed at $518,078. Mr Gould’s superannuation balance was $394,792 and Mr Smith’s superannuation balance was $47,709.58. There are no relevant liabilities. The balance of this pool was held by Mr Gould.

The divisible pool of assets collectively summarised

254It is convenient to summarise the total divisible pool in a table, that indicates in whose possession the value of the pool lies, excepting assets transferred under the separation agreement in 2004 and 3/31 Marne Street.

Sub-pool	Total	Mr Gould	Mr Smith
Residential real estate	$3,026,435	$3,026,435	0
Investments	$2,359,899	$1,110,363	$1,249,536
Art (privately owned)	$16,923,004	$4,057,550	$950,750
Dukville		$11,914,704	0
Other	$518,078	$470,369	$47,709
Totals	$22,827,416	$20,579,421	$2,247,995

1. The parties joined issue at trial as to what was the measure of the market value of the artworks comprised in the pool.  Ground 13A states:

13AThe learned trial judge erred by excluding the buyers premium from the calculation of market value of the artworks (Reasons [185]). 

1. The individual value of artworks was arrived at in different ways.  Since 2004 many artworks had been sold by Gould Galleries and in those cases the invoice sale price was adopted.  Unsold artworks were valued by two valuers.  There was substantial agreement as to compromise values. 

1. Nevertheless, Mr Smith’s valuer, Mr Dwyer, assessed the market value as including the auction house buyer’s premium which he estimated would be payable, but excluding goods and services tax, and seller’s commission payable to the selling agent.  The value he adopted was thus what a willing but not anxious buyer would pay for the artwork at auction.  Mr Abdullah, who gave evidence on behalf of Mr Gould, included GST but excluded buyer’s commission from his assessment of value.  His valuation was said to reflect the equivalent of a valuation opinion expressed in an auction catalogue. 

1. The trial judge concluded that while GST would be relevant to a cash flow based analysis of the value of the business, it was not relevant to the assessment of the value of individual artworks.[41]  He further concluded the estimated buyer’s premium should be excluded from the calculation of value because:

the relevant inquiry focuses on the value that would, hypothetically, be agreed for the artwork between the buyer and seller, each knowledgeable and willing, but not anxious. Incidents of the transaction that are dealings between one of those parties and a third party are ignored. It does not matter that incidental third party transactions might apply consistently to such transactions, if that be the case.  The concept of market value does not involve assessing the incidence of the levies, taxes, charges, or expenses that are incidental to the transaction.  Such expenses are incurred either before, or after, the time contemplated by the proper concept of market value and are outside the concept as properly understood.  The hammer price represents what the buyer offers and the seller accepts, before each accounts to others for the expenses and imposts incidental to the transaction.  The true value of the work must be the same whether the valuer is speaking to a seller or a buyer.  Thus, a valuer would inform a seller that his opinion of the true value of an artwork is $500,000 but the seller will not likely receive more than, say 96%, of the value after allowing for expenses of sale and a valuer would inform a buyer that it will likely cost 120%-125% of the value to acquire the work.[42]

[41]Ibid [182].

[42]Ibid [183].

1. We respectfully agree with this analysis.  The agreed basis of valuation of the business was the market value of the stock.  Market value in this context is essentially the value that would be realised upon sale in the open market.  For the reasons stated by his Honour, this value should be regarded as the estimated hammer price.  Ultimately the Court’s task was to assess the value of the artworks to the owner.  It was not an assessment of damages being the amount necessary to put the owner in a position to replace artworks which had been damaged or lost.[43]  

   [43]Cf The Owners of the Dredge Liesbosch v The Owners of the Steamship Edison [1933] AC 445 – a case of negligent destruction of goods; and see Hill & Anor v Reglon Pty Ltd [2007] NSWCA 295 – a case of conversion.

1. Moreover the evidence did not demonstrate that Mr Smith lost a large pool of paintings which he needed to replace.  Rather, it showed Mr Gould retained some seven artworks owned by Mr Smith having a total value of $656,200.  An adjustment of 20 per cent to the value of these works would not materially affect the ultimate calculation made by the trial judge.[44] 

   [44]It would increase the total value of privately owned artwork by $130,240 and the 10 per cent adjustment in favour of Mr Smith by $13,124. 

1. The written submissions filed on behalf of Mr Smith conclude on this point:

to apply the ‘hammer price’ alone for the purpose of valuation would be to substantially undervalue the value of the art and provide Gould with an unfair windfall by selling the artwork at Gould Galleries. 

1. There was no evidence justifying the conclusion that Mr Gould would receive an unfair windfall if the art was sold at Gould Galleries.  First, the evidence did not support the conclusion that the art would be substantially sold at auction and thus attract an auction buyer premium.  Secondly, there was no evidentiary basis on which to evaluate the extent to which any buyer’s premium received by Gould Galleries would be offset by expenses such as costs on borrowings, staff costs, insurance, advertising, running expenses, tax liabilities and the like. 

1. We are not persuaded that his Honour did other than correctly apply the agreed methodology to arrive at the market value which the parties agreed was to be utilised as a proxy for the value of the business.  Self-evidently a different result might flow if the stock were valued at cost to the gallery and such value were then utilised for some form of cash flow calculation or some other analysis which realistically balanced assets and liabilities to arrive at a capitalised value. 

D        The evaluation of the contribution of Mr Smith

1. Grounds 1, 14, 22, 22A, 23, 24 and 25 make complaint about the way the judge characterised the relationship between the parties, assessed the contributions of Mr Smith and determined the percentage adjustment in favour of Mr Smith.  While grounds 2 and grounds 18 to 20 are also relevant to these issues, we will deal here with ground 2  only so far as the premises upon which it is based are concerned, and we will deal with grounds 18 to 20 separately when we come to consider residential property issues between the parties. 

15The learned trial judge erred by excluding from the divisible pool of assets the sum of $927,894 held in the name of the respondent in Hong Kong dollars in an account at HSBC Bank in Hong Kong: Reasons [230]-[237].

16The learned trial judge erred by excluding from the divisible pool of assets a sum of $719,000 alleged by the respondent to have been a gift to his brother, Gary Gould, at the time the relationship between the parties ended, notwithstanding that the learned trial judge was not satisfied with the explanations proffered by the defendant for that transaction: Reasons [242].

17The learned trial judge erred by excluding from the divisible pool of assets half of the sum of $1,060,148.50 held in trust by solicitors Marshalls and Dent in the name of the defendant and his mother, Edith Gould, notwithstanding that the Court was not satisfied with the explanation proffered by the respondent that that money was held on trust for his brother, Gary Gould: Reasons [241]-[242].

The Hong Kong Bank Account

1. The evidence demonstrated that at the date of separation a sum of AU$927,894 was held in Hong Kong in a Citibank account in the name of Mr Gould.  The trial judge concluded the probability was that the Hong Kong funds were held on behalf of Edrob.  As such they constituted a business asset and did not require separate inclusion in the divisible pool of assets because the parties accepted that the value of the business was to be arrived at by way of valuation of stock. 

1. His Honour set out the evidence as to the history of the operation of bank accounts in Hong Kong in conjunction with the conduct of sales of art by Gould Galleries.  Mr Gould’s evidence was that accounts were opened in his name because of difficulties in opening such accounts in Hong Kong at that time in the name of foreign business entities.  The accounts were utilised for trading in Hong Kong and to ‘salt money’ away for travel purposes. 

1. Mr Gould identified the net proceeds from Hong Kong art exhibitions and sales as the only source for deposits into two passbook accounts opened in the names of Mr Smith and himself.  As his Honour noted:

235… When cross-examined, Mr Gould estimated that the total of funds deposited in these accounts probably exceeded AU$1.5 million. A Hong Kong Citibank account monthly statement dated 25 February 2004 reveals an account balance of HK$6,402,315.74. The Hong Kong exhibitions ceased in 1997, stretching this explanation of deposit sources beyond probable credulity. It seems likely that more than $1.5 million has passed through these accounts and that there are other possible sources for deposits, such as, for example, sales of art to overseas buyers.[72]  Statements for these accounts were addressed to Mr Gould and the passbooks were kept upstairs at Park Street. Mr Smith took with him a file of documents that contained statements from the offshore accounts when he left Park Street in June 2004. When making discovery, Mr Gould claimed not to have any documents relating to his Citibank account as it was his practice to discard them. During the course of the trial, Mr Gould served two folders of Citibank bank account statements, in Mandarin, apparently recently obtained from the bank. Neither party required the tender of these account statements.[73]

[72][The trial judge made] no finding to this effect as this issue was not explored in evidence.

[73]Reasons [231] (citation in original).

1. It can be seen that whilst the overall context favoured the conclusion that the moneys were generated by the business of Gould Galleries the transactions generating funds in the accounts were not clear.  The trial judge went on to make the following further findings:

232On the probabilities, these Hong Kong funds were held on behalf of Edrob Nominees Pty Ltd. No document from Edrob Nominees Pty Ltd, such as a loan account ledger or a dividend distribution statement or the like, was produced to the court. Mr Gould’s solicitor’s letter on 23 April 2012 informed the Australian Taxation Office of the existence of these offshore bank accounts. Mr Gould’s solicitors suggested to the Australian Taxation Office that income from the Hong Kong exhibitions was used to fund art purchases for Mr Gould and Mr Smith. The solicitors suggest that the extent of the proceeds of sales at the Hong Kong exhibitions returned to Edrob Nominees Pty Ltd as income cannot be determined. 

233Mr Smith sought to distance himself from these accounts. Although Mr Smith claimed he conducted the banking at HSBC for Mr Gould for the first Hong Kong exhibition, he maintained he was not involved with accounts in his name. Mr Smith claimed that Mr Gould controlled the withdrawals from Mr Smith’s account with signed blank withdrawal slips, which were not for his benefit but for Mr Gould’s use. Mr Gould suggested that Mr Smith wished to have a foreign account and that he acted on advice from his accountant, Phillip Dunn, that accounts in different names at more than one bank would be an advantage ‘if there was ever someone looking into it’. 

234Mr Gould admitted to using his offshore bank accounts to purchase artworks under false names and thus repatriated such funds to Australia. Mr Smith denied that he used his offshore account or Mr Gould’s offshore accounts. I accept Mr Smith’s denial in its literal sense, but I am satisfied that when Mr Smith signed blank withdrawal forms he knew of these accounts and knew and approved of their use for art purchases. Lloyd Rees, A Mountain Stream was purchased with funds from Mr Smith’s Standard Chartered account in Hong Kong. I have referred above to other purchases that Mr Smith contends [form] part of the private collection that were bought with offshore funds in the name of Schwartz. Other purchases, which Mr Smith included in his schedule 3B, had been funded and transacted in this way.  Although Mr Gould conceded that all false name purchases were funded with Hong Kong money, I cannot determine the total value of such purchases.[74]

[74]Ibid [232]-[234].

1. Ultimately like his Honour we are not persuaded that the fact that moneys were held in an account bearing Mr Gould’s name at the date of separation displaces the probability that they were generated by the business activities of Gould Galleries and that Edrob was beneficially entitled to them.  As his Honour put it:

235On 30 June 2004, there was AU $927,894 in a Hong Kong bank account in Mr Gould’s name.[75]  No evidence established that Mr Gould had a better claim than Edrob Nominees Pty Ltd to this account. There is no evidence of any authority for Mr Gould, or for that matter Mr Smith, to draw on these finds [scil funds] for any private purpose. As I have described above, funds from Hong Kong that were ‘repatriated’ into Australia, by funding purchases of art at auctions in Australia or were otherwise used for other undisclosed purposes that may have included overseas travel or art purchases overseas, probably came from Edrob Nominees Pty Ltd. There was no other explanation. I am satisfied that Mr Smith understood, and probably approved of, Mr Gould’s use of these accounts in this way. The subsequent use of the funds that were in the account in 2004 was not revealed.[76]

[75]Mr Smith contended that the account balance at 25 February 2004 was HKD6,542,828.19, which was AU$1 million. I have applied the same exchange rate to the account balance at 30 June 2004, which was HKD6,071,052.97.

[76]Reasons [235] (citation in original).

1. It follows that his Honour was correct to exclude the funds from the divisible pool of assets, although if the business of Gould Galleries had been valued on a more conventional basis it would have been necessary to take the Hong Kong moneys into account.  For parallel reasons the evidence as to the potential liability of Edrob for unpaid tax, penalties and interest was irrelevant to the assessment of the value of the business on the agreed basis. 

1. Likewise as Mr Gould submits the reasons given by the trial judge at [226]-[227] for not including amounts in the trading account as a separate component of the value of the business of Gould Galleries apply equally to the funds held in the Hong Kong bank accounts. 

Moneys paid to Gary Gould

1. The same sort of confusion and underlying probabilities affect the issue of moneys paid by Mr Gould to his brother on 15 June 2004.  The moneys were paid from a trust account with Simon Parsons & Co, the firm at which Mr Singer practised as a solicitor.  The sum of $437,300 was credited to the account on 1 June 2004 and the further sum of $290,000 was credited on 3 June 2004.  The source of the deposits was not identified.  On 4 June 2004 $215,000 was debited from the account but the entry was then reversed.  On 15 June the same sum was again debited.  Mr Singer was not called by Mr Smith to give evidence with respect to this series of transactions. 

1. Mr Gould’s evidence was that the money was paid to his brother as a gift.  Mr Smith contended that the transaction was a sham designed to keep the money out of the divisible pool of assets.  Mr Gould denied that the money was to be or had been repaid to him by his brother. 

1. There was further evidence supporting the view that the money was derived from the sale of artwork through Goldcheck Pty Ltd.  His Honour summarised this evidence as follows:

240When Mr Gould’s solicitors wrote to the Australian Taxation Office on 23 April 2012, Mr Gould revealed that Edrob Nominees Pty Ltd paid commissions to Goldcheck Pty Ltd in excess of $1 million for which it claimed tax deductions. The funds received by Goldcheck Pty Ltd were applied for purposes including a payment of approximately $700,000 to Gary Gould. The admission regarding the payment to Gary Gould is within a paragraph that explains commissions paid to Goldcheck Pty Ltd. An implication is that the $700,000 was money derived from selling paintings through Goldcheck Pty Ltd. The letter to the Australian Taxation Office did not describe the money as a gift. Mr Singer was not called to explain transactions involving Goldcheck or the Simon Parsons & Co trust account.[77]

[77]Ibid [240].

1. His Honour had earlier dealt with the overall significance of the failure of Mr Singer to give evidence[78] and with the role of Goldcheck stating in part:

322Goldcheck Pty Ltd, affiliated with Mr Singer and Mr Dunn,  played a significant, but largely unexplained, role in Mr Gould and Mr Smith’s affairs. I have mentioned its participation in their property investments. Goldcheck was involved in buying and selling artwork and made available to Mr Gould and his entities access to accumulated tax losses, an opportunity that Mr Gould’s solicitors referred to the ATO in the communication at the start of the trial that I have elsewhere mentioned.

323Mr Dunn confirmed that Goldcheck had significant tax losses. Mr Gould claimed that Mr Dunn and Mr Singer proposed a scheme whereby Gould Galleries, and Mr Smith and Mr Gould personally, could trade artwork or other assets through Goldcheck, which took a commission of 5%, setting off profits or gains for their mutual advantage. Mr Gould was rather vague in his evidence about this arrangement, but estimated that approximately $1,000,000 in commissions was paid to Goldcheck between 1999 to 2004. Mr Gould explained his inability to give detail because Mr Singer processed the transaction through accounts that he controlled, taking Goldcheck’s commission in the process.[79] 

[78]Ibid [314]-[321].

[79]Ibid [322]-[323].

1. At the date of trial Mr Singer was still Mr Smith’s partner in an intimate relationship.  The failure to call Mr Singer to give evidence to explain the apparent generation of funds by way of sale of paintings through Goldcheck and the passage of those funds through the trust account of the firm at which he practised meant that the judge was entitled to treat the documentary evidence as demonstrating matters in respect of which Mr Singer’s evidence would not have assisted Mr Smith. 

1. There was also other evidence of dealings between Mr Gould and his brother. 

241Other solicitors, Marshalls and Dent held funds in trust for Mr Gould and his mother Edith. Mr Gould claimed that those funds were held on behalf of his brother Gary Gould. On 30 June 2003, the account had a balance of $1,060,148.50 and Mr Smith claimed half of that sum as a divisible pool asset. Mr Gould stated that he was not beneficially interested in these funds, which belonged to his brother. Asked to explain, he referred to Gary’s business, a telecommunications business, that was put in to receivership some years earlier when his brother went through a divorce. Apparently the business was sold and the trust funds represented his share of the sale proceeds. He stated that these funds were returned to Gary Gould and it appears that repayment occurred before 30 June 2004.[80]

[80]Ibid [241]. Citation in original – ‘The balance of that trust account on 30 June 2004 was $1,442.’

1. Ultimately his Honour was not persuaded that the $719,000 was a divisible pool asset or that half of the moneys which at one point were held by Marshalls and Dent should be regarded as part of the divisible pool of assets.  We see no error in these conclusions.  The fact that his Honour did not accept Mr Gould’s explanation of his dealings with his brother was not inconsistent with the conclusions he reached by reference to the evidence as a whole with respect to the $719,000.  Further, the moneys held in 2003 in the Marshalls and Dent trust account were not prima facie owned by Mr Gould at the date of separation.  It was not sufficient for Mr Smith to demonstrate that at one point Mr Gould held these funds.  Essentially his case eschewed a detailed examination of the financial affairs of Mr Gould and in particular accepted that in circumstances where it was common ground that Gould Galleries was the principal generator of Mr Gould’s wealth, the net value of that business should be assessed by reference to the market value of its stock at a particular date. 

G        The determination of the appropriate adjustment

1. Ultimately the trial judge reached the following conclusion with respect to a just and equitable adjustment to the pool of assets by reference to the sub-pool approach that he had adopted with the agreement of the parties:

412I have concluded that Mr Smith has no entitlement to an adjustment of the residential sub-pool in his favour and has received both a welfare contribution from it and a direct financial contribution to his post relationship financial resources from it. I have concluded that the just and equitable distribution of the investment property sub-pool is that Mr Gould and Mr Smith should share it equally. Further, Mr Smith should have an adjustment in his favour of 10% of the value of the art sub-pool. There will be no adjustment in the other assets sub-pool. In the following table the ‘total’ column shows the assessed total value of the sub-pool and the columns for Mr Gould and Mr Smith show what monetary value of the sub-pool after adjustment consequent on my findings of entitlements at the separation date, is being allowed

2696	Total	Mr Gould	Mr Smith	Adjustment
Residential real estate	$3,026,435	$3,026,435	0	Nil
Investments	$2,359,899	$1,179,950	$1,179,950	50%
Art (privately owned) Dukville	$5,008,300	$4,507,470	$500,830	10%
	$11,917,704	$10,725,934	$1,191,770
Other	$518,078	$470,369	$47,709	Nil
Totals	$22,830,416	$19,910,158	$2,920,259

Subject to remaining observations, to arrive at a just and equitable adjustment, so assessed, Mr Smith was entitled at the separation date to a share of the divisible pool totalling $2,920,259.[81]

[81]Ibid [412].

1. His Honour then undertook a comparative check by way of a global approach before reaching an overall conclusion. 

413Although the above analysis is warranted by the different nature of contributions to the several sub-pools, it may appear mathematical. Considering all of the matters discussed above afresh, and from a broad holistic perspective, uninfluenced by any reductionist process, I consider that a just and equitable entitlement in favour of Mr Smith, from a divisible pool accumulated over a 14 year period, when Mr Smith’s contribution was not by equity or capital but was principally as advice, knowledge or research effort, is in a range from $2,500,000 to $3,000,000. In so doing, I have considered again the settlement offered by Mr Gould in 2004. I have already noted that Mr Gould did not press the settlement agreement he alleged to forestall the exercise by the court of its broad jurisdiction under Part IX. Rather, Mr Gould relied on those arrangements as evidence of the parties’ respective views of Mr Smith’s entitlements at the time. Mr Gould in submissions valued his offer at just over $4 million but using different, and higher, values than I have adopted and I have not thought it useful to revalue that arrangement. I consider that Mr Gould took a generous view when dealing with Mr Smith in 2004, possibly the result of an over-inflated view of the totality of the divisible pool.

414Bearing in mind the comparative correlation of my global and sub-pool approaches, I fix Mr Smith’s share of the divisible pool of assets of the relationship between Mr Smith and Mr Gould between April 1990 and June 2004 at $3,000,000.[82]

[82]Ibid [413]-[414].

1. In challenging these conclusions Mr Smith contends first that the trial judge made errors in the ultimate calculation he made with respect to the adjustment of interests in sub-pools. 

1. Grounds 12 and 12A are as follows:

12The learned judge erred by adjusting in favour of the respondent’s interests in the ‘Art (Privately Owned)’ sub-sub-pool by reducing the appellant’s interest in that sub-sub-pool by $449,920, being an amount substantially constituted by 7 paintings found by the Court (and admitted by the defendant) to be plaintiff’s paintings but remaining in the possession of the defendant and by declaring in Declaration 3 that those paintings be owned by the respondent from the date of judgment: Reasons [193]-[212], [251]-[262], [412].

12AHaving found and determined (incorrectly) that the appellant’s contribution to the business of Gould Galleries was to be fixed at 10 per centum of the total value of that business (less $500,000 initial value) the learned Judge erred by applying that quantum of per centum to the art (privately owned) by the parties for the purpose of adjusting their interest under the Act. (Reasons [412]).

1. It is first submitted that his Honour erred by including the value of artworks owned by Mr Gould prior to the commencement of the relationship within the sub-pool.  If this was an error it favoured Mr Smith and not Mr Gould. 

1. It is next submitted that his Honour erred by treating the privately owned art as part of the divisible pool.  His Honour had earlier found that the value of the art privately owned by Mr Gould was $4,057,550 and by Mr Smith $950,750.[83]  The effect of the 10 per cent adjustment to the total of $5,008,300 was to reduce Mr Smith’s interest in this part of the art sub-pool to $500,830.  Conversely, of course, Mr Smith obtained a 10 per cent interest in the balance of the sub-pool with a value of $1,191,770 in circumstances where he had no prior interest in that part of the sub-pool. 

   [83]Ibid [254].

1. We do not accept that the trial judge made any error of calculation.  The approach he took was to adjust the value of the sub-pool as a whole as between the parties by fixing an overall entitlement on Mr Smith’s part of 10 per cent.  The net result was substantially in Mr Smith’s favour. 

1. In turn there was no error in the order which his Honour ultimately made relating to the ownership of particular artworks.  Mr Smith received 10 per cent of the value of all the artworks including those which he formerly owned.  Conversely, if his submissions are upheld he would receive both ownership of those artworks and 10 per cent of their value.  This was plainly not the intention of the trial judge. 

1. It is next submitted the trial judge erred in having regard to the settlement arrangements which Mr Gould offered in 2004.  Grounds 26 and 27 provide:

26In determining the adjustment to be made in favour of the appellant pursuant to Part IX of the Act, the learned judge erred by referring to an alleged ‘settlement arrangement’ (Reasons [17] [37] and [43] [44]) or ‘separation agreement’ (Reasons [258]) and by using the terms thereof as indicating the basis upon which adjustments should be made for the appellant’s contributions to the divisible pool of assets.

27In determining what adjustment of interests should be made in favour of the Appellant, the learned judge erred by considering and giving weight to the parties subjective views of the Appellant’s entitlement at the time of the separation. 

1. It was necessary in the first instance for his Honour to consider this proposed arrangement in analysing the course of the parties’ dealings.  In our view there was no error in again considering this offer as his Honour said he did in forming his ultimate conclusions.  It was necessary to explain why the amount arrived at by way of equitable entitlement was less than that at which Mr Gould valued his offer, in circumstances where that offer might otherwise have been regarded as evidence of some admission as to the extent of what was just and equitable in the circumstances of the separation.  It was also a contextual circumstance to which his Honour was entitled to have regard although it is plain from his ultimate reasoning that it was not critical to his conclusions. 

1. Lastly it is submitted the award is manifestly inadequate.  Ground 2 of appeal is:

2The learned trial judge erred in the exercise of his discretion to order an adjustment of interests by fixing the appellant/plaintiff’s share of a divisible pool of assets found to be $22,827,416 at $3,000,000 (or approximately 13% of the pool as so found), such an amount being manifestly inadequate, unjust and inequitable having regard to:

(a)the duration of the domestic relationship;

(b)the non-financial contributions of the appellant/plaintiff to the acquisition, conservation and improvement of the artworks of the parties and Dukville Pty Ltd;  and

(c)the non-financial contributions of the appellant/plaintiff to the acquisition, conservation and improvement of the domestic residence at 23 Park Street South Yarra:

Reasons [76], [273]-[275], [400]-[402], [412], [414].

1. This ground does not bear much analysis.  In the first instance it is urged simply by reference to the length of a mutually beneficial relationship of 14 years.  It is submitted a 13 per cent entitlement to the divisible pool of assets cannot be regarded as adequate following a relationship of this substance. 

1. We do not agree.  First, it must be observed that the trial judge explicitly took into account all of the circumstances argued as demonstrating the inadequacy of the figure in issue.  Secondly, his Honour adopted a holistic overview utilising a lump sum approach by way of a check upon his sub-pool calculations.  Thirdly, the 13 per cent was the net outcome of considered distinctions between analysis of different sub-pools.  Fourthly, the trial judge’s reasons as a whole reflect a careful examination and considered evaluation of the evidence as to the circumstances of the relationship as a whole.  Fifthly, the trial judge not only considered the parties’ contributions to particular sub-pools of assets but also considered whether further adjustment needed to be made to reflect ‘welfare’ considerations and any indirect contribution by Mr Smith to Mr Gould’s financial resources flowing from Mr Smith’s contribution to the success of Gould Galleries.  Sixthly, the ultimate figure of $3 million does not on its face strike us as manifestly inadequate.  To some extent this must be a matter of impression but it is a substantial sum by community standards and embodies the accrual of very substantial financial advantage to Mr Smith as a product of the relationship. 

1. Insofar as other particular considerations are highlighted by ground 2 we have already dealt with the appellant’s contentions concerning his non-financial contributions to the art sub-pool and to the value of 23 Park Street. 

1. We accept that views might differ as to the precise quantification of Mr Smith’s entitlement but this is not a case where the decision goes beyond the ‘generous ambit within which reasonable disagreement is possible’.[84]  There is necessarily a range of discretionary outcomes in a case such as the present because there are a number of factors to be taken into account and the Court must form a view as to the appropriate weight to be given to particular factors and the overall synthesis which reflects a just and equitable outcome.[85]  His Honour explicitly recognised the ultimate need for a holistic value judgment and we are not persuaded that the award which he made to Mr Smith was manifestly inadequate. 

   [84]Norbis v Norbis (1986) 161 CLR 513, 539-40 (Brennan J), quoting Bellenden v Satterthwaite (1948) 1 All ER 343, 345.

   [85]Ibid.

The orders for costs

1. Before the judge, Mr Smith submitted that, as he had established an entitlement to an adjustment in his favour, he was entitled to an order for the costs of the proceeding.  However, Mr Gould submitted to the contrary, contending that Mr Smith should pay Mr Gould’s costs of and incidental to the proceeding, on an indemnity basis.  In making that submission, Mr Gould relied principally upon his substantial success in the proceeding and what he said was Mr Smith’s unreasonable refusal of settlement offers in the form of Calderbank letters.[86]

   [86]Smith v Gould (No 2) [2012] VSC 541 [3]-[4] (‘Costs Reasons’).

1. The judge set out in some detail the relevant offers that passed between the parties, before concluding that ‘the offer of particular significance for resolving liability for costs was Mr Gould’s 11 April 2012 [Calderbank] offer’.[87]  The Calderbank letter of 11 April 2012 offered Mr Smith the retention by him of the various property adjustments made since settlement, plus a further $1.75 million, plus Mr Smith’s party and party costs.  As the judge noted, this offer was significantly more favourable to Mr Smith than the eventual outcome of the proceeding.[88]  Having analysed the history of the proceeding, the judge concluded that Mr Smith’s rejection of the 11 April 2012 offer was unreasonable.[89]

   [87]Ibid [29].

   [88]Ibid [33].

   [89]Ibid [35]-[36].

1. The judge concluded that, when one analysed the history of this proceeding, ‘properly understood, Mr Smith … failed [in the proceeding]’.[90]  However, the judge refused Mr Gould’s application for costs to be taxed on an indemnity basis from 12 April 2012 because none of Mr Gould’s Calderbank offers (including the offer of 11 April 2012) foreshadowed an application for indemnity costs.  Specifically, the 11 April 2012 letter stated with respect to costs:

It must not be forgotten that costs orders are in this area of the law do not follow the traditional view that the Plaintiff gets his costs if he gets any award.  Costs are entirely at the Courts discretion and the case-law sets out the relevant factors that the Courts take into account when determining costs orders.  For instance if a plaintiff has made a substantial offer and then only succeeds in receiving, say one-fifth of that offer there is authority for the view that the plaintiff should only receive one-fifth of his or her costs.  Further the Courts will take into account the competing offers of the parties to determine whether one or other party has been unreasonable in their attempts to resolve the proceeding and upon such a determination refuse or reduce that parties entitlement to costs.

You will note that this offer includes an offer to pay your clients party-party costs in addition to the capital sum offered.  We urge you to consider the totality of this offer in the context of the case law about parties’ entitlements to costs and your client’s previous and only formal offer.

…

This offer is made in accordance with the principles in Calderbank v Calderbank [1975] Fam 93 and Cutts v Head [1984] Ch 290. If it is not accepted, our client may seek to rely on this offer on the question of costs.

[90]Ibid [19].

1. The judge then dealt with the conduct of the trial in the following terms:

39Each of Mr Smith and Mr Gould contributed to the unreasonable prolongation of the trial and to the high solicitor and client costs that have been unnecessarily incurred by each of them.  In the first place, they agreed to focus their dispute upon establishing the stock list as at the separation date as the critical consideration for determining the value of the art sub-pool. Although proffered as an agreement between the parties that was likely to save court time, it is now clear that that objective was not, and would not ever have been, achieved.

40The trial of the proceeding took 28 hearing days. Much time was taken up attempting to resolve issues that were founded on a misconception of proper valuation principle as I explained in my principal reasons. Of that hearing time, the examination and cross-examination of all witnesses, other than the parties, opening and closing addresses and argument on interlocutory applications were within normal parameters. The examination and cross-examination of each of Mr Smith and Mr Gould was not.  In each case, it was unreasonably protracted, largely because of the approach jointly adopted by the parties to identifying the extent and value of the art sub-pool.

41Mr Gould, in my view, must accept significant responsibility for the prolongation of the trial. The lack of proper financial records that would have enabled a principled valuation of Dukville Pty Ltd was a matter for which he bore primary responsibility. Mr Smith was trenchant in his criticism of the manner of Mr Gould’s discharge of his discovery obligations but, as I explained in my principal reasons, Mr Smith’s response to a want of proper financial discovery was misconceived. From my review of the evidence of Mr Smith and Mr Gould, I am satisfied that the trial was prolonged by at least 25% by such factors. Although I suspect that a great deal of trial preparation after 12 April 2012 was directed to schedules 3A and 3B, I am not in a position to make any specific finding about that.  However, as I have said, neither party established the value of the divisible pool for which he contended.

42It is more difficult to assess the effect of the conduct of the parties in inflating pre-trial costs beyond what would be reasonably and properly incurred in efficiently conducted litigation. The difficulty that Mr Gould faced was that Mr Smith’s claim that he contributed to the financial success of the gallery exposed the financial affairs of Edrob Nominees Pty Ltd and Dukville Pty Ltd to scrutiny. Had Mr Gould taken timely steps during 2005 or 2006 to regularise his compliance with statutory reporting obligations and produce financial records that represented a true and fair view of the financial position and dealings of those entities, the costs that might reasonably have been incurred in this litigation would have been substantially reduced. Further, the prospect of early resolution of the proceeding may have been improved. I do not place great significance on the latter prospect since Mr Smith’s consistent view about the extent of his contribution to Mr Gould’s success is likely to have remained a significant impediment to a settlement.

43An application by Mr Smith under s 57 of the Civil Procedure Act 2010 to examine Mr Gould about his discovery prior to trial reflects the broader considerations.  Dismissing the application, the associate judge noted that Mr Smith was about to file and serve his fifth affidavit of documents and Mr Gould his third affidavit of documents. The associate judge observed that the real issue in dispute in relation to discovery was the proper assessment of the pool of assets for distribution. The associate judge was satisfied that discovery of relevant documents going to the pool of assets as at June 2004 and the value of that pool had been completed, and was not satisfied that Mr Gould was failing to disclose discoverable documents or misinterpreting his discovery obligations, which matters are the touchstone for an order for an oral examination.

44Having issued proceedings in December 2006 with the matter set down for trial in April 2012, such an application, in January 2012, was too late.  If its proper purpose was to enable instructions to appropriate experts, that was not made clear and I can see no basis to accept that it was. The conduct of the trial did not suggest that the interlocutory war of attrition that characterised this proceeding, and of which this application was an example, was intended to facilitate the just, efficient, timely, and cost effective resolution of the real issues in dispute between the parties.  Mr Smith’s appeal against the order of the associate judge was ultimately adjourned to the trial by which time it was of little practical use.  The associate judge reserved the costs.  For the purposes of the orders I will make, the costs of the application before the associate judge and the appeal to a judge are to be regarded, whether or not it is the case, as incurred before 12 April 2012.[91]

[91]Ibid [39]-[44].

1. The judge then made the orders about which complaint is made, after ‘balancing all of the matters that [the judge had] identified, from a broad holistic perspective’.[92] 

   [92]Ibid [45].

1. Each of the parties seek leave to appeal the judge’s costs orders.  Mr Smith contends that, in lieu of the costs orders made by the judge, the judge should have made an order that Mr Gould pay Mr Smith’s costs.  While Mr Smith’s proposed notice of appeal in relation to the costs orders contained seven grounds, essentially Mr Smith made two criticisms of the judge’s costs orders and reasons:  first, Mr Smith contended that the judge was wrong to hold him responsible for any undue prolongation of the trial;  and secondly, Mr Smith submitted that it was not unreasonable to reject the 11 April 2012 offer because it was, as he put it, ‘impossible’ for Mr Smith to assess the value of the offer, given that Mr Gould had failed to provide proper discovery of relevant financial documents.

1. Mr Gould seeks leave to appeal the costs orders, seeking in lieu of 75 per cent of his taxed costs after 11 April 2012, costs on an indemnity basis.  Mr Gould submits that the reference in his Calderbank letter of 11 April 2012 to Calderbank v Calderbank[93] and Cutts v Head[94] makes it plain that, notwithstanding the absence of an express statement about indemnity costs, indemnity costs would be sought if Mr Smith rejected the offer and obtained a judgment no more favourable than the terms of the offer.  In support of this submission, Mr Gould relied upon the statement of Carruthers AJ in Assaf v Skalkos as follows:

In the instant case, I consider that any prudent solicitor with experience in litigation in this Court, would construe the phrase ‘without prejudice except as to costs’ continually repeated in settlement negotiations of this nature, as an indication that, if a settlement offer is unreasonably refused, then the rejecting party would be at risk of a subsequent application for a costs order on an indemnity basis.

Accordingly, I do not consider the absence of a specific communication from the plaintiffs’ solicitors to the defendants’ solicitors stating that if the offer ... were rejected, a costs order ‘on an indemnity basis’ would be sought if the plaintiffs went to trial and obtained a more favourable result, constitutes a bar to the plaintiffs recovering appropriate indemnity costs in this case.[95]

[93][1976] Fam 93.

[94][1984] Ch 290.

[95][2000] NSWSC 935, [110]-[111].

1. We see no basis to interfere with the exercise of his Honour’s discretion as to costs.  We agree with the judge that, properly understood, Mr Smith failed in this proceeding.  However, the judge did not order Mr Smith to pay all of Mr Gould’s costs of the proceeding.  Mr Smith’s liability to pay Mr Gould’s costs was substantially reduced by the judge because of the unreasonable prolongation of this litigation brought about to a significant extent by the pre-trial conduct of Mr Gould as described by the judge.

1. That said, Mr Smith was not entirely without fault.  As the judge put it (with respect, correctly in our view) both parties engaged in a war of attrition.[96]  No point appears to have been too small or too inconsequential to be abandoned.  It could not be said that either party conducted this case in accordance with the letter or spirit of the provisions of the Civil Procedure Act 2010.  We see no basis for interfering with the judge’s conclusions in relation to the parties’ unnecessary prolongation of the proceeding.

   [96]Costs reasons [44].

1. As to the judge’s conclusion that it was unreasonable of Mr Smith not to accept the 11 April 2012 Calderbank offer, again we see no error.  This was a conclusion that was well open to the judge, his Honour being in the best position to assess this matter after observing the conduct of this excessively long trial.  

1. As to Mr Gould’s application to leave to cross-appeal on the ground the judge was wrong to hold against him the failure to refer specifically to the fact that an application for indemnity costs would be made if the Calderbank offer was not accepted and Mr Smith did no better at trial, again we see no basis to interfere with the judge’s discretion.  One may accept that, in an ordinary case, the reference to Calderbank v Calderbank and Cutts v Head in a letter headed ‘without prejudice save as to costs’ foreshadows the possibility of an application for indemnity costs being made in appropriate circumstances after judgment.  However, the present case is not an ordinary case.  The 11 April 2012 letter foreshadowed various possible competing costs orders.  In the circumstances of the terms of that letter (which we have set out above) we see no error in his Honour’s denial of indemnity costs to Mr Gould for the reasons given by the judge.  Further, it is not as if the judge did not give operative effect to the 11 April 2012 Calderbank letter.  The costs liability of Mr Smith for costs incurred after 11 April 2012 is 50 per cent higher than it is for costs incurred up to 11 April 2012. 

Conclusion

1. Mr Smith’s appeal must be dismissed and both parties’ application for leave to appeal the judge’s costs orders must be refused.