Liberty Grove (Concord) Pty Limited v Mirvac Projects Pty Limited

[2006] NSWSC 1168

CITATION:	Liberty Grove (Concord) Pty Limited v Mirvac Projects Pty Limited [2006] NSWSC 1168
HEARING DATE(S):	7/11/06
JUDGMENT DATE :	9 November 2006
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	Einstein J
DECISION:	Separate question to be ordered. Certain interrogatories to be allowed. Balance of motion stood over to abide separate question decision.
CATCHWORDS:	Practice and Procedure - Interrogatories - Separate question orders
CASES CITED:	Boyle v Downs [1979] 1 NSWLR 192 Lang v Australian Coastal Shipping Commission [1974] 2 NSWLR 70 Sharpe v Smail (1975) 5 ALR 377
PARTIES:	Liberty Grove (Concord) Pty Limited (Plaintiff) Mirvac Projects Pty Limited (Defendant)
FILE NUMBER(S):	SC 50173/05
COUNSEL:	Mr DJ Hammerschlag SC, Mr V Kerr (Plaintiff) Ms S Duggan (Defendant)
SOLICITORS:	Deacons (Plaintiff) Corrs Chambers Westgarth (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

Einstein J

Thursday 9 November 2006

50173/05 Liberty Grove (Concord) Pty Limited v Mirvac Projects Pty Limited

JUDGMENT

The proceedings

1 These proceedings concern the contractual rights of Liberty Grove (Concord) Pty Ltd and Mirvac Project Pty Ltd.

2 The parties entered into a profit-sharing agreement relating to the development of land in Cabarita, largely as residential properties, by the defendant. The Development was apparently carried out under the sole control of the defendant between January 2000 and September 2005.

3 The agreement provided for the defendant to pay the plaintiff a share of profit which was to be calculated in accordance with a formula set out in the contract. That formula requires as inputs, amongst other things:

(i) the “ungeared cash flow” for the Development; and

(ii) the defendant’s “profit on the Development”.

The notice of motion

4 Liberty seeks leave by the notice of motion filed on 21 August 2006 to administer a number of interrogatories to Mirvac. The essential purpose of the interrogatories is to enable Liberty to understand various accounting documents including spreadsheets and reports which have been produced by Mirvac

The rules

5 Rule 22.1 of the Uniform Civil Procedure Rules 2005 (“the UCCPR”) provides:-

“(1) At any stage of the proceedings, the Court may order any party to answer specified interrogatories.
…
(4) In any case, such an order is not to be made unless the Court is satisfied that the order is necessary at the time it is made.”

6 Further, Rule 22.2 of the UCCPR provides:-

“A party may not object to being ordered to answer an interrogatory except on the following grounds:


a) The interrogatory does not relate to any matter in issue between that party and party seeking the order,

b) The interrogatory is vexatious or oppressive…”

7 An order for interrogatories is not to be made unless the court is satisfied the order is “necessary at the time it is made” (UCPR 22.1(4)).

The meaning of "necessary"

8 The criterion for necessity means “necessary in the interests of a fair trial” (see Boyle v Downs [1979] 1 NSWLR 192 and other cases cited at [22.1.15] of Ritchies Uniform Civil Procedure).

9 One circumstance in which interrogatories are “necessary” is where interrogatories are directed to “the meaning of symbols, ciphers and abbreviations” used in documents produced by the party interrogated: Sharpe v Smail (1975) 5 ALR 377 at 381 (Gibbs J).

10 Another circumstance is where interrogatories are directed to material matters whose proof would otherwise be difficult or involve unreasonable costs: Lang v Australian Coastal Shipping Commission [1974] 2 NSWLR 70 at 73; see also Boyle v Downs at 206, where Cross J considered the “enormous” evidentiary difficulties faced by the plaintiff to be a significant consideration.

The contractual terms with more specificity

11 In the plaintiff's contentions the allegation is made that each of the following was a term of the Contract.

(a) If the internal rate of return based on an ungeared cash flow for the Development exceeds 20%, Mirvac will pay to Liberty at the completion of the Development (including sales) the greater of:


(i) $350,000; or

(ii) 20% of Mirvac’s profit on the Development in excess of a 20% internal rate of return based on an ungeared cash flow
Particulars
Clause 5(d)
(b) The internal rate of return is calculated by Mirvac in accordance with Mirvac’s normal accounting practices.
Particulars
Clause 6
(c) Mirvac must, at Liberty’s cost, provide Liberty with access to such information and documents as Liberty reasonably requires to satisfy itself that Mirvac’s calculations of:

(i) the ungeared cash flow for the Development;

(ii) Mirvac’s profit on the Development based on an ungeared cash flow; and

(iii) the profit on the Development at a 20% internal rate of return based on an ungeared cash flow.

Particulars
The term is implied in fact and is necessary to give business efficacy to the Contract.”

12 The Contentions also include in paragraph 6:

“The internal rate of return based on an ungeared cash flow for the Development exceeds 20%”

13 The Commercial List Response to paragraph 4 is as follows:

“Mirvac does not admit that the matters pleaded at paragraph 4 of the plaintiff's contention is a complete statement of the terms of the Agreement. Mirvac relies upon the Agreement and the terms set out therein.”

14 The Commercial List Response in answer to paragraph 6 of the Contentions is as follows:

“Mirvac denies that the internal rate of return based on an ungeared cash flow for the Development exceeds 20%. Mirvac says that whether or not the internal rate of return based on an ungeared cash flow for the development in fact exceed 20% is a matter of contention before this Court. Depending upon the manner in which the calculation is undertaken, the internal rate of return based on an ungeared cash flow for the development may be less than 20%.”

15 The contentions at paragraph 7 are as follows:

“Mirvac has calculated:

(a) its profit on the Development based on an ungeared cash flow to be $70,718,000;

(b) the profit on the Development at a 20% internal rate of return based on an ungeared cash flow to be $59,874,000; and

(c) Liberty’s profit share to be $2,168,837 (20% x ($70,718,000 - $59,874,000)).

16 In answer to this contention, Mirvac admits that it undertook the calculations set out in paragraph 7, adding

"[ Mirvac] submits that Liberty's profit share is now a matter of contention before this Court."

The somewhat curious position in relation to the motion

17 The burden of the submissions advanced by Liberty on the notice of motion [and of its evidence adduced on the motion] goes to the propositions that the interrogatories which are proposed are entirely proper given the following matters:

i. that Liberty has sought access to information and documents in Mirvac's control to satisfy itself that the Cash flow Report provided inaccurate statement of the own ungeared cash flow and profit for the Development;

ii. that Mirvac had [in paragraph 12 of its Commercial List Response] conceded a preparedness to provide such information as may be in its possession, custody or power;

iii. that Liberty has been unable to establish the accuracy of the Cash flow Report by a consideration solely of the documents discovered by the defendant.

18 The responsive submissions of Mirvac contend that Liberty is putting the ‘cart before the horse’ by seeking to interrogate on the assumption that it is entitled to both the information which it seeks and to the verification of that information, before the Court has had the opportunity to determine in particular, the entitlement to the verification. It's contention is as follows:

i. This dispute raises two issues for determination namely:-


(1) whether the Defendant is required to provide the Plaintiff with access to information and documents to enable the Plaintiff to verify the Defendant’s calculation of profit on the development.

(2) the correct method of calculation of a 20% Internal Rate of Return (“IRR”) on the development.


ii. The first of the issues relates to the Plaintiff’s assertion that it is entitled to “verify” the Defendant’s calculation. The Plaintiff asserts that this entitlement is an implied term of the Contract.

iii. The second issue relates to a determination, in effect, as to whether the Contract dictates, as a matter of construction, the manner of calculation of the IRR. The second question does not (as presently posed) require the Court to go behind the Defendant’s calculation of its Cash Flow Report. The contract requires the IRR to be calculated “ by Mirvac in accordance with Mirvac’s normal accounting practices ”.


iv. In respect to the first question, the Plaintiff identified a number of nominated documents that it required to enable it to undertake the verification. Such documents (to the extent that they exist) and others have been provided to the Plaintiff.

v. Whilst the Defendant agreed to provide those documents to the Plaintiff, at no stage has the Defendant admitted the Plaintiff’s asserted entitlement to “verify” the Defendant’s calculations of the profit of the Development. The interrogatories (at least in part) relate to a reconciliation and verification of these documents and the Cash Flow Report.

vi. As each of the interrogatories goes to the issue of verifying the Defendant’s calculations, the interrogatories do not “ relate to any matter in issue ”, namely whether the Plaintiff is entitled to the information and entitled to the verification of that information. Rather, the Plaintiff is, seeking to undertake such verification through the process of the administration of interrogatories before the Court has had the opportunity to determine whether the Plaintiff is in fact entitled to the verification.

vii. The situation is analogous to that in Lovell & Lovell [1970] 3 All ER 721 where Salmon LJ said:-

“I think it would be a wholly wrong exercise of discretion to compel a Defendant to kill its own defence by taking a step in the action which will itself amount to an acknowledgement.”

The evidence in more detail

19 There are a number of factual matters before the court on the motion and it is appropriate to make clear what the evidence in relation to these matters is.

20 Each of the following matters is established on the evidence:

i. Mirvac provided Liberty with a one page spreadsheet “the Cashflow Report” showing:


(a) Mirvac's calculation of the ungeared cash flow for the Development (setting out receipts and payments on monthly basis);

(b) Mirvac's’ profit on the Development: gross monthly sales of $280,793,000 and incurring gross monthly costs of $210,076,000 and generated net monthly cash flow, or profit, or $70,718,000


ii. Liberty has been and continues to seek access to information and documents in Mirvac's to control to satisfy itself that the Cashflow Report complies with the contract

iii. Amongst other documents Mirvac relevantly produced the following two documents:


(a) Costs Transaction Report (“CTR”) of some 3000 pages: showing total costs paid on the project of $195,230,300;

(b) Income Transaction Report (“ITR”): showing total income on the project of $253,212,917.

iv. Liberty has experienced the following difficulties:

(a ) Mirvac has failed to identify the information used to compile the Cashflow Report
[Mirvac had indicated that it was “not possible to provide an electronic copy of this document which could be read by a third party, as the document is compiled from programs and information located in our client’s central hard drive”]
(b) Mirvac has failed to clarify the relationship between the CTR and the Cashflow Report so as to reconcile the apparent discrepancies between them.

v. Matters which are likely to be critical in determining the accuracy of the Cashflow Report are as follows:


a) the timing of the recognition of costs and revenue in the CTR and ITR;

b) identification of the costs recorded in the Cashflow Report;

c) reconciliation of the costs recorded in the Cashflow Report against those recorded in the CTR;

d) identification of the income recorded in the Cashflow Report;

e) reconciliation of the income recorded in the Cashflow Report against the income recorded in the ITR,

[cf the evidence that Liberty has retained Mr Wayne Lonergan, an expert accountant, to review the Cashflow Report, the Costs Transaction Report and the Income Transaction Report, together with the other documents discovered by the defendant, with a view to establishing the accuracy of the Cashflow Report and that Mr Lonergan could not establish the accuracy of the Cash flow Report because of these difficulties ]

21 More particularly the evidence before the court as to the difficulties experienced by Mr Lonergan has been put as follows:

“Timing of recognition of costs and revenue

Since Mr Lonergan was unable to determine the timing of recognition of costs and revenue, it is unclear whether the IRR calculation was performed accurately on the basis of cash flows

Recognition of costs:

Mr Lonergan unable to determine at what date the costs are recorded in the CTR – the dates in the CTR appear to refer to the “date posted” and it is said to be unclear whether this date reflects the date cash payments were made, accrued or recorded in the accounting system. [22]

[Mr Lonergan] Mirvac appears to have recognised costs in the Cashflow report based on the “date posted” where a corresponding amount appears in the “Total: Invoiced” column rather than on the “date posted” where a corresponding amount appears in the “Total: Paid” column. [24]

Recognition of revenue on sales

[Mr Lonergan] The dates in the ITR refer to the “date posted” and it is unclear whether this date reflects the date revenues were received, accrued or recorded in the accounting system.” [30]

Reconciliation of costs


Mr Lonergan’s difficulties in relation to the methodology of the reconciliation. [35]

Reconciliation of categories of revenue

Mr Lonergan’s calculations still resulted in a discrepancy of $7.3 million between revenue in the Casflow Report and the ITR which remained unaccounted for. [37]

Capped overhead cost arrangement

Mr Lonergan’s arrangement whereby Mirvac will “only charge direct project costs together with overheads which will not exceed 2.5% of total costs”. Mr Lonergan was unable to verify whether Mirvac did not exceed its 2.5% cap of allocation of overhead costs to total costs. [38]

Method of allocation of other overheads, indirect costs and other journals

Mr Lonergan was unable to establish the accuracy of these costs because the approach used to allocate other overheads could not be determined based on the information provided. [41]

Details of the interest and sundry income

Mr Lonergan was unable to verify the accuracy of the interest income as shown in the ITR. [42]

Basis of the calculation of GST on settlements payable under the margin scheme

Mr Lonergan was unable to assess the accuracy of the GST on settlement costs included in the ITR. [43]

Amount and treatment of discounts, credit notes, settlement discounts, rebates or any other form of cost reduction benefit

Mr Lonergan was unable to assess the accuracy of the costs included in the CTR for which a cost reduction benefit arrangement was in place. [44]

Existence of any contra or similar deals which may have impacted on either the cash flow or the profitability of the Development

Mr Lonergan was unable to comment on the accuracy of the Cashflow report if contra or similar deals existed in relation to any aspect of the Development. [45]

22 Mirvac's solicitors in a letter dated 19 July 2006 addressed to Liberty's solicitors had stated as follows:

i. As to the information used to compile the Cashflow Report:


1.2 We are instructed that the source of that information is as follows: Data is extracted from an off the shelf financial system used in the construction industry called Timberline Job Cost Model . This information is transferred into Microsoft SQL . A product called “Crystal Reports” is used to extract the data and reports such as the cost transaction reports are then loaded onto the Mirvac intranet. The costs which appear in the cashflow are transferred from the Timberline model into the Microsoft SQL. From here, a file is created that is linked into the costs transaction report via a lotus spreadsheet.

1.3 The costs transaction report cannot be exported into excel or any other electronic format.

ii. As to the apparent discrepancies between the Cost Transaction Report and the Cashflow Report:

4.1 There is no obligation whatsoever upon our client to assist your client in understanding the documents you (sic) have discovered to assist them (sic) in manufacturing a case against our client. If your client has further questions (over and above the many questions already answered by our client) then they (sic) should approach the court for appropriate orders.

Dealing with the issue

23 Mirvac effectively contends that paragraph 12 of its Commercial List Response constituted no more than a limited acceptance [put without admission as to the assertion that access to particular documents formed an implied term of the agreement], that it would provide particular documents to Liberty. Mirvac's contention is that notwithstanding its consent to orders made by the Court on 28 April 2006 that it make available the documents referred to in paragraph C.8 of the amended commercial list statement, this was not an acceptance that those documents were in fact discoverable and that it has certainly at no stage admitted Liberty's entitlement as a matter of contractual right, to "verify" Mirvac's calculations of the profit of the Development.

24 The principled approach to the notice of motion is somewhat difficult to discern. The counterbalancing considerations involve:

i. Liberty's contention that it is entitled to have the order for interrogatories made as a matter of right and consistently with the principle permitting litigating party A, once the opposing party B has provided it with particular documents on discovery or otherwise, to have access to the necessary information to enable litigating party A to understand the materials so provided to it;

ii. the circumstance that Mirvac has not admitted any entitlement in Liberty to verify, this clearly being an issue for determination in the proceedings which would be foreclosed if the interrogatories were to be permitted.

25 It is pertinent to note that in recent correspondence, the solicitors for Mirvac have sought to obviate the need for a contested hearing in relation to the interrogatory issue and have indicated that their client, on a particular basis only, would be prepared to answer questions 2, 3, 5, 7, 8, 9, 10, 11, 12 and 13. The proviso was expressed as a requirement that Liberty withdraw its motion and that the answers to those interrogatories would be final and that there would be no further or supplementary questions or requests raised by Liberty.

26 To my mind the above indication suggests very strongly that the principled exercise of the Court's discretion in the present circumstances extend to require an answer to those questions. I propose to so order but on the basis that:

i. Liberty pay the reasonable costs incurred by Mirvac in the exercise of providing an answer to those questions [not including any costs going to a suggested inability in any officer of Mirvac being unable by reason of having to attend to providing such answers, to satisfactorily manage other development projects under their supervision];

ii. in the first instance, Liberty pay up to a limit of $15,000, such costs as Mirvac advise it has incurred in the exercise of providing those answers;

iii. Ultimately the costs of and occasioned to Mirvac in having to provide an answer to those questions will be costs of the proceedings.

27 In so ordering I note that a careful examination of the precise terms of paragraph 12 make clear that the offer was to provide “such information” as may be in its possession, custody or power. The offer was not limited to production of documents per se.

28 During the hearing of the motion Liberty sought to cross-examine Ms Leanne Clifton, a senior development manager at Mirvac. The cross-examination was proposed to be directed to Mirvac’s contention that it would be oppressive for the Court to allow the administering of the interrogatories. Leave to cross examine was not granted and the Court indicated that if the interrogatories were permitted it would accommodate the suggested problems of the costs to be incurred in answering the interrogatories, by in the first instance, requiring Liberty to pay up to a limit of $15,000, such costs as Mirvac would advise it had incurred in the exercise of providing those answers. Ultimately the costs of Mirvac in having to provide an answer to interrogatories would be costs of the proceedings. Naturally all that would ultimately be allowed on a costs assessment would be reasonable costs so incurred.

29 Albeit that the exchanges on this topic with counsel during the hearing of the motion were directed to the possibility that all of the interrogatories may be directed to be answered when in fact these reasons and orders will only require answers to the nominate interrogatories referred to above, it still seems to me appropriate that the $15,000 upper limit be retained.

30 It was common ground that Ms Clifton would be a principal witness on liability at the final hearing. Senior counsel for Liberty made plain that had the Court granted leave to cross-examine Ms Clifton presently, the cross examination would go to credit. It was particularly for this reason that the leave to cross examine was not permitted and the above proposed accommodation put to the parties by the Court.

31 A common thread which is discernible in relation to those interrogatories which Mirvac excluded from the above described conditional offer was that it was not prepared to answer interrogatories being integers going directly into the calculation of the amounts said to be owed. Plainly enough these are the sensitive questions where Mirvac stands on its central proposition that the question of the suggested entitlement in Liberty to verify, is an issue for determination in the proceedings which would be foreclosed if the interrogatories were to be permitted.

Separate question regime

32 During the hearing of the motion I made clear to the parties that as I saw it, one clear possibility was that the Court may presently determine at a case management level, to order a separate question in terms of whether or not, properly construed, the Contract yields a term entitling Liberty to 'verify' Mirvac's calculation of profit on the development.

33 Determination of that separate question will clearly produce an answer on the matter of the propriety of the remaining interrogatories which will not have been ordered presently. In that regard the current notice of motion insofar as not already dealt with, can simply be stood over to abide the decision on the separate question.

34 During address both counsel accepted that the framing of a separate question in terms of whether or not the suggested term of the contract pleaded in the Contentions at 4 (c), should not suffer difficulties in terms of the accepted principles concerning the making of separate question orders and would clearly determine the issue put up by Mirvac as presently making it inappropriate for the interrogatories to be ordered.

Short minutes of order and costs

35 The parties are to bring in short minutes of order which will provide for an order permitting those interrogatories which the above reasons have accepted as presently appropriate, providing for the separate question regime, and standing the part heard motion over consistently with the reasons.