National Telecoms Group Ltd v John Fairfax Publications Pty Ltd (No 1)
[2011] NSWSC 455
•19 May 2011
Supreme Court
New South Wales
Medium Neutral Citation: National Telecoms Group Ltd v John Fairfax Publications Pty Ltd (No 1) [2011] NSWSC 455 Hearing dates: 27-28 April 2011; 2-5 May 2011; 9-12 May 2011; Decision date: 19 May 2011 Jurisdiction: Common Law Before: Davies J Decision: The following portions of the report of Mr Ross of 5 May 2008 are rejected - para 2.2.4(ii), section 2.9, para 2.10.2(iii), para 2.12.2(iii), section 8, para 9.1.1(v), para 9.4.4, section 9.5, para 9.6.1(v), para 10.1.3(iv), para 10.1.4, para 10.1.5 and Appendix 13 to the report.
Catchwords: EVIDENCE - opinion evidence - expert opinion - specialised knowledge - whether conclusions of experts based on specialised knowledge - principles in Makita v Sprowles - reliance by expert on analysts' and brokers' reports concerning the Plaintiff - whether such reports constitute business records - whether such reports admissible. Legislation Cited: Evidence Act 1995
Trade Practices Act 1974Cases Cited: Carson v John Fairfax and Sons Ltd (1993) 178 CLR 34
Davie v Lord Provost, Magistrates and Councillors of the City of Edinburgh [1953] SC 34
Dingle v Associated Newspapers [1964] AC 371
Guest v Commissioner of Taxation [2007] FCA 193
Forbes Engineering (Asia) Pte Limited v Forbes (No 4) [2009] FCA 675
Idoport Pty Ltd v National Australia Bank Ltd (17) [2001] NSWSC 123
Linfox Transport (Aust) Pty Ltd v Arthur Yates & Co Ltd; Dynamic Lifter Pty Ltd v Linfox Transport (Aust) Pty Ltd [2004] NSWSC 943
Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705
Roach v Page (No 15) [2003] NSWSC 939
Roach v Page (No 27) [2003] NSWSC 1046Texts Cited: Odgers, Uniform Evidence Law (2010), 9th Ed, Thompson Reuters, Sydney. Category: Procedural and other rulings Parties: National Telecoms Group Ltd (Plaintiff)
John Fairfax Publications Pty Ltd (Defendant)Representation: B McClintock SC & C H Withers (Plaintiff)
T Blackburn SC & P Silver (Defendant)
Gilbert & Tobin (Plaintiff)
Freehills (Defendant)
File Number(s): 2002/69417
Judgment
On 25 November 2002 the Defendant published in the Financial Review an article concerning the Plaintiff which made a number of allegations about the way the Plaintiff conducted its business. On 29 November 2002 the Plaintiff sued the Defendant for defamation in relation to that article. A jury found 4 imputations proved as follows:
(a) that the plaintiff produced misleading accounts by not complying with generally accepted accounting standards;
(b) that the plaintiff falsified its accounts so as to make its financial position look better than it actually was;
(c) that the plaintiff's accounting practices were so shoddy as to cause its chairman Jeff Kennett to resign;
(d) that the Plaintiff had deliberately misled its customers as to the value of equipment supplied by it.
Background
The Plaintiff was a telecommunications company that sold equipment and airtime to small businesses. Up until early 2002 it financed the sales internally. In early 2002 it entered into 2 Facility Agreements, one with BankWest and the other with SocGen, to fund these leases externally.
The article published on 25 November was the last in a series of articles that had been published by the Financial Review about the Plaintiff.
On 26 November 2002 BankWest wrote to the Plaintiff saying that it would no longer fund the Plaintiff's leases after the end of November 2002. On 17 February 2003 SocGen wrote saying that it was suspending its facility which would not be resumed unless BankWest also resumed its funding.
The Plaintiff says that as a result of a recall of those facilities it was forced to restructure the whole company with the result that it suffered a considerable downturn in profits. In addition to general damages the Plaintiff claims special damages in respect of the restructure of the business.
The Defendant says that the reason for the restructure of the company had nothing to do with the publication of the article but came about as a result of the Plaintiff's own conduct of its business and other external factors.
The experts engaged by both parties give evidence about 3 matters. The first area concerns the truth or otherwise of the imputations including the contextual imputations detailed by the Defendant in its defence. The second area concerns the causation of the loss suffered by the Plaintiff. The third area concerns proof of the damages suffered by the Plaintiff.
In relation to the issue of causation each party has engaged an expert to prepare reports concerning the cause of the Plaintiff's restructure. Objection was taken by the Plaintiff to large portions of the reports of one of the Defendant's experts, Mr Andrew Ross. The Plaintiff argues that Mr Ross does not have the expertise to give some of the evidence to which objection was taken. It argues that Mr Ross has not complied with the principles in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705, in particular that his reports contain assertion, argument and speculation. The result is said to be that he is not an expert but an advocate for the Defendant.
Mr Ross's CV is set out in Appendix 2 to his first report. It is lengthy, but he provides what might be described as a fair summary in paras 1.3.3 and 1.3.4 of the first report. Because his expertise is of some significance in relation to the arguments advanced against portions of the report being admitted I should set out those paragraphs:
1.3.3 My relevant training, study and experience includes:
(i) Completion of a Bachelor of Commerce (with Honours) at the University of Queensland. Completion of that degree included, inter alia, study in valuation, accounting, auditing and finance at both undergraduate and post-graduate levels.
(ii) Tutoring accounting and auditing at the University of Queensland.
(iii) Completion of the Institute of Chartered Accountants in Australia Professional Year programme, including further study in accounting, auditing and finance.
(iv) Completion of a Graduate Diploma in Finance and Investment with the Securities Institute of Australia (since renamed the Financial Services Institute of Australasia), including study in mergers and acquisitions, valuation and finance.
(v) More than 20 years training and experience in chartered accountant firms. This training and experience includes:
(a) Undertaking audits of small and large entities, including:
consideration of the reporting of sales, costs and profits in the accounting systems of each entity;
analysis of the assets and liabilities of each entity, including the appropriateness of the recognition and carrying values of goodwill; and
evaluation of the adequacy and sufficiency of documentation relating to the recording of sales, costs, profits, assets and liabilities.
(b) Performing valuations of assets, shares, goodwill and businesses, including:
assessment of reported sales, costs and profits;
identification of key drivers of sales, costs and profits; and
preparation and assessment of projections and forecasts of expected sales, costs and profits.
(c) Preparation of detailed models which identified key sales, costs and profit drivers of businesses for use in business planning and for the preparation of projections of future sales, costs and profits.
(d) provision of forensic accounting advice and evidence on a wide variety of matters involving the preparation or assessment of projections of the sales, costs and profits that were or would have been derived or incurred in circumstances defined by the relevant facts of each matter.
1.3.4 My forensic accounting experience includes:
(i) Consideration of claims for economic loss made by a large telephony company in relation to claims that a supplier of billing services breached its contract with the company, resulting in the inability of the company to bill its customers accurately or in a timely manner.
(ii) Consideration of claims for economic loss made by a large telephony company against a mobile phone reseller who had allegedly failed to meet minimum sales standards under a contract.
(iii) Preparation of an independent expert's report addressing claims that a vendor of a mobile phone reselling business reneged on an agreement to sell. This report required consideration of the value of the vendor's business.
(iv) Preparation of an independent expert's report addressing claims that the vendor of an option to acquire a television satellite licence had suffered loss as a result of it being misled by the purchaser.
(v) Preparation of an independent expert's report addressing claims that a successful bidder for microwave pay television licences reneged on an agreement with an intended bidder in relation to the supply of licences for pay television channels.
(vi) Preparation of independent expert's reports in a wide variety of matters which required an assessment of the impact of an event (typically to alleged wrongful acts of a party) on the financial position and prospects of an entity.
There are a number of challenges to aspects of Mr Ross's reports. Many but not all of these were based on what was claimed to be the lack of expertise to which I have made reference. The parties agreed that in relation to the issue of causation those areas of challenge are best considered in Mr Ross's first report of 5 May 2008. Except where the context requires otherwise I will refer to this in this judgment as "Mr Ross's report". A decision in relation to the matters in this report will flow through into other reports prepared by Mr Ross.
The matters covered by Mr Ross that are challenged by the Plaintiff may be grouped as follows:
(1) His assessment of the Plaintiff's financial position as of 31 December 2002;
(2) The effect on the Plaintiff of the investigation by ACCC;
(3) The effect on the Plaintiff of enquiries made by ASIC; and
(4) Mr Ross's assessment of competition within the telecommunications industry.
(1) Assessment at 31 December 2002
The analysis in Mr Ross's report details the state of the Plaintiff as at 31 December 2002. It is not necessary to set out all of the paragraphs in the report that identify that date as the one used by Mr Ross. Most of the paragraphs objected to appear in section 4 of the report which is headed "The adequacy of the capital available to NTG". The issue can be most clearly identified by setting out 4 paragraphs in the summary section of the report as follows:
2.5.5 NTG's trading operations provided NTG with approximately $20.4 million in cash between its listing and 31 December 2002. In my opinion, given the scale of its operations, this was inadequate to meet its financing and investing requirements.
...
2.5.7 In my opinion, it was these decisions that were the primary causes of the significant decline in NTG's cash position in the six months to 31 December 2002, which decline was the precursor to NTG's restructure which was announced only six weeks later.
...
2.7.2 As I describe in that Section, in my opinion NTG generated only $31.5 million in net cash inflows between when NTG listed on the ASX and 31 December 2002.
...
2.7.4 In addition, NTG was required to use much of its remaining cash as security deposits. Those funds were not available to meet NTG's cash flow needs. At 31 December 2002, these security deposits totalled $3.6 million.
The Plaintiff's position on this issue was a simple one. The defamatory publication was published on 25 November 2002. On 27 November 2002 the first of the Plaintiff's financiers (BankWest) informed the Plaintiff that it would no longer fund the Plaintiff pursuant to the facility from the end of November 2002. The Plaintiff says, therefore, that any assessment as at 31 December 2002 cannot be relevant because the position of the Plaintiff was affected both by the publication and the withdrawal of BankWest's finance and that those matters are necessarily reflected in the Plaintiff's financial position during December.
The Plaintiff also points to what Mr Ross says in his second report of 15 September 2010 in para 2.4.1 as follows:
2.4.1 My First Report was not directed at establishing NTG's financial position in late November 2002. However, in the course of addressing the questions I was asked to consider, I stated, inter alia, that:
a. The significant deficiencies in NTG's internal accounting and management reporting systems presented challenges in accurately determining NTG's financial position immediately prior to the Publication of the Article; and
b. To the extent that analysis was possible, in my opinion it suggested that, by 25 November 2002, NTG's financial position was dire. Among the indicators that I considered in reaching this conclusion, I reviewed NTG's available cash, concluding that, on the available information, it had been "virtually exhausted".
The Plaintiff submits that that is an acknowledgment by Mr Ross that his earlier assessment at 31 December 2002 was inappropriate.
Mr Blackburn SC submits that even though the second report deals with the situation at 25 November 2002 Mr Ross does not change the opinion that he expressed in his earlier report. What Mr Ross appears to do, he submits, by reason of the conclusions he reaches in relation to the Plaintiff's position at 25 November 2002 is to conclude that nothing thereafter changed up to 31 December 2002.
Mr Blackburn also says that it is not possible, in any event, to do the surgery to the first report in relation to conclusions about 31 December. Further, there is a great deal of analysis in Mr Ross's report, he says, which is not dealt with in the second report, and that alone means that the first report should not be rejected in its entirety.
Decision
It seems likely, although I make no finding in this regard, that the reason Mr Ross considered the position in his first report at 31 December 2002 was that he had the Plaintiff's half-yearly accounts to that date and may not have had other documents including management accounts which might have related to the period no later than 30 November 2002. It seems from his second report that by the time that report came to be written he had available to him the management accounts for November 2002.
In my opinion, a consideration of the Plaintiff's position at 31 December 2002 is not so self-evidently irrelevant as to justify a rejection of the whole of Mr Ross's report nor even the specific paragraphs to which objection is taken. Although it is the Plaintiff's case that things changed fairly drastically after the publication and particularly after the withdrawal by BankWest, part of the Defendant's case is that nothing that took place from the time of publication to the end of the calendar year made any difference to the Plaintiff's position. That appears to be Mr Ross's opinion in his second report and certain matters in his first report, in particular para 2.2.6, anticipated that opinion.
The Defendant and Mr Ross may be wrong about the factual matters in para 2.2.6 and in establishing that there was no change during December 2002. But that is a matter to be determined after all of the evidence has been heard. Any statement in the first report concerning 31 December 2002 would have to be read in the light of the material in the second report where an assessment of the position at the earlier date is made by Mr Ross.
The challenge to the whole of the first report and to the particular paragraphs dealing with 31 December 2002 fails.
(2) The ACCC investigation
On a date which is uncertain, but certainly by about July 2002, the ACCC commenced an investigation into the Plaintiff's selling practices. The investigation led to the commencement of proceedings in the Federal Court on 13 February 2003 by the ACCC against the Plaintiff. The ACCC sought declarations and injunctions concerning alleged breaches of provisions of the Trade Practices Act 1974 including s 52.
The proceedings were ultimately resolved in December 2003 by the dismissal of the ACCC's application with the Plaintiff agreeing to a declaration that it had engaged in conduct that was misleading and deceptive in contravention of s 52 TPA and amounted to false or misleading representations with respect to the price of goods or services in contravention of s 53(e) of the Act, and an injunction restraining the Plaintiff from making a number of representations in connection with the promotion of the Plaintiff's package.
Having recited these matters in a little more detail Mr Ross then proceeded to deal with the impact of those matters on the Plaintiff's restructure as follows:
8.2 My analysis
8.2.1 I have assessed the impact of the ACCC investigation and subsequent litigation on NTG's financial position within the following broad categories:
(i) The commencement of the ACCC investigation, and reactions to it;
(ii) The continuing impact of the investigation after 25 November 2002;
(iii) The ACCC litigation, and its impact on NTG; and
(iv) The resolution of the ACCC litigation, and its subsequent impacts on NTG.
8.2.2 In addition, I have also considered whether, in my opinion, that impact would have been different had the Publication not occurred.
8.2.3 In addressing these issues, I have referred to a large number of documents which mention the ACCC investigation, the ACCC litigation, or allegations associated with that investigation and litigation. Given the somewhat voluminous nature of this exercise, I attach it separately as Appendix 13.
8.2.4 In preparing Appendix 13, for the most part I have extracted limited portions of each document I considered. I did this solely to limit the volume of the material included in that Appendix. To enable the reader to assess the context of each extract, I provide, by way of footnote, a reference to each document discussed.
8.2.5 I have endeavoured to incorporate all references I could find to the issues associated with the ACCC investigation and litigation. Given the number of documents discussed, I do not seek to analyse the impact on NTG's financial position of the information appearing in each document. Rather, I have attempted to group the documents I reviewed into categories and time periods to assist in my analysis.
8.2.6 I summarise the opinions I reach having undertaken this review in the next sections of this report.
8.3 Summary of the position at 25 November 2002
8.3.1 Based on the analysis in Section 2 of Appendix 13, I conclude that, by 25 November 2002:
(i) The ACCC had, for some significant time, been conducting an investigation into NTG's selling techniques;
(ii) The ACCC had, by that date, apparently formed the view that the alleged conduct was so widespread that "potentially none of NTG's ... Synergy customers had been obtained by appropriate lawful means";
(iii) The management and Board of NTG were aware of the existence of the investigation and of the ACCC's apparent views;
(iv) NTG made no formal public statement in relation to the investigation until well after it became public through a number of articles in the AFR;
(v) To the extent that it made any informal comment on the investigation, NTG was consistently reported to have stated that the issue was restricted to a very small number of its customers and that most if not all of the issues had been resolved;
(vi) The existence of the ACCC investigation had already been raised as a concern by NTG's financiers, Soc Gen and BankWest;
(vii) In responding to those concerns, NTG's management had:
(a) Reassured Soc Gen that the ACCC "had found nothing untoward";
(b) Agreed to indemnify Soc Gen (by paying out the contract) should a Soc Gen customer stop payment under a rental agreement; and
(c) Stated that the incidents in question were "isolated";
(viii) NTG's Board had responded to the concerns of its financiers by stating that:
(a) To the best of the Board's knowledge, there had been "no deliberate or repetitive breaches by NTG of the [TPA]";
(b) They believed the allegations made by complainants to the ACCC were "isolated cases arising from, in hindsight, the actions of over-aggressive sales persons acting outside acceptable company guidelines";
(c) They considered that "the media attention given to this subject matter to be part of a competitor campaign to discredit the company amongst its customers, suppliers and providers of capital";
(ix) NTG's financiers had determined to continue providing finance to NTG, although they remained concerned with their exposure; and
(x) The initial reaction of company analysts to publicity in relation to the ACCC investigation (maintaining a "BUY" rating on NTG's shares) had proceeded on the basis (apparently confirmed by NTG) that:
(a) There had been only a very small number of complaints lodged with the TIO and furthermore, most have been settled internally, before being taken to the TIO;
(b) NTG has been working closely with the ACCC for some time and believed they had made substantial inroads to address these issues and appease the regulator;
(c) The ACCC enquiries related to a small number of dissatisfied customers, something that was "fairly normal for telecommunications companies"; and
(d) The company had resolved most of the issues by highlighting contract termination clauses more adequately in the sales process.
8.4 Summary of the continuing impact on NTG of the ACCC investigation from 25 November 2002 to 12 February 2003
8.4.1 Based on the analysis in Section 3 of Appendix 13, I conclude that:
(i) The Article published on 25 November 2002 dealt primarily with NTG's accounting issues, with only a passing mention of the ACCC investigation. However, further articles in several newspapers during December 2002 made reference to this existence of the ACCC investigation;
(ii) While NTG issued a press release on 29 November 2002 in relation to its claim against the AFR, that announcement did not confirm or deny the existence of an ACCC investigation. Rather, prior to the filing of the ACCC litigation, NTG made no formal public announcements in relation to the ACCC investigation. This appears to have been because it was NTG's "preferred strategy" to "downplay the issue". Statements attributed to NTG personnel in this period included that:
(a) NTG had engaged Gilbert + Tobin for its "dealings with the ACCC"; and
(b) Soc Gen and BankWest "were the group's current financiers";
(iii) Notwithstanding that Mr Hakim had advised the Board on 20 November 2002 that a successful candidate for the position of compliance manager would "commence employment in two weeks", it appears that a job offer was not to be made to the "intended compliance supervisor" until sometime "before the end of January 2003";
(iv) I have seen no direct evidence as to the impact on NTG's customers of the ACCC investigation . Although NTG representatives stated publicly that the "negative publicity" was having an impact on NTG's sales, they told Soc Gen in early February 2003 that "the impact was relatively localised to Sydney" and that it had "lessened in the past month or so"; (emphasis added)
(v) NTG's financiers remained concerned about the possibility of an ACCC investigation. BankWest communicated the suspension of its facility with NTG on 26 November 2002, citing, inter alia , adverse media commentary regarding the "activities of the company". Further, BankWest made it a precondition of the resumption of financing that an "independent review" be undertaken of, inter alia , NTG's "business model" and "compliance issues";
(vi) Analysts reports highlighted the risks to NTG's business of continued access to finance. However, it appears that they were unaware of BankWest's suspension;
(vii) Soc Gen continued to express "unease" about the "adverse media campaign", identifying one of the "three main allegations" as being that "the [ACCC] is investigating aggressive sales practices";
(viii) During this period, NTG continued to inform BankWest and Soc Gen that:
(a) It was "working with the ACCC to finalise any matters on consumer dissatisfaction";
(b) The instances were "isolated";
(c) The ACCC had considered around 10-20 of NTG's clients;
(d) NTG had "very strong processes in place to make sure that customers are not misled"; and that
(e) It was "not unusual for the ACCC to be checking on telcos";
(ix) In this context, BankWest formed the view that the "accounting and TPA issues" had been "adequately addressed already", while Soc Gen concluded that there was no "compelling evidence of irregularities by NTG";
(x) Notwithstanding these views, however, Soc Gen recognised the risks to its security position associated with the assertion that the airtime and equipment contracts were "linked";
(xi) Most significantly, in my opinion it appears that the timing of Soc Gen's decision to suspend financing NTG's receivables on 13 February 2003 was determined by the announcement of the ACCC litigation. I say this because:
(a) By on or about 11 February 2003, Soc Gen had apparently formed the view that it would suspend future financing on 17 February 2003;
(b) On 13 February 2003, Soc Gen was advised of the ACCC proceedings. Less than two hours later, Soc Gen issued its notice of suspension; and
(c) The conditions precedent for renewal of financing were changed between 11 February and 13 February 2003 to include "satisfactory resolution of the ACCC proceedings".
8.5 The ACCC litigation, and its impact on NTG
8.5.1 Based on the analysis in Section 4 of Appendix 13, in my opinion:
(i) The announcement that the ACCC had commenced litigating against NTG received significant coverage in the media, which coverage noted, inter alia , that NTG's share price had fallen significantly on the release of the news;
(ii) NTG did not make its first formal announcement in relation to the ACCC investigation until after the ACCC had commenced litigation;
(iii) This public statement was followed only four days later by a further announcement which advised the market that NTG had determined to undertake a "radical restructure" of its business. Later in 2003, NTG stated that the rationale for this restructure comprised:
(a) Increasing competition within the target market;
(b) Regulatory difficulties with the ASIC and the ACCC;
(c) "Channel management"; and
(d) To allow for full utilisation of NTG's main assets;
(iv) NTG's legal advice at the time indicated that it was likely that the ACCC would succeed in relation to at least some of the allegations that had been raised;
(v) Within two hours of being made aware of the ACCC litigation, Soc Gen notified NTG that it was suspending its finance facility. Moreover, Soc Gen made the successful resolution of the ACCC proceedings a precondition of resumption of funding;
(vi) When company analysts became aware of the commencement of the ACCC litigation, they were of the view that the risks they had previously identified (the impact of the ACCC investigation on sales and access to finance) had come to fruition; and
(vii) The ability of NTG to raise additional capital was directly impacted by the commencement of the ACCC litigation.
8.6 The resolution of the ACCC litigation, and its subsequent impacts on NTG
8.6.1 Based on the analysis in Section 5 of Appendix 13, in my opinion:
(i) NTG's initial comment following the settlement at 23 December 2003 was that "NTG is of the view that the undertakings will not have any material financial affect on its business";
(ii) It became clear to NTG soon after the conclusion of the ACCC litigation that resolving the many complaints lodged by NTG's customers would be a costly and time-consuming exercise. NTG's initial estimates were that it would cost NTG in the vicinity of $1.3 million to settle the unresolved claims;
(iii) NTG did not have $1.3 million available to resolve these claims. As a result, it was required to seek further funds from its shareholders to pay the costs it was incurring;
(iv) NTG recognised that one method it would need to adopt to resolve some of the claims made against it was to allow customers to escape the contracts they had entered into with NTG. This further diminished NTG's asset base;
(v) The impact of the ACCC investigation included the shutting down of NTG's website as a defensive measure against further claims. This was perceived by NTG's Board as having a negative effect on NTG's sales;
(vi) NTG's financiers were increasingly concerned about the solvency of NTG and the increased risks they faced collecting the lease payments; and
(vii) Contrary to its own expectations, NTG continued to receive new complaints well after the anticipated cut-off date for complaints in early calendar 2004. As late as mid 2005 new complaints were still emerging.
8.7 Conclusion
8.7.1 Based on the analysis in Appendix 13 (as summarised in this Section), in my opinion the commencement of the ACCC litigation on 13 February 2003 was the final and most significant cause of NTG's restructure (which was announced only five days later).
8.7.2 Moreover, the result of the litigation (the emergence of several hundred claims against NTG) was something that had been foreshadowed by the ACCC as early as August 2002.
8.7.3 In this context, NTG's deliberate strategy to downplay the significance of the ACCC's investigation both publicly and to its financiers by insisting that the ACCC's concerns were limited to only a few customers and/or had been or were being resolved served only to heighten the impact on NTG's reputation when, rather than seeing an end to the ACCC's investigation NTG was served with proceedings in the Federal Court of Australia.
8.7.4 NTG's decision to restructure its operations by disposing of its retail operations was a direct response to its perceptions of the damage that had already occurred to its reputation in the market as a result of the ACCC investigation and litigation and its recognition that the most effective way to avoid further risk was to disengage from the retail sales process entirely.
8.7.5 The ACCC investigation commenced at least three months before the Publication. It continued after the Publication and resulted in a decision on the part of the ACCC to commence litigation. That litigation was only resolved when NTG agreed to consent orders which included an admission of its liability. in my opinion, the course of the ACCC investigation and subsequent litigation - and the effects of that investigation and litigation on NTG's financial position was largely, if not completely, unaffected by the Publication.
Section 2 of his report contained a summary of his opinions and in relation to the ACCC investigation included the following:
2.2.4 As I summarise in the balance of this Section and consider in detail in Sections 3 to 9 of this report, in my opinion NTG's restructure came about because:
(i) NTG's cash resources were exhausted, principally as a result of the decisions made by NTG's Board and management to use those resources to:
(a) Buy other businesses;
(b) "Internally" fund the purchases of telephony equipment for customers who did not meet external funding credit criteria; and
(c) Pay its shareholders dividends and buy back its shares; and
(ii) Public awareness of the ongoing ACCC investigation of the practices of NTG's sales staff and the resulting litigation commenced by the ACCC on 13 February 2003 made it impossible for NTG to continue selling its products under its own name.
...
2.9 The ACCC investigation and subsequent litigation
2.9.1 In Section 8 of this report (and Appendix 13 as summarised in that Section), I describe the origin and history of the investigation by the ACCC into NTG's selling practices and the impact of that investigation, and the litigation that followed, on NTG's financial position.
2.9.2 Based on the analysis in that Section, in my opinion the commencement of the ACCC litigation on 13 February 2003 was the final and most significant cause of NTG's restructure (which was announced only five days later).
2.9.3 Moreover, the result of the litigation (the emergence of several hundred claims against NTG) was something that had been foreshadowed by the ACCC as early as August 2002.
2.9.4 In this context, NTG's deliberate strategy to downplay the significance of the ACCC's investigation both publicly and to its financiers by insisting that the ACCC's concerns were limited to only a few customers and/or had been or were being resolved served only to heighten the impact on NTG's reputation when, rather than seeing an end to the ACCC's investigation NTG was served with proceedings in the Federal Court of Australia.
2.9.5 NTG's decision to restructure its operations by disposing of its retail operations was a direct response to its perceptions of the damage that had already occurred to its reputation in the market as a result of the ACCC investigation and litigation and its recognition that the most effective way to avoid further risk was to disengage from the retail sales process entirely.
2.9.6 The ACCC investigation commenced at least three months before the Publication. It continued after the Publication and resulted in a decision on the part of the ACCC to commence litigation. That litigation was only resolved when NTG agreed to consent orders which included an admission of its liability. in my opinion, the course of the ACCC investigation and subsequent litigation - and the effects of that investigation and litigation on NTG's financial position was largely, if not completely, unaffected by the Publication.
In addition, Appendix 13 sets out in much greater detail the information upon which Mr Ross relied in relation to the ACCC investigation, and contains some conclusions he draws from the material, most or all of which conclusions are reproduced in the report itself.
The objections of Mr McClintock SC who appears for the Plaintiff can be summarised as follows:
(a) The Defendant is not entitled to rely on other newspaper reports to show that the Plaintiff's reputation was damaged quite apart from the damage caused by the report sued upon. He referred to Dingle v Associated Newspapers [1964] AC 371;
(b) Mr Ross demonstrates no expertise in relation to the effect on a company of an investigation by the ACCC;
(c) Mr Ross is not entitled to give evidence which amounts to assigning a reason for taking particular steps whether those steps were taken by the Plaintiff or by the financiers. In that regard, Mr McClintock says that it was never put to Mr Curtin (a Director of the Plaintiff at the relevant time) nor to Mr Clarke from SocGen that the ACCC enquiry motivated their actions.
Mr Blackburn SC for the Defendant points to Mr Ross's qualifications, experience and expertise and, in particular, that he is a valuer. He says that that must entitle him to opine on the effect of an ACCC investigation on any need for a company to restructure. Mr Blackburn says that particularly because Mr Ross is a valuer, his expertise must extend not only to internal but all external matters that go to assess the value of a company, and that that would include reputation and external factors weighing on matters which may affect the good will or the trading prospects of the company. In those circumstances, Mr Blackburn says, it would be ridiculous to ignore the ACCC investigation, and Mr Ross is entitled to express opinions about its impact on the Company's decision to restructure. He points to all of the material which Mr Ross has reviewed and says that that material enabled Mr Ross to say that the cause of the restructure was not the publication.
Mr Blackburn draws attention to what was said by Einstein J in Idoport Pty Ltd v National Australia Bank Ltd (17) [2001] NSWSC 123 at [153]:
Identification of functionality may take place at more than one level. Comparisons as to functionality may take place at more than one level. The Court must exercise special care to permit appropriately qualified experts having shown the requisite specialised knowledge based on training, study and experience, to express their opinions. The Court must take special care to permit opinions for example as to functionality, to come forward from different streams of persons each of whom may have been able to establish by a different route that the section 79 criteria have been satisfied. The requisite specialised knowledge may have been acquired from different types of training, study and experience. Hence for example, the question of whether or not a person has satisfied section 79 criteria in showing an entitlement to express opinions as to functionality or as to functionality comparisons, may be answered in the affirmative in respect of A who has demonstrated specialised knowledge of a very technical nature (as for example in relation to the writing of technical specifications and functional specifications and calculation of effort estimates and use of source lines of code and the like) with far less experience of a conceptual nature. The question may also be answered in the affirmative in respect of B who has demonstrated specialised knowledge of functionality at far more of a conceptual level but with less technical experience. There are some cases where too narrow an approach to the route to or categorisation of specialised knowledge or to classification of the opinions capable of being expressed as based whether wholly or substantially, on that specialised knowledge, may lead to injustice because the Court will have pre-empted the entitlement of the parties through appropriately qualified experts to have the issue litigated and only determined in the final judgment following the receipt of the respective opinions of experts. This is such a case.
Decision
In Appendix 13 Mr Ross details a number of other newspaper reports which deal with the ACCC investigation into the Plaintiff. Those are the reports which Mr McClintock says cannot be relied upon because they offend the principle referred to in Dingle that a defendant cannot mitigate damages by tendering evidence of other defamatory publications concerning the Plaintiff - see Carson v John Fairfax and Sons Ltd (1993) 178 CLR 34 at 99. However, the purpose of the reference to the other newspaper reports is not for showing anything about the Plaintiff's reputation nor is it there for the purposes of mitigating the Defendant's damages in that way. The evidence is put forward as part of the case the Defendant seeks to make to answer the Plaintiff's claim that the offending newspaper article caused the Plaintiff's loss, identified as the special damages claimed, and for making the Defendant's case that other factors were the real cause of the Plaintiff's restructure. The articles do not reflect on the reputation of the Plaintiff as such. They do not go to anything associated with the general damages that the Plaintiff might recover for injury to its reputation. They go only to the issue of causation in relation to the Plaintiff's special damages.
Nor can the fact, in itself, that Mr Blackburn did not ask questions of Mr Curtin & Mr Clarke about the motivation for their actions mean that the evidence is inadmissible. That is only a Browne v Dunn point which may make the evidence of little weight or even inadmissible when all the evidence has been given, as a matter of unfairness.
On the other hand, there seems to me to be a number of reasons why the evidence should be rejected. First, Mr Ross demonstrates no expertise in being able to provide an opinion on the effect of an investigation by the ACCC in relation to a company. Neither his CV nor the summary of his experience in paras 1.3.3 and 1.3.4 of the report shows that he has ever had to consider what the effect of such an investigation might be on a company whether as something going to a company's value or otherwise.
In his CV where he provides examples of previous assignments the following appears:
Regulatory disputes
Undertaking reviews of the methodologies used in the pricing of Broadband and other telephony services by a telecommunications provider in disputes with the ACCC, including:
...
Assisting with the preparation of an expert's report in respect of an ADSL pricing dispute between a telephony services provider and the ACCC
This is the only reference to the ACCC in the CV, but it seems to be some considerable distance from what Mr Ross purports to do in the present report. What he purports to give evidence about is the effect or impact of the ACCC investigation on the Plaintiff particularly in terms of its decision to restructure. He does not do this, for example, by purporting to value the Company before and after the ACCC investigation to show some diminution in its value. But even if he had done that it is extremely doubtful that he could take the next step and express an opinion that because of that change in value the Company made a decision to restructure based on the ACCC investigation. Nor do I think that anything that was said by Einstein J in Idoport , even if one does not take too narrow an approach to the categorisation of specialised knowledge, provides assistance to the Defendant in relation to Mr Ross's expertise.
A reading of Appendix 13 and the material contained in sections 8.3 - 8.7 of the report (which, as I have said, has largely been reproduced from Appendix 13) does not show the bringing to bear of any expertise that Mr Ross might have on the material he discusses. He sets out extracts and summaries from a great many documents and material, and then purports to draw inferences from those documents and material to come to a view not only about why the Plaintiff acted in a particular way but also why the financiers acted in a particular way. Those are matters ultimately that the Court has to decide.
Nor is Mr Ross assisted by s 80 of the Evidence Act 1995 that enables an opinion to be given about a fact in issue or an ultimate issue, because in coming to the conclusions he does Mr Ross is not reaching those conclusions as a result of his expertise. Rather he is drawing inferences and reaching conclusions in the way that any other informed person might do.
In that way, the detailing of the material, the inferences that are drawn, and the conclusions that are reached by Mr Ross amount only to submission and argument in a way that could, and probably will, be made by the lawyers acting for the Defendant.
It is worth quoting what Lord President Cooper said in Davie v Lord Provost, Magistrates and Councillors of the City of Edinburgh [1953] SC 34 at 39-40, reproduced in Makita at [59]:
Expert witnesses, however skilled or eminent, can give no more than evidence. They cannot usurp the functions of the jury or Judge sitting as a jury, any more than a technical assessor can substitute his advice for the judgment of the Court ... Their duty is to furnish the Judge or jury with the necessary scientific criteria for testing the accuracy of their conclusions, so as to enable the Judge or jury to form their own independent judgment by the application of these criteria to the facts proved in evidence. The scientific opinion evidence, if intelligible, convincing and tested, becomes a factor (and often an important factor) for consideration along with the whole other evidence in the case, but the decision is for the Judge or jury. In particular the bare ipse dixit of a scientist, however eminent, upon the issue in controversy, will normally carry little weight, for it cannot be tested by cross-examination nor independently appraised, and the parties have invoked the decision of a judicial tribunal and not an oracular pronouncement by an expert."
I also note the distinction made by Brownie AJ in Linfox Transport (Aust) Pty Ltd v Arthur Yates & Co Ltd; Dynamic Lifter Pty Ltd v Linfox Transport (Aust) Pty Ltd [2004] NSWSC 943 at [903] where he contrasts a report being the product of investigative work and a report which contains the opinion of an expert witness. Whilst I accept that there is a fine line between what an expert undertakes and what might be described as investigative work, a reading of Mr Ross's approach particularly in Appendix 13 places the matter clearly on the investigative side of the line without any resort to his expertise.
Some examples of this can be found in section 8.4 of the report. Many of the conclusions contained in para 8.4.1 are simply the reproduction of portions of letters, memos or emails that Mr Ross has set out in Appendix 13. What is contained in sub-para (ix) is an extract of an email from BankWest of 20 December 2002 set out in para 3.5.19 of the Appendix. What is contained in sub-para (v) is merely a summary of BankWest's letter of 26 November 2002.
A far better example is to be found in sub-para (xi) of para 8.4.1 where Mr Ross offers as his opinion that the timing of SocGen's decision to suspend financing was determined by the announcement of the ACCC litigation. The statement is largely repeated in para 9.4.4. Whilst, for the reasons that Mr Ross offers for that opinion, that is an available inference, an examination of the material leading to SocGen's decision might lead to other inferences. But the inference that Mr Ross draws is not an inference that is based on expertise he has as an accountant or even a forensic accountant (if there is such a sub-category of expertise). At the very least the sort of conclusion that appears in this sub-paragraph would need to come from a person who had some expertise as a banker or a financier.
But the inference is ultimately a decision for the Court. Mr Ross's conclusions involve mere speculation based on the timing of events. That does not seem to derive from any skill or expertise he has.
In para 8.5.1(vii) Mr Ross gives his opinion that the ability of the Plaintiff to raise additional capital was directly impacted by the commencement of the ACCC litigation. It is not clear what the basis of this conclusion is. There are some references earlier on to analysts' reports, and even if they are admissible (which for reasons I detail later I do not think they are) those reports do not seem to provide any basis for a conclusion that there was a difficulty for the Plaintiff to raise additional capital. Indeed, para 8.4.1(vi) suggests that the real focus of the analysts' reports concerned the ability of the Plaintiff to access finance from people in the position of BankWest and SocGen. Moreover, Mr Ross said in a number of places in both Appendix 13 and the report, such as para 8.4.1(iv), that he has seen no direct evidence as to the impact on the Plaintiff's customers of the ACCC investigation. That might be an indication that he has seen no direct evidence of the impact that investigation on would-be shareholders but in fact he says nothing about such persons.
In para 8.7.1 (reproduced in para 2.9.2) he gives his opinion that the commencement of the ACCC litigation on 13 February 2003 was the final and most significant cause of the Plaintiff's restructure which was announced only five days later. I cannot discern from what he describes as his analysis in Appendix 13 his reasons for this conclusion. He does not set out the reasons, and the distinct impression one gains is (as with his conclusions about SocGen's decision contained in para 8.4.1(xi)) that his conclusion is based on an inference from the timing of events. If that is right it cannot be said to be a conclusion based on any expertise that Mr Ross has. If the timing of events is not the explanation, there is no other explanation offered for the conclusion he reaches in this paragraph. That offends the principles set out in Makita .
In para 8.7.4 (reproduced in para 2.9.5) Mr Ross concludes that the Plaintiff's decision to restructure its operations was a direct response to its perceptions of the damage that had already occurred to its reputation in the market as a result of the ACCC investigation and litigation. The reasons for this conclusion are not set out nor identified apart from a reference back to what Mr Ross describes as his analysis in Appendix 13. That so-called analysis consists of extracting and summarising material from a large number of documents followed by inferences that Mr Ross draws from the material which he puts forward as conclusions. It is not apparent from reading Appendix 13 how Mr Ross's expertise is brought to bear on that process.
Nor does the material set out in Appendix 13 provide a factual basis for this conclusion. The number of documents referred to that emanate from the Plaintiff up to June 2003 is minimal, and I can see no evidence in them that the Plaintiff had a perception of damage that had occurred to its reputation in the market as a result of the ACCC investigation and litigation. Mr Ross does not explain what particular documents he relies upon to reach that conclusion. His opinion does not show a "demonstration or examination of the scientific or other intellectual basis of the conclusion reached". In those circumstances it is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge - Makita at [85].
The conclusion in para 8.7.5 (reproduced in para 2.9.6) suffers from the same vice that I have discussed in para [39] above. The conclusion that the Plaintiff's financial position was largely if not completely unaffected by the publication seems to be based only upon the fact that the ACCC investigation commenced prior to the publication and continued after it culminating in the litigation. No other reasoning is provided to demonstrate that the financial position was unaffected by the publication.
Finally, the conclusion in para 2.2.4(ii) appears to have no factual basis nor to be based on any process of reasoning that is disclosed in the report. It is not easy to see how Mr Ross is able to give evidence about the public awareness of the ACCC investigation when he says on a number of occasions, but particularly in para 8.4.1(iv), that he has seen no direct evidence as to the impact on the Plaintiff's customers of the ACCC investigation. He does not proceed to identify indirect evidence as to the impact on the Plaintiff's customers, and he does not otherwise show what public awareness there was of the ACCC investigation. The conclusion in this paragraph is so crucial to the case that without an adequate factual basis and proper reasoning based on Mr Ross's expertise it cannot be permitted to stand.
The result is that para 2.2.4(ii), section 2.9, section 8, paras 9.4.4 and 10.1.3(iv) and Appendix 13 should be rejected. In addition, although para 10.1.4 does not expressly refer to the ACCC investigation it is clear that that is the basis for the conclusions stated in that paragraph because of the references to Appendix 13. Para 10.1.4 should also be rejected.
Para 10.1.5 states:
Taking into account my analysis in Sections 3 to 9 of this report, in my opinion, NTG's financial position would not have been materially different had the Publication not occurred.
Because I have rejected the whole of section 8 that conclusion is no longer sustainable. That paragraph should be rejected but Mr Ross should be given leave if he wishes to modify the conclusion notwithstanding the rejection of section 8.
(3) ASIC investigation
Section 9 of Mr Ross's report deals with what he describes as other external influences on the Plaintiff which he says could have reduced the likelihood that the Plaintiff's business model could be maintained over the medium term. One of these matters was what he has called the ASIC investigation although the Plaintiff disputes that it was an investigation.
The matter seems to have commenced with a letter from the Chairman of ASIC dated 16 July 2002 advising that ASIC intended to concentrate a review on certain aspects of the audited annual accounts of 30 June 2002. The issue as it ultimately developed concerns what is called revenue recognition. The issue concerned the accounting practice of bringing to account revenue from the sale of equipment following the sale of the underlying assets or lease receivables to an external financier. The Plaintiff called to account revenue from airtime sales as calls were made by the Plaintiff's customer. The issue raised by ASIC was whether the two elements of the package of equipment and airtime should be considered as one transaction in determining the Plaintiff's revenue recognition accounting policy.
Ultimately, it appears that the Plaintiff changed its accounting policy. Mr Ross asserts that that meant a revision needed to be made to the accounts to 31 December 2002. He says that if that accounting policy had been followed for the June 2002 and December 2002 accounts the profit previously said to have been made by the Plaintiff would have been reduced. Mr Ross says that the result for the June 2002 figures would have been that the Plaintiff would have recorded a loss rather than a profit.
Mr McClintock points in particular to a paragraph in Mr Ross's second report of 15 September 2010 where this appears:
2.3.14 (d) The formal notification on 3 December 2002 by ASIC that it had commenced an investigation into NTG's 2002 financial statements which, by 14 December 2002, had become public knowledge via an article published in the Australian. I do not know whether publicity in relation to this investigation impacted on the demand for NTG's products.
Mr McClintock says that Mr Ross, acknowledging his lack of knowledge about the matter, purports, particularly in his first report, to draw conclusions about the impact the ASIC investigation had. Mr McClintock says that the change in accounting method did not affect either the Plaintiff's cash or profitability.
Mr Ross's conclusion in relation to the ASIC matter is to be found at para 9.6.1 of the report where he says:
9.6.1. Set out in this Section of my report are a number of additional external influences on NTG which, when coupled with the events and decisions discussed in Sections 3 to 8, I considered could have reduced the likelihood that NTG's business model could be maintained over the medium term. They included:
(i) The ASIC investigation into NTG's accounting policies which, after almost 12 months, resulted in a complete restatement of NTG's financial position;
Mr Ross then lists the other additional external factors that he says could have affected the business model.
Mr McClintock says it is not within Mr Ross's expertise to say that the enquiries by ASIC were such that they could have made the business model unviable.
Mr Blackburn submits that the change in accounting practice, which carried with it, at least on Mr Ross's assertion, the fact that the stated profit of the Plaintiff at the earlier time had to be revised so that a loss was actually experienced, must have had an effect on the perpetuation of the business model pursuant to which the Plaintiff was operating.
Decision
In the first instance, Mr Ross clearly has the expertise to discuss accounting methods and what the adoption of those methods might have meant for a particular business model which a company was pursuing. What he says he does not know is whether publicity associated with the ASIC enquiries had any impact on the demand for the Plaintiff's products.
Mr Ross is not purporting to provide opinion evidence on the issue of publicity and the effect it might have had on potential customers. He has given opinion evidence on whether, when a different accounting policy is adopted, that results in a change to disclosed profit levels of a company which might have been a factor that influenced a change in the direction that the company would take. He does not assert at any point that the ASIC enquiries with the change in approach did result or must have resulted in a change of the Plaintiff's approach to its business model. He merely opines that it could have been a factor that was considered by the Plaintiff and influenced it in the course it did take. That seems to me to be well within his expertise.
There appears to be a dispute about whether the Plaintiff in fact revised its earlier accounts after the conclusion of the ASIC review. If the factual basis for Mr Ross's conclusions about the effect of the changed accounting practice are not ultimately established his conclusions will not be made out. The evidence he gives is within his expertise. Given the existence of the factual dispute concerning the restatement of accounts, it would not be appropriate at this stage to reject Mr Ross's evidence in this regard. The challenge to those portions of his report fails.
(4) Competition in the industry
The material objected to is contained in section 9 of the report, the section which deals with other external influences on NTG. Section 9.5, headed "Change in the competitive environment" contains the following:
9.5.1 NTG's formation and listing on the ASX occurred in an environment where NTG had a number of significant market advantages. These advantages, which were articulated clearly by analysts, included:
(i) A focus on an under-served and relatively unsophisticated market segment - the SME sector;
(ii) An ability to package both equipment and airtime as one product; and
(iii) An ability to access a variety of airtime carriers and, thereby, derive cost savings in purchasing airtime which were not available to competitors (like Commander) who were tied to one airtime carrier.
9.5.2 However, the competitive environment in which NTG operated from October 2000 to December 2002 was not static. In this section of my report I record some of the reported changes in that environment and the impacts they had on NTG's otherwise unique market position.
Changes in the market as a whole
9.5.3 The Managing Director's Report included in the papers for the Board meeting on 4 April 2001, noted that:
It seems that the market has tightened up and the expected growth that we are expecting is much harder than we actually thought. I think Mr G Tawaf's intention of growing Brisbane, Adelaide, Perth, is much quicker than planned, which should compensate for our expected growth in other states.
9.5.4 I have assumed that this means that the actual growth was lower than expected in NTG's (then) current markets and so to compensate, NTG rolled out its business to the other capital cities sooner than was originally planned.
9.5.5 The minutes of the Board meeting held on 18 September 2002 noted that Mr Tawaf advised that the market was sluggish in both Sydney and Melbourne.
9.5.6 The Minutes of Meeting of Directors held on 11 December 2002 noted that:
The decline in EBITDA had resulted from reduced revenue and increased costs. The increase in costs was largely a consequence of the time required to integrate acquisitions. As a result costs were approximately $0.5 million per month higher than expected. Given the current reduced operating levels, costs were more than $1 million higher than appropriate for the current level of business.
9.5.7 This reference to "reduced operating levels" may be a reference to general market conditions.
9.5.8 NTG's Half Year Results dated 14 March 2003 noted that:
Cash out flows from operating activities for the half year ended 31 December 2002 were $0.3 million (31 December 2001, cash inflow $2.9 million). The deterioration in cash flows from operating activities has occurred due to the reduction in the market demand in the last quarter of the half year, greater operating expenses with staff levels geared to the higher revenue targets and the decision of the company to internally finance some sales.
9.5.9 The KPMG report dated 22 March 2004 prepared for BankWest notes that:
NTG's key market, the fixed line voice sector, is in decline. The underlying revenue growth in the other sectors in which NTG competes ranges from 3% to 7% pa.
9.5.10 The report goes on to summarise various key points to note on the competitive profile of the telecom services sector including:
Although the market share of providers - ex Telstra and Optus - has increased in recent years, this increase has, in general, been at the expense of margins and cashflow and includes significant price decline, especially in fixed line telephony services. Furthermore, smaller service providers have yet to demonstrate that they can compete profitably on a sustainable basis in a competitive market where scale is important. Also, growth in data services markets for smaller providers is yet to compensate for price decline in voice revenues. ...
The market for telco services is cyclical and very competitive with pricing / margin pressure evident. Revenues are also seasonal with cashflow pressures occurring January to March / April of each year.
9.5.11 In my opinion, the apparent negative changes in the market during the period prior to the Publication:
(i) Did have a negative impact upon NTG's business in the period prior to the Publication; and
(ii) Would have had a negative impact upon NTG's business in the period following the Publication (whether or not the Publication occurred).
Replication of model
9.5.12 One of NTG's perceived market advantages was its ability to offer a bundled package of products to its potential customers.
9.5.13 However, an SSB analyst's report on Commander dated 23 February 2001 noted that:
Commander is currently trialling a bundled product with Telstra in response to a successful competitor product. Bundling is positive for Commander in that it receives the system income up front, and also earns a commission on trailing carriage use.
9.5.14 I have seen no other information regarding trials of this bundled product. The next references I have seen to competitors replicating NTG's bundled product are in early 2003.
9.5.15 The Managing Director's Report included in the papers for the NTG Board meeting on 4 April 2001, noted that:
Also we are finding that other companies that are in our sphere have started to realise that they must change their business strategy and we are finding that some are trying to follow our methods.
At this stage they are still very small and in their infant stage but if we allow them to pick up momentum they will affect our business within 6-9 months time. I will be having discussions with some of the better players and planning a strategy on how to prevent this occurring.
9.5.16 SSB's report on Commander dated 11 November 2002 titled "Telstra relationship - dancing with the gorilla" stated:
Commander's relationship with Telstra is currently being re-negotiated, with a range of possible outcomes, threats, and opportunities. December is a critical time in that either party can signal its intention to leave from then on.
The parties are seeking mutually beneficial outcomes which would allow both parties to compete more effectively. Assessing the balance of power in this symbiotic relationship is difficult as is predicting the outcome.
In the event that the relationship is disbanded, we see considerable short term risk and disruption for Commander, offset by medium term strategic benefits.
In the meantime, due to slower than expected sales in the first quarter, we have downgraded our EPS forecasts by 10-12%.
We have downgraded our EPS forecasts by 10-12% for FY03e and FY04e following a decline in systems volumes (5-7%) in the first quarter due to the lack of a bundled offering in the face of intense competition. Commander's inability to access wholesale rates and consistently market a bundled product is a disadvantage in an increasingly competitive market place.
The company also experienced a disruption to the sales effort following a restructure of the division in May/June, resulting in inefficiencies during Q1. Inertia rental income continues to decline in line with management expectations, with cost savings helping to offset this decline in high margin income.
Until 1998, Commander was a division of Telstra, and was the monopoly supplier of phone systems to the SME market prior to deregulation in the late 1980s. In a decision to move away from selling equipment, Telstra sold 70% of its holding to Plestel, who then floated the business in December 2000, with Telstra retaining a 16% holding. RMB also had a 20.6% holding.
The current relationship (outlined below) exists until July 2003, and either party can move away with six months notice. Hence the importance of negotiations over the coming two months.
In more ways than one, Commander and Telstra remain joined at the hip. Commander is a key channel for a highly profitable segment of Telstra's target market, and Commander gains strong lead flow and billing services through Telstra.
There are a number of tenets to the relationship, including:
Lead flow - Telstra refers enquiries by SME's on phone systems to Commander in most circumstances, and Telstra sales staff are rewarded by Commander for any leads which are successfully converted. It is estimated that over 50% of Commander new product sales come via a lead from Telstra;
Billing - Telstra currently bills over 90% of Commander's voice customers (i.e. the Commander rental fee appears as a line on the Telstra telephone bill);
Carriage access - Commander is currently only allowed to sell/resell carriage from Telstra only at retail rates, which is a competitive disadvantage against more aggressive players with access to wholesale rates;
Commission on resale - Commander receives an upfront fee from Telstra for carriage sales as a FixedNet dealer, and a trailing commission over the life of a contract;
Factoring - Telstra currently factors Commander's bills at a favourable rate, which results in efficiencies and zero debtor risk to Commander;
Non-compete - Telstra will not compete with Commander for at least two years following listing (i.e. expires December 2002);
Forward looking information sharing - Telstra and Commander meet on a quarterly basis to discuss future product development plans and other strategic initiatives; and
Escrow - Telstra's shareholding is in escrow until December 2002.
While Commander and Telstra hold the largest market share and strongest brand in their respective markets, both are faced with intense competition in the space. Commander has lost market share to companies such as NTG which can access wholesale rates and bundle them with the phone system, creating a more attractive offering. However, it seems the most effective means of combating this competitive threat is to offer a similar bundle using wholesale rates, which would negatively impact on Telstra's largely retail sales to the SME sector.
The balance of bargaining power in negotiations is difficult to discern, although it is clear that both companies bring much to the party. Telstra generates an estimated $1.7bn of revenue in the SME market place, and Commander plays a crucial role in access to the market, through direct FixedNet sales and indirect leads via equipment sales. On the flipside, Telstra provides lead flow, billing, factoring and other shared services to Commander.
Potential outcomes from a renegotiation with Telstra (or a combination thereof):
Status quo - Commander will potentially remain uncompetitive with other bundled offerings, risk further market share loss, and ultimately this market share decline may also negatively impact Telstra's earnings from the sector;
Remain with Telstra on more favourable terms such as higher commissions on carriage resale and/or access to wholesale carriage for the purposes of bundling. Access to wholesale carriage for bundling would dramatically improve Commander's ability to compete, which would also offset the downstream effect on Telstra of market share loss. This would, however, involve a negative hit to Telstra in receiving lower average carriage rates from it's SME customer base;
Go it alone - Commander and Telstra may part ways altogether, which would free Commander up to access wholesale rates from an alternative telco, and would also allow Telstra to compete directly with Commander.
9.5.17 The effect on NTG of each of these three possible strategies of Commander would have been, in my opinion:
(i) Status quo - little change to the competition to NTG and NTG would retain any pricing advantages of its bundled offering;
(ii) Remain with Telstra on more favourable terms - increased competitive threat to NTG as Commander's prices would reduce; or
(iii) Go it alone - significantly increased competitive threat to NTG from Commander (the market leader) due to Commander being able to access wholesale rates (one of NTG's advantages) and a new competitive threat from Telstra.
9.5.18 Commander undertook the "go it alone" strategy by purchasing RSL COM which gave Commander access to airtime from various carriers. In my opinion, this meant that, irrespective of whether the Publication occurred, NTG would have been facing a significantly different competitive landscape in 2003 than it had in 2002.
9.5.19 An ABN Amro Morgans broker report 24 March 2003 noted that:
Commander' acquisition of RSL COM is critically important for the company' strategic development. With a bundled product, network billing system, enlarged customer base and the ability to access airtime from various carriers, the company is making a significant step towards life as an integrated telecommunications services provider.
9.5.20 The report to NTG Directors dated May 2003 under the headings "Report of the Chief Executive Officer" and "Market Review" notes:
A review of the market conditions faced by NTG and its dealers has demonstrated a softening of conditions. In particular market sentiment seems to have been effected by the Iraqi conflict, and the general economic outlook. Suppliers to NTG759 agree with this sentiment, with their own sales being at 50% of budget.
9.5.21 And under the further heading "competitor offerings" notes:
Additional competition is expected within the market place with Telstra and Commander unveiling their new offerings.
Telstra has launched a value proposition around ISDN, under Domovo, which sees telephony rebates offered to customers around an ISDN service. This offer is priced at around $2,000 with the end user tied to Telstra for a three-year period.
Commander, through its acquisition of RSL com, will be offering a "Synergy" type product to the market from 1st of July.
9.5.22 The minutes of meeting of Directors held on 21 May 2003 noted that:
The Managing Director advised that Commander was planning to launch a product similar to that of NTG [Synergy] on 1 July 2003.
9.5.23 A document internally generated by NTG titled "Positioning NTG for Sustainable Growth" dated 24 June 2003, under the heading "Competition" notes:
One of the main obstacles facing NTG is the fact that its main competitors are embracing the 'synergy' offering, meaning that NTG's share of the market will be further eroded. In particular the acquisition of RSL by Commander, the Optus indirect channel offering a 'Synergy' type product and Telstra's slated release of a like offering will see NTG's market share and margin further eroded. The accompanying table shows the go to market status for these competitors:
(i) Commander/RSL 1 July 2003;
(ii) Optus Engaging market;
(iii) Telstra 1 August 2003.
9.5.24 Commander's 2003 annual report dated 11 September 2003 noted that:
The acquisition of the RSL COM group provided the essential element of a strategy which has transformed Commander from a systems provider into a company that has the tools and expertise to provide a complete communications solution in voice, data, internet and telecommunications services. I am pleased to report that the integration is on track. Sales of the company's new bundled products and services commenced on 1 July 2003 and the transition of Commander customers to RSL COM's robust billing and customer management platform has progressed smoothly.
Before the acquisition RSL COM was Australia's largest privately owned network provider, and was chosen by Commander because of its size, profitability, complementary customer base and reach of the national telephony and data network. Our ability to provide a bundled product will contribute significantly to the growth of our business from the second half of the financial year and beyond.
The acquisition also transformed our relationship with Telstra: Commander and Telstra ended their retail relationship at the end of June 2003 and from July 2003 entered into a new wholesale agreement which sees us, through RSL COM, become one of Telstra's wholesale's largest customers.
The acquisition is a natural progression in the growth profile and maturing of our company and has given Commander a new and exciting business model. The Commander network and wholesale supply agreements provide an environment which gives us the ability to offer bundled products on competitive terms throughout Australia - essential for a fast-moving customer-focused organisation such as ours.
Para 9.6.1 (set out in part in para [54] above) then contained this:
(v) A significant change in the competitive environment in which NTG operated meant that its competitors (and, in particular, the dominant industry player, Commander) replicated the otherwise unique aspects of NTG's business model, depriving NTG of any competitive advantage in its market.
Similarly, paras 2.10.2(iii) and 2.12.2(iii) contain conclusions derived from this other material.
The Plaintiff objects to this material on 2 grounds. First, it says Mr Ross has no expertise to enable him to discuss competition within the telecommunication industry and its effects on the Plaintiff. Secondly, the Plaintiff says that there is a reliance on material which in itself is inadmissible, that being the material set out in para 9.5 other than material contained in the Plaintiff's records. The objectionable material may be described as reports of brokers and analysts about he market.
Mr Blackburn submits that the material is relevant to an issue about which there cannot be much doubt. He points to the affidavit of Mr Tawaf sworn 12 April 2011 where Mr Tawaf says at para 74, "Since 2002 a number of companies have sought to emulate the business model of NTG, including large telecommunication providers like Telecom and Optus". Mr Blackburn further submits that the documents referred to are plainly business records and are admissible despite the hearsay representations in them. He says that the documents are admissible because an expert opinion can be formed in reliance on all sorts of matters including other statements and documents
Mr Blackburn pointed to what is said in Odgers, Uniform Evidence Law (2010) Thompson Reuters, 9 th ed, at para 1.3.4330:
Where some basis of the opinion is hearsay in form, that is, evidence of out-of-court representations of fact, careful analysis is required. Such evidence is not caught by the hearsay rule (s 59) because it is not adduced to prove the existence of the facts asserted by the representations - it is relevant and admissible to explain the assumptions on which the opinion is based.
Mr Blackburn handed up a copy of the documents referred to in this part of Mr Ross's report. He ultimately submitted that only 2 of these documents could be regarded as business records. The first was a document prepared by JP Morgan Securities on 13 December 2002. The document was described as "morning meeting notes" and dealt with the Plaintiff. He submitted that it was a business record because it appeared on its face to be the notes of a meeting held within the offices of that company rather than a document produced for the purposes of dissemination to the market or otherwise. The other document was one prepared by someone at Bell Potter Securities on 31 July 2002 which was headed "For internal distribution only".
In my view, the whole of the evidence in section 9.5 should be excluded. I do not consider that Mr Ross is proved to have the expertise to be able to provide an opinion on competition within the telecommunications industry. True it is that he discloses forensic accounting experience in relation to telephony companies, and in one case he was engaged to value a mobile phone business that was being sold. None of those matters self-evidently deals with competition within the industry for the way products were marketed.
Moreover, the opinion expressed by Mr Ross appears only to be a conclusion based on a reading of a number of documents some of which would not be admissible as evidence in these proceedings. Those documents consist of reports from analysts and brokers that comment about the Plaintiff.
But for the two documents to which I have made specific reference I do not consider that these reports are admissible as business records. The documents are not shown to be part of the business records of the Plaintiff. Rather, they are said to be the business records of the organisations that prepared the reports.
In Roach v Page (No 15) [2003] NSWSC 939 Sperling J said:
[5] The records of a business are the documents (or other means of holding information) by which activities of the business are recorded. Business activities so recorded will typically include business operations so recorded, internal communications, and communications between the business and third parties.
[6] On the other hand, where it is a function of a business to publish books, newspapers, magazines, journals (including specialised professional, trade or industry journals), such publications are not records of the business. They are the product of the business, not a record of its business activities. Similarly, publications kept by a business such as journals or manuals (say, for reference purposes) are not records of the business.
...
[8] The approach may be tested in a commonsense way. It cannot have been intended that newspapers, magazines and journals (publication of any kind produced and / or received in the course of a business undertaking) would be evidence of whatever was stated in them.
Similarly, in Roach v Page (No 27) [2003] NSWSC 1046 Sperling J said:
[9] So far as is presently relevant, it is the recording of business activities in the course of carrying on the business which is critical. The publication of a book by a business providing a history of the business may record details of the business carried on but it is not a "record of business" within the meaning of s69. Similarly, a flyer or a media advertisement or a website publication, extolling the virtues of the business in the way such publications do, is not a record of a business merely because it purportedly records activities of the business.
[10] It is necessary to place such a restrictive construction on s69 because it cannot have been intended that publications of this kind would qualify, any more than it would have been intended that - in the ordinary course - books, magazines or newspapers published by the business would be covered by that section.
[11] The thinking behind the section is clear enough. Things recorded or communicated in the course of the business and constituting or concerning business activities are likely to be correct. There is good reason for the courts to afford to such records the same kind of reliability as those engaged in business operations customarily do. The same is not true of publications made for wider dissemination, for entertainment, for advertising or for public relations purposes. Such publications are justifiably received with healthy scepticism.
That view was followed by Collier J in Forbes Engineering (Asia) Pte Limited v Forbes (No 4) [2009] FCA 675 at [101].
Moreover, it is clear from the description of some of the reports (those in paras 9.5.9 and 9.5.24) that they post-date relevant events to such an extent as not to be relevant material in any event.
Even if I am wrong in determining that the material is inadmissible the nature of the material is such that I would apply s 135 of the Evidence Act to exclude the evidence because its probative value is substantially outweighed by the unfair prejudice to the Plaintiff in not being able to test the material particularly when all that is known of it is that it consists of reports prepared by unnamed persons in various organisations who form a view about financial and economic matters at a given point in time. Whilst I accept that the lack of opportunity to test by cross-examination the material is not automatically fatal to the admissibility of a business record ( Guest v Commissioner of Taxation [2007] FCA 193 at [25]; Forbes at [104]), I consider there would be a sufficient unfair prejudice in the present case to exclude the material.
Section 9.5, paras 2.10.2(iii) and 2.12.2(iii) (which largely replicate the material in section 9.5), para 9.6.1 (v) and para 9.1.1(v) (which contains similar material) should be rejected.
Conclusion
The following portions of the report of Mr Ross of 5 May 2008 are rejected - para 2.2.4(ii), section 2.9, para 2.10.2(iii), para 2.12.2(iii), section 8, para 9.1.1(v), para 9.4.4, section 9.5, para 9.6.1(v), para 10.1.3(iv), para 10.1.4, para 10.1.5 and Appendix 13 to the report.
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Decision last updated: 20 May 2011
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