Neville's Bus Service Pty Ltd v Pitcher Partners Consulting Pty Ltd
[2018] FCA 2098
•21 December 2018
FEDERAL COURT OF AUSTRALIA
Neville’s Bus Service Pty Ltd v Pitcher Partners Consulting Pty Ltd [2018] FCA 2098
File number(s): NSD 830 of 2016 Judge(s): O'CALLAGHAN J Date of judgment: 21 December 2018 Catchwords: TORTS – applicant brought proceedings against three respondents, being two different Pitcher Partner entities and a former partner and director of each – allegations of deceit and negligence – where respondents engaged to provide services to the applicant to assist it prepare its tender bid for Transport for New South Wales (TfNSW) for provision of bus services – where costs calculated by the respondents contained an amortisation error which affected the tender bid – where applicant won the tender and entered into contract and novated leases based on erroneous figures – where result was that the contract with TfNSW was not as profitable as anticipated and the applicant was bound by novated lease obligations – where applicant alleges that respondents discovered the error and fraudulently concealed it – finding of fraudulent concealment – damages awarded in deceit
AGENCY – whether second respondent was an agent of the first and therefore liable – finding of agency relationship
CONSUMER LAW – where same circumstances gave rise to allegations of misleading and deceptive conduct in breach of the Australian Consumer Law
CONTRACTS – where same circumstances gave rise to allegations of breach of contract and claims for lost opportunities
Legislation: Competition and Consumer Act 2010 (Cth), Sch 2
Passenger Transport Amendment (Bus Reform) Act2004 (NSW)
Professional Standards Act 2003 (NSW)
Professional Standards Act 2003 (Vic)
Cases cited: 4 Eng Ltd v Harper [2008] EWHC 915 (Ch); [2008] 3 WLR 892
Badenach v Calvert (2016) 257 CLR 440
Clark v Urquhart [1930] AC 28
Clef Aquitaine SARL v Laporte Materials (Barrow) Ltd [2001] QB 488
Gould v Vaggelas (1985) 157 CLR 215
Gray v Motor Accident Commission (1998) 196 CLR 1
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
International Paper Co v Spicer (1906) 4 CLR 739
John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1
Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563
Lamb v Cotogno (1987) 164 CLR 1
Mal Owen Consulting Pty Ltd v Ashcroft [2018] NSWCA 135
Malec v J C Hutton Pty Ltd (1990) 169 CLR 638
Magill v Magill (2006) 226 CLR 551
Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170; [1992] HCA 66
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
Palmer Bruyn & Parker Pty Ltd v Parsons (2001) 208 CLR 388
Pavan v Ratnam (1996) 23 ACSR 214
Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332
Smith New Court Securities Ltd v Citibank NA [1997] AC 254
South Australia v Johnson (1982) 42 ALR 161
Tabet v Gett (2010) 240 CLR 537
Eggers, Deceit: The Lie of the Law, (Informa Law, London, 2009)
Date of hearing: 30-31 May, 1 June, 4-8 June, 20 June, 27 June, 10-12 September 2018 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Category: Catchwords Number of paragraphs: 281 Counsel for the Applicant: Mr ATS Dawson SC and Mr ARR Vincent Solicitor for the Applicant: HWL Ebsworth Counsel for the Respondents: Mr L Glick QC, Mr AJ Bailey and Mr J Davaris Solicitor for the Respondents: SBA Law ORDERS
NSD 830 of 2016 BETWEEN: NEVILLE'S BUS SERVICE PTY LTD
Applicant
AND: PITCHER PARTNERS CONSULTING PTY LTD
First Respondent
PITCHER PARTNERS
Second Respondent
IAN STEWART
Third Respondent
JUDGE:
O'CALLAGHAN J
DATE OF ORDER:
21 DECEMBER 2018
THE COURT ORDERS THAT:
1.The applicant file and serve no later than midday today a note with a calculation as to the sum in respect of which judgment is to be entered against the respondents in relation to its claim for damages in deceit in the sum of $5,485,416, which, subject to any such adjustment, is allowed.
2.The parties file and serve submissions on the questions of costs and interest by 21 January 2019.
3.The matter be listed for further hearing on a date to be fixed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
O’CALLAGHAN J:
INTRODUCTION
The parties
The Calabro family has owned and operated bus companies in New South Wales since the early 1950s. The applicant, Neville’s Bus Service Pty Ltd, which trades as “Busabout” (NBS or the applicant), together with a number of other companies owned and controlled by Mr Giuseppe (Joe) Calabro and his brother Mr Antonio (Tony) Calabro, has operated bus services since the early 1990s. Those companies currently employ over 200 staff and operate about 180 buses on scheduled route and school services in New South Wales. Since the early 1990s, the two brothers have divided their responsibilities. Mr Joe Calabro is responsible for the day-to-day operations of the business. Mr Tony Calabro takes care of the bus workshop and the mechanical side of things.
There are three respondents to the application in which NBS seeks, among other things, an award of damages arising out of conduct which it says was fraudulent, in breach of contract, negligent and in breach of provisions of the Australian Consumer Law at Schedule 2 of the Competition and Consumer Act 2010 (Cth) (the ACL). The first respondent is Pitcher Partners Consulting Pty Ltd. The second respondent is described as “[t]he persons identified in Schedule 1” of the amended statement of claim dated 3 April 2018 (the ASOC), trading as the partnership known as “Pitcher Partners”. The third respondent is Mr Ian Stewart. Mr Stewart was at all relevant times until mid-2014 an Executive Director of the first respondent and a partner of the second respondent. In mid-2014 he commenced working for first and second respondents as a consultant.
There was an understandable tendency of the parties during the time when the relevant events the subject of this proceeding occurred, and during the trial, to refer to “Pitcher Partners” without distinguishing between the consulting and the accounting “arms” (the first and second respondents respectively). For reasons which I will explain later, I find that the second respondent is liable for the relevant acts and omissions of the first respondent, but it is important, because of the controversy about that question, to bear in mind the separate legal identity of the first and second respondents.
A simple amortisation error
The trial of this proceeding occupied 13 days. NBS was represented by Mr ATS Dawson SC and Mr ARR Vincent of counsel. Each of the respondents was represented by Mr L Glick QC, Mr AJ Bailey and Mr J Davaris of counsel. The court book comprised 12 volumes, although by the end of the hearing the parties had agreed on a “filleted” court book of 5 volumes. Mr Stewart was cross-examined by Mr Dawson for almost 3 days.
The trial would not have occurred had Mr Stewart (or an employee under his supervision) not made what he now concedes was a simple amortisation error in figures about so-called “transfer-in buses” that he inputted into a bus tender bid. During the course of cross-examination, Mr Stewart agreed that it was an error which, in hindsight, “leapt off the page” and that if a simple Quality Assurance Review (QA review), something he described as the firm’s “practice” which “should have been done” had in fact been done, the amortisation error would have been detected before the bid was submitted.
It is helpful to describe the amortisation error at this point.
In early 2012, NBS received notification that Transport for New South Wales (TfNSW) proposed to carry out an open tender for the provision of bus public transport services in regions in metropolitan Sydney. A successful tenderer for a region previously operated by another bus operator is, by the terms of the contract that the new operator enters into with TfNSW, required to take over and fulfil the lease commitments with respect to any buses held by the incumbent bus operator in that region. These buses are known as “transfer-in buses”. Under such a contract, TfNSW in effect covers the full amount of the finance costs that an operator will incur for those buses to be used in any given region that are up to 15 years old. As a result, the cost to the new operator of the transfer-in buses must be included in the tender figures as a capital cost.
Because the amount of what is called the “Vehicle Termination Payment” – and not the original purchase price of the buses – was incorrectly entered into the accounting tool used to calculate the cost of buses for the purpose of the tender the tool spread the (lesser) Vehicle Termination Payment cost across a 15 year term, rather than the original purchase cost. The result of the error was that there was a failure to amortise properly the cost of the transfer-in buses over the life of the region 15 contract (the amortisation error or the error). As counsel for NBS put it in their written closing submissions, the error can be expressed in two ways:
First, because the VTP (Vehicle Termination Payment) amount was incorrectly entered in Pitcher Partners’ Tool 2 to calculate the cost of buses for the purpose of the tender, whereas the original purchase price of the buses ought to have been entered – with the result that Tool 2 spread the (lesser) VTP cost across 15 years rather than the original purchase cost. Alternatively, if the VTP was to be used, Pitcher Partners admit that the cost should have been spread across the 9 year period of the Region 15 Contract (or a shorter period taking into account the age of the relevant buses)…
Both Mr Stewart, and his assistant Mr Pfirter, agreed that the error is properly so characterised.
Because the error was contained in the tender documents, the tender which TfNSW accepted significantly understated the available funding from the government for the transfer-in buses for the region 15 tender. As a consequence, the costs incurred by NBS in performance of the region 15 contract were, and remain, significantly higher than the costs incorporated in the tender bid and upon which the region 15 contract price was agreed.
The tender bid and the modelling work used computer programs. The “electronic” exhibits tendered at trial included all relevant computer generated documents. Hard copy paper versions of those exhibits were also tendered, where possible. Ultimately, it is unnecessary to explore in detail how the error arose or how it appears, or is reflected in, those documents, electronic or otherwise, because the nature and cause of the error was ultimately not a disputed question. By the end of the trial, there was little dispute about most of the relevant facts. The amortisation error was revealed as a startlingly simple, yet critical, mistake that the respondents (belatedly) conceded was the product of negligence, in breach of contract, and in contravention of s 18 of the ACL. What was disputed was the point in time at which the respondents became aware of the amortisation error and whether they fraudulently concealed it from the applicant.
The main questions to be resolved
The main questions necessary to resolve are:
(1)Did Mr Stewart act dishonestly, including by fraudulently concealing the error?
(2)Did NBS prove that the actions or omissions of the respondents caused their pleaded losses?
(3)Is the second respondent also liable?
The parties also made detailed submissions about the Professional Standards Scheme established by the Professional Standards Act 2003 (Vic) and the Professional Standards Act 2003 (NSW) (the Professional Standards Schemes) and in particular whether, absent proof of fraud, the schemes operate to limit liability in the circumstances of this case to $1m. The parties agreed that it would be unnecessary to consider these submissions if the court were to find that Mr Stewart’s conduct was dishonest as NBS alleged.
The question of dishonesty is relevant not only because of the Professional Standards Schemes cap point, but because if NBS succeeds in its claim in deceit, it is entitled to recover damages which include the whole loss directly flowing from the fraud: see, e.g., South Australia v Johnson (1982) 42 ALR 161, 170 (per Gibbs CJ, Mason, Murphy, Wilson and Brennan JJ).
In order to understand how the amortisation error arose, and its significance for the applicant’s claim for damages against the respondents in excess of $5m, it is necessary to understand relevant aspects of the tender process used by TfNSW to allocate bus regions to private bus owners.
THE FACTS
Transport for New South Wales and the applicant’s tender for regions 2 and 15
In 2004-2005, TfNSW made changes to the operation of the bus transportation system in New South Wales following a number of recommendations made by the Hon Barrie Unsworth as part of a ministerial review into bus services in New South Wales. Those changes involved, among other things, changes effected by the Passenger Transport Amendment (Bus Reform) Act2004 (NSW) and dividing metropolitan Sydney into 15 regions, most of which were (and are) operated by private bus companies such as NBS. (Of the 15 regions, only four are currently operated by the State Transit Authority, the government operator). Those changes also involved changing the way in which TfNSW paid private bus companies for the provision of bus transportation services, from a “fare based” payment to a “per kilometre based” payment. That, in turn, meant that when the time came for private operators to tender for the right to provide bus services in a particular region under the new system, they were required to calculate the profit component of any bid in a way that was fundamentally different to the previous system, and generally to compile tenders differently.
In early 2012, NBS received notification that TfNSW proposed to carry out an open tender for regions in metropolitan Sydney, including regions 2, 4, 5 and 15.
NBS was then the incumbent operator of region 2 and, through another Calabro company, the Calabro brothers also had some involvement in providing services in two other regions.
Mr Joe Calabro thought that region 2 was, from the applicant’s point of view, the most attractive option because it was the majority incumbent operator of that region. That meant that it would not need to incur significant additional capital expenses or overheads if it won the tender for the whole of region 2. He also thought that region 15 was attractive, especially if it was successful in its bid for region 2, because its proximity to that region meant that, by amalgamating bus depots and some services, overheads and expenses could be reduced and profits increased.
NBS had retained the respondents to provide accounting advice, financial forecasting, and other modelling services for bus contracts since at least 2003. Mr Stewart had extensive knowledge of the bus industry, including in New South Wales. He has had over 35 years of experience working with various parties involved in the bus industry in New South Wales and Victoria. His work in this field has included assisting bus operators in tendering and negotiation processes with government, including tender pricing, advising prospective bidders on the acquisition of bus operated businesses, and advising targets of offers to purchase bus businesses. Mr Stewart was, and the Calabro brothers regarded him as, one of the best qualified advisors in the bus industry.
In 2005, Calabro family companies, including NBS, also engaged Pitcher Partners to provide accounting, bookkeeping, auditing and taxation advisory services, including the preparation of annual financial statements.
Throughout the period from about 2003 to 2014, NBS did not employ a financial officer or accountant. It relied entirely upon the services provided by the first and second respondents to provide it with financial, accounting and related services.
The Calabro brothers decided that NBS should tender for regions 2 and 15 and appointed the first respondent to assist it in the preparation of the two tenders.
NBS engages first respondent to assist with the tender
Terms of the agreement between NBS and the first respondent
NBS and the first respondent entered into separate “Business Consulting Client Service Agreements” in respect of each of the two proposed tenders, both dated 19 March 2013. Relevantly, the agreements (which the ASOC defined as “the Agreement” and which the respondents call the “tender agreement”) provided as follows:
We thank you for the opportunity to assist you during this important phase in the future of your company. Pitcher Partners Business Consulting (“PPC”) values the relationship we develop with our clients and we look forward to working with you again. This engagement letter outlines our client service promise as well as the basis upon which we will work together.
We refer to various discussions that you have had with us and confirm that this letter, together with the standard terms and conditions attached, form the basis of our engagement and illustrate our understanding of the assignment.
Scope and Objectives
We consider the scope and objectives of our engagement is to advise NBS with various matters related to the submission of its tender response for Metropolitan Bus Services. Where we refer to ‘you’ we refer to work that may be undertaken with NBS and/or its advisers.
This will include the following tasks:
ŸAnalyse the request for tender and proposed contract form and provide advice on commercial aspects including risk.
ŸBased upon information provided by NBS and a toolkit of costing models that have been developed by PPC, undertake the costing of services including base level costing of bus our costs, kilometre costs, overheads, and depot and fleet costs. This will include analysis of historic trends, predictive costing analysis for costs such as fuel, maintenance, and bus capital as examples.
ŸAdvise you in relation to the likely financial outcomes of a successful bid including forward forecasts of profitability and cash flows utilising analysis tools developed by PPC. This will enable scenario analysis to be conducted at varying levels of margin or variations to other key assumptions.
ŸApply our industry experience and benchmark information to guide decision making.
ŸAdvise in relation to bid strategy.
ŸAdvise in relation to the commercial matters to be considered with the proposed contracts.
ŸAssist with preparation of the bid documentation.
ŸAny other related matters as requested by you.
Upon receipt of the signed copy of this Agreement, we will provide you with some data gathering tools in the form of Excel spreadsheets and work closely with you to assist in populating the data. It is a fundamental term of this Agreement that PPC is the holder of copyright over all tools and materials used in this process and that NBS has a limited licence to use them for the purposes outlined in this letter and for no other purpose. Under no circumstances can the tools or materials be provided to any party external to NBS.
Engagement team and professional fees
This engagement will be performed under the direction of Ian Stewart (Executive Director) with work to be performed by Mark Burton (Client Director), Emilio Pfirter (Manager) and other staff as required at our discretion.
Pitcher Partners Consulting fees for this engagement are based upon the degree of responsibility and skill involved and the time necessarily occupied on the assignment, plus the separate reimbursement of our outlays. The standard hourly rates, as listed below, will be applied to the hours worked by the staff necessarily involved in the process.
…..
(Italics added.)
NBS also retained other consultants to assist with “non-price” components of the tenders, including regulatory compliance, quality assurance, training proficiency and service quality. This reflects the fact that, in order to win the tender, the tenderer was required to meet a multitude of evaluation criteria that did not relate to the price of the bid. The evaluation criteria included:
(1)Operator performance. The tenderer was required to evidence its experience in operating scheduled public transportation in a major city through detailing its background, submitting performance assessments and providing references;
(2)Technical Ability. The tenderer was required to evidence their skills in properly scheduling contract bus services. This was done by providing, among other things: details of their systems and personnel; examples of scheduling and on-time running of services; examples of block scheduling; resource estimates; and processes and systems used;
(3)Contract Bus Services. The tenderer was required to evidence its compliance with, and improvements on, timetables and dedicated school services timetables.
(4)Fleet Age. This required the tenderer to demonstrate its ability to ensure the average bus age is kept below the maximum average age and that the tenderer always has a sufficient number of buses to service the region. It did this through submitting fleet ages, bus replacement plans (including method, source and timing) and bus replacement prices;
(5)Vehicle Passenger Features. The tenderer was required to set out features such as seating and standing capacity;
(6)Safety. This required the tenderer to explain the processes it proposed to offer to ensure passenger and staff safety. This included provision of details regarding: staff training and instruction; driver’s daily journal; route-targeted risk management; driver monitoring; drug and alcohol testing; vehicle safety; vehicle maintenance; safe driving; depot safety; conflict management; incident management and response; and work, health and safety consulting;
(7)Customer Travel Experience. This required the tenderer to offer competitive innovation and improvements to customers’ experiences, with respect to criteria such as comfort, customer service training, marketing, community engagement, social media, initiatives for passengers with special needs and technology; and
(8)Other ad hoc information, including with respect to proposed critical transition milestones and other special offers from the tenderer.
Part of the first respondent’s role involved the preparation of financial statements and making a series of different calculations. Among other things, in order to complete the tenders it was necessary to input into the “data gathering tools” referred to in the retainer agreement data and other information regarding the NBS business and the regions for which it was submitting tenders, including bus fleets, fuel costs, wages and other expenses and overheads.
NBS provided some data to the first respondent and all the relevant data was contained in an online database, administered by TfNSW, called the “Data Room”. That data included region specific information about costs, routes, fleet and patronage, data based on the performance of an operator for a region, as well as copies of documents and agreements relating to the operation of the regions, including copies of the leases for the buses used by each regional operator. NBS and Pitcher Partners were granted access to the data room in March 2013.
Mr Stewart swore that his role as the leader of the team at the first respondent was to review the work produced by his team, which included Mr Emilio Pfirter and Mr Lucas Schirato, and “to take instructions from the client, to provide the benefit of my experience when jointly analysing the bid and the bid pricing, and to ensure that the work performed by the team working with me was performed accurately and in accordance with the client’s instructions”. He also swore that his role was “to ensure that the resulting work product – the bid pricing model and its results (i.e. the bidding price) – was accurate and complete”.
Tool 2
Part of the services offered by the first respondent included a financial “tool” which it had created and developed to assist in putting together tenders for government bus contracts. Known as “Tool 2”, it was designed to calculate the capital cost of the transfer-in buses to be included in a bid. The tool did not use or calculate the actual cost of the transfer-in buses by reference to the leases which were to be in place at the time of the commencement of a new contract, because tenderers do not then know: (1) the total monthly lease costs being paid by the incumbent bus operator for each such bus; or (2) the interest rate or term of the incumbent bus operators finance arrangements in respect of those buses. Nor, ordinarily, would a tenderer be sure of what its own terms of finance would be in respect of the buses once transferred from the incumbent operator to it. As a result, when formulating the tender bid for region 15, neither the first respondent nor the applicant knew what the applicant’s actual monthly costs would be in respect of the transfer-in buses once the contract commenced.
Tool 2 was designed to ensure that, whatever the actual cost of the transfer-in buses might be, the tender bid would be calculated on the basis that NBS would be able to access the maximum amount of TfNSW funding available in respect of each transfer-in bus.
Part of the tool involved in-putting a “Vehicle Termination Payment” or “VTP” (also sometimes called a “transfer-in value”). A VTP is the amount that is paid by an incoming bus operator to an outgoing operator in respect of each bus in the fleet. It is a sum calculated by TfNSW as part of the tender process.
Counsel for NBS devoted considerable time in opening submissions to explaining the way in which Tool 2 operated and how the error consequentially affected the many figures generated by Tool 2. Given that the fact of the error is not disputed, it is unnecessary to repeat or set out in any detail the inner workings of Tool 2. It is sufficient to note that it was a means of calculating costs for the purpose of the tender that relied on accurate data input.
Many of the documents, including the accounting figures in the tender bid and the modelling, were prepared (and tendered into evidence) in electronic form. Many of them are difficult to reproduce and interpret in paper form. But as I said earlier, in the end, there is no dispute about the nature and cause of the error, so it is not necessary to burden these reasons with a detailed explanation of that evidence.
May 2013: bids submitted – region 15 a winning bid
NBS submitted its tender for region 15 in late May 2013. The tender incorporated the bid pricing prepared by the first respondent, and thus also contained the amortisation error.
On 24 May 2013 Mr Joe Calabro sent an email to Mr Stewart saying: “good afternoon gents … All lodged. Now the long wait. Also, Tony & myself would like to thank you all for your contribution”. A few minutes later Mr Stewart responded with an email saying: “Good to hear Joe. I assume you lodged both???”
In his witness statement, Mr Stewart said that he did not receive a reply to that email but that he recalled “a conversation with Joe shortly after this date [24 May 2013], in which the following exchange was said to have occurred:
IS: Joe we did not have time to complete a QA [Quality Assurance] review on the Region 15 pricing models. Do you want us to do one now?
JC: No, I don’t want you to do any more work for now.”
Mr Stewart went on to explain in his witness statement that if he had completed a QA review of the region 15 pricing models at this time, he believed that he would have noticed the error in Tool 2 and would have “immediately spoken” to Joe about it, including with respect to “whether other pricing components could be reduced to make up the difference”.
There was some dispute during oral submissions as to whether a QA review, or other cash flow analysis, was within the scope of the retainer. But it clearly was. Mr Pfirter, for example, swore that with respect to a cash flow model prepared for Westpac in February 2014, “[t]his type of cash flow analysis would normally have been prepared as part of the bid pricing work as an added layer of review of that work.”
In the witness box, Mr Stewart sought to correct the time at which he said that the conversation with Mr Joe Calabro (recorded at [35] above) took place, by deleting from his witness statement the words “after this date” (being 24 May 2013) and inserting instead the words “on or about 23 May 2013”.
The timing of the call might have been a critical matter because, if Mr Calabro had declined an offer from Mr Stewart to complete a QA review before the tender had been submitted, then it may have added some strength to the idea that the failure to complete such a review (or the fact that the error was contained in the bid) was in some way the responsibility of NBS.
Unsurprisingly, Mr Stewart was cross-examined about his last-minute change of mind as to when he said the exchange about the QA review occurred, as follows:
And your evidence this morning … you corrected or asked that paragraph 141 be corrected -
Yes.
- to bring the date of the conversation you set out there in paragraph 141 from after 24 May 2013 to before 24 May 2013, that is, on or about 23 May 2013?
Yes.
And you say you’ve had a look at the APS time-recording system?
Yes.
What does that entry say?
Something to the extent of “discussion with Joe Calabro”. It records a conversation we had.
No. And you’re speculating, aren’t you, Mr Stewart, about the content of that conversation and its timing?
I had issue upon reading my affidavit last week with the words – the word “after” at that time. During this week I had cause to go through some of the more detailed affidavit material that was there and I noticed that there was that entry and thought that that was the most likely date, if I have to put a date on it, that was the most likely date of that conversation.
And you recognise, don’t you, Mr Stewart, that there’s not much point having that conversation with Mr Calabro after the bid is lodged, is there?
That was not my intent, no.
…
Come on, Mr Stewart, you knew that the timing of that conversation was crucial, didn’t you?
No, I don’t believe so.
Well, “23 May” means if you had a conversation to that effect then that before Mr Calabro put the bid in you had warned him about, as you say, the numbers in the region 15 pricing models.
That was not my intention. I was merely trying to be more precise in my evidence.
…
You know, don’t you, that it’s very significant as to whether or not you had a conversation like that before or after the submission of the region 15 bid?
I know that now.
You knew it at the time you corrected or purported to correct it this morning, didn’t you?
No, I did not.
…
The truth is, isn’t it, Mr Stewart, you never had these conversations with Mr Calabro about a quality assurance review at all, did you?
I did.
You’ve made it up to make it look like he has been the one to instruct you not to conduct a review that would have revealed the error; correct?
No.
…
What you’re saying to his Honour in your defence of this … is that he should not take a negative view of Pitcher Partners not having done a review of the numbers which would have revealed the error because Mr Joe Calabro instructed you not to do it?
Yes, that’s what I’m saying.
To the extent that it matters, I do not accept Mr Stewart’s evidence that this conversation, assuming that it occurred at all, occurred before the tender bid was filed.
On 2 June 2013 the first respondent issued a tax invoice to NBS in the amount of $193,472 in respect of the bid pricing work done for regions 2 and 15. That invoice was promptly paid.
In early August 2013 NBS was awarded the tender for region 15, but not for region 2. The bid for region 2 did not contain the amortisation error.
In his witness statement, Mr Stewart recalls that at around “late July or early August 2013” Mr Joe Calabro told him in a telephone conversation that the region 15 bid had been successful. Mr Stewart recalls the conversation proceeding in the following manner:
IS: Now that you’ve won Region 15, we should do a detailed QA review of the bid price numbers. We haven’t done one. To check if there are any gremlins.
JC: No thanks, I’m very comfortable with the numbers.
NBS asks Mr Stewart to confirm the accuracy of the dollar figures in the tender bid
Shortly after that, TfNSW sent to Mr Joe Calabro a revised draft of the region 15 contract. In that email, TfNSW told Mr Calabro to “[d]ouble-check that dollar figures for buses in the annexures to Schedule 3 [to the agreement] (especially in Annexure D and E) are assigned to the correct annexure (D or E) and are/will be consistent with a list of Existing Buses that has yet to be completed in Schedule 8 Annexure 2…” The dollar figures in those annexures included the figures that were affected by the amortisation error.
Mr Calabro immediately forwarded that request to Mr Stewart asking him, among other things, to check the figures, as TfNSW had requested.
In his response to that request, although Mr Stewart did not specifically mention the figures referred to in the email from TfNSW, he did confirm his advice that the documents were now in order, albeit that a number of other matters (irrelevant here) needed to be attended to. He thereby, obviously enough, confirmed the accuracy of the pricing in the tender bid.
NBS says, and it cannot be doubted, that this was another occasion upon which the respondents could have completed the work which should have been completed in May 2013, including by the conducting of a QA review, in which case the amortisation error would have been identified and the bid corrected accordingly.
August 2013: execution of the region 15 contract
On 26 August 2013 NBS executed an agreement with TfNSW called the Sydney Metropolitan Bus Service Contract (the region 15 contract) on terms and conditions that codified the costings, margins and/or financial information contained in the region 15 tender.
Relevant terms of the region 15 contract
NBS was to commence the provision of bus services on 1 June 2014, comprising a 5 year term plus 4 years if granted under clause 3.3 of the region 15 contract. Clause 3.2 provides: “The Term commences on the Services Commencement Date and continues for a period of five years, unless extended under Clause 3.3(a) or 3.3(b) or earlier terminated in accordance with Clause 30”. Clause 3.3(c) provides: “Nothing in this Clause 3.3 shall be construed as affording the Operator a right or expectation of renewal or extension of this contract. The Operator will have no Claim, and no Claim by the Operator will be justiciable, in connection with a failure by TFNSW to extend the Term, or for any Loss arising in connection with any potential Extension Period or Discretionary Extension Period”.
Other important provisions in the region 15 contract are:
(1)Clause 22.1(g)(i): Accreditation and Compliance with Laws and Standards: During the first month after the Services Commencement Date and every 12 months thereafter, the Operator must certify in writing to TfNSW compliance with the following legislative and regulatory requirements: (i) Disability Discrimination Act 1992 (Cth); (ii) Anti-Discrimination Act 1977 (NSW); (iii) Environmental legislation, including but not limited to the Protection of the Environment Operations Act 1997 (NSW); and (iv) Industrial Relations Act 1996 (NSW).
(2)Clause 5.1 Bus Services: The Operator must provide the Bus Services (i) on the Bus Routes; (ii) in accordance with the Timetables and the relevant provisions of the Services Schedule; and (iii) in a manner that effectively and efficiently carries out the Contract Service Levels, from the Services Commencement Date and for the duration of the Term.
(3)Clause 5.5 Expression of Support: The Operator acknowledges and supports, and agrees to perform the Contract Bus Services so as to fulfil, TfNSW’s aims communicated to the Operator or made publicly known in relation to the Strategic Transport Corridors and the Bus Routes which, among other things, are: (a) the provision of modern high standard network of Bus services that will satisfy demand for passenger bus transport along the Bus Routes; (b) the achievement of a service strategy that facilitates integration of: (i) services along the Bus Routes with those along a Strategic Transport Corridor; (ii) Fares and ticketing; and (iii) the strategic route network in Sydney generally; (c) the incremental upgrading of the infrastructure and Bus services along the Strategic Transport Corridors; and (d) full integration of passenger information to deliver a seamless service across metropolitan Sydney.
(4)Clause 6.2 Timetables: (a) If, at any time during the Term, the Operator believes it can deliver the Bus Services more efficiently and effectively, the Operator must immediately submit a revised timetable for approval by TfNSW, by notice to TfNSW via the BSAR system.
(5)Clause 10.1 Key Performance Indicators: (a) TfNSW will measure the Operator's performance against the Key Performance Indicators set out in the KPI Schedule. (b) The Operator must comply with its obligations relating to the measurement and reporting of Key Performance Indicators and the remedy of breaches of the Key Performance Indicators, as set out in the KPI Schedule. (c) Other than an Excused Performance Incident for which KPI Relief is granted, an Operator's failure to comply with a Class 1 Key Performance Indicator (set out in the KPI Schedule) is a Non-Compliance Event.
(6)Clause 13.1 Contract Buses: (a) The Operator must perform the Contract Bus Services using Contract Buses. (b) The Operator must only use the Contract Buses for purposes other than the Contract Bus Services when not required for the performance of the Contract Bus Services, and must prioritise newer Contract Buses over older Contract Buses for the performance of the Contract Bus Services (wherever practicable). (c) A Contract Bus must not be exchanged or interchanged with a Bus used for the performance of other Service Contracts, without the prior written approval of TfNSW. (d) The Operator must ensure that all Contract Buses comply with the standards in the Contract Buses and Contract Depots Schedule, in addition to any other requirements imposed in any other Transaction Documents.
(7)Clause 13.2 Replacement of Buses: (a) The Operator must replace any Bus which: (i) reaches it maximum age, as set out in paragraph 3 of the Contract Buses and Contract Depots Schedule; or (ii) is irretrievably lost, stolen, destroyed or damaged beyond economic repair during the Term, with a Replacement Contract Bus, unless TfNSW agrees otherwise in writing with the Operator. (b) Any Bus that has been replaced in accordance with Clause 13.2(a) shall be deemed to no longer be a Contract Bus and the Operator may dispose of the Bus and retain all sale and/or insurance proceeds from the sale. (c) The Operator must provide TfNSW with notice when a Bus is replaced in accordance with Clause 13.2(a) (and at least 21 days’ prior notice if the Operator intends to dispose of a the Bus), to allow TfNSW to remove any New Systems and Equipment or Existing Systems and Equipment, in accordance with Clause 12.2(g).
(8)Clause 22.1 Accreditation and Compliance with Laws and Standards: (a) The Operator warrants that it will hold, for the duration of the Term, all Authorisations required to operate the Contract Bus Services in accordance with, and to perform its obligations under, this Contract. (b) In operating the Contract Bus Services, and in performing its obligations under this Contract the Operator must: (i) comply at all times with all Authorisations required to be held by the Operator under Clause 22.1(a); and (ii) procure that with respect to Driver Authorities required to be held by Drivers under Clause 22.1(a), the Driver will comply at all times with such Driver Authorities required to be held by the Driver. (c) The Operator acknowledges that nothing in this Contract restricts or otherwise affects TfNSW's unfettered discretion to use its statutory powers, including its statutory powers relating to Accreditation under the PT Act. The Operator must immediately notify the TfNSW Representative of any circumstance which may affect the Operator's Accreditation. (d) If the Operator is a corporation, there must be at all times a designated manager or director of the Operator in accordance with section 7 of the PT Act. (e) Without limitation to any other provision of this Contract, the Operator must comply with all applicable Laws and all quality and safety plans from time to time applicable to the Contract Bus Services. (f) Without limiting any other approvals or permissions required for the provision of the Contract Bus Services, the Operator must operate the Contract Bus Services only upon: (i) Roads and Road-Related Areas that have been approved by the appropriate Road Authority for use by Bus traffic; or (ii) if the Contract Bus Services are to be provided on private property, with the permission of the owner of the private property. (g) During the first month after the Services Commencement Date and every 12 months thereafter, the Operator must certify in writing to TfNSW compliance with the following legislative and regulatory requirements: (i) Disability Discrimination Act 1992 (Cth); (ii) Anti-Discrimination Act 1977 (NSW); (iii) Environmental legislation, including but not limited to the Protection of the Environment Operations Act 1997 (NSW); and (iv) Industrial Relations Act 1996 (NSW).
Critical Transition Milestones
The terms of the region 15 contract included that NBS must before 1 June 2014 acquire any transfer-in bus and do all things necessary to complete any transfer, novation, acquisition of or dealing with relevant buses in connection with the bus services to be provided by NBS. Those obligations were referred to as “Critical Transition Milestones”, non-compliance with which permitted TfNSW to terminate the region 15 contract.
The Critical Transition Milestones were listed at clause 3.1(b) as follows:
During the Transition Period, the Operator must:
(i) comply with and meet the Transition Milestones contained in Schedule 9, by the date specified for their completion;
(ii) acquire any Transfer in Contract Bus in accordance with the terms of any Preceding Bus Services Contract;
(iii) acquire all other Contract Buses for the purposes of performing the Contract Bus Services;
(iv) do all other things necessary to complete any transfer, novation, acquisition of or dealing with Contract Buses or potential Contract Buses in connection with the Contract Bus Services; and
(v) make offers of employment to employees of any Preceding Operator, in accordance with the terms of any Preceding Bus Services Contract
…
Late February 2014 – early March 2014: novating the bus leases
In February 2014, NBS met with representatives of Westpac to discuss the process of novating the leases for the transfer-in buses for region 15 from “Busways” (the then incumbent operator of region 15) to NBS.
3 way cash flow modelling
The bank required a cash flow analysis for region 15 in order to consider whether to agree to provide funding. NBS was not able or qualified to prepare such a cash flow analysis, so it engaged the first respondent to prepare a 3 way cash flow model, so called because it integrates a cash flow statement, a profit and loss statement and a balance sheet.
NBS again entered into a written agreement with the first respondent for the provision of financial modelling and the relevant services needed to prepare it. The ASOC calls this agreement “the Second Agreement”. The respondents call it the “modelling agreement”. It was executed by NBS on 19 February 2014 and relevantly provided as follows:
Thank you for the opportunity to submit this client service agreement to assist you with financial modelling, forecasting and consulting services.
Pitcher Partners Business Consulting Group (‘BCG’) values the relationship we develop with our clients and we look forward to working with you. We are committed to delivering excellent client service every day and this letter outlines our client service promise as well as the basis upon which we will work together.
Background
[NBS] is seeking assistance with the preparation of forecasts to obtain authority understanding of their cash flows as they enter their Region 15 bus NSW contracts.
The forecast will be derived from the financial statements for NBS with adjustments made to reflect the number of forecast assumptions about the trading income and expenses.
Our Understanding of Your Needs
The business requires support in the preparation of forecasts that will enable management to forecast the financial statements for NBS. These forecast financial statements will include the profit and loss, balance sheet and cash flows.
Developing the forecast
The forecast financial statements will be based upon the categorisation of your existing financial statements. More specifically in relation to the development of the forecast;
We will model the impact from the following revenue categories:
ŸIncome and cash flows associated with the new South Wales bus contracts for Region 15;
ŸOther income will be consolidated into a single income category with a standard assumption around the timing of cash flows.
The forecast will be developed to reflect the profit and loss and cash flow impact from:
ŸDirect Costs: These will be grouped into Bus Hour and Distance Variable costs to the extent that they are captured in your current profit and loss.
ŸSalary and Wages (including on-costs): To the extent that they are not included in Direct Costs will be grouped as an indirect cost.
ŸOther expenses: These will be grouped into high level categories, i.e. depot related costs, administration costs.
ŸTax expense: This will be calculated as an effective rate, i.e. at 30% of net profit before tax.
The following asset and liability accounts will be modelled to reflect the impact on the cash flow, the related asset and liability accounts and the profit and loss accounts:
ŸCash, including overdraft
ŸTrade debtors
ŸTrade creditors
ŸPrepayments
ŸFixed Assets and associated depreciating expense at a fixed asset category level
ŸBusiness Loan
ŸEquipment finance
ŸLoan accounts
ŸGST.
The scope of our engagement and the Services to be provided to you will involve the preparation of a four year integrated three way model for the commencement of your Region 15 NSW bus contract.
ŸMonthly forecast profit and loss, balance sheet and cash flows for FY 2015, FY 2016, FY 2017 & FY 2018.
ŸAnnual financial year summaries for FY 2015, FY 2016, FY 2017 & FY 2018
Key Financial Assumptions Summary
As part of your application we will prepare a key financial assumptions summary that details at a high level the financial assumptions that relate to the base and alternative forecasts and a summary of the business context that will provide the background and commentary for the basis of the forecast position.
Timeframe
As discussed with you, we will be working towards a timeframe for completion by early March 2014.
Assumptions and Limitations
We have made the following key assumptions in detailing our understanding of your requirements and the proposed fees that are detailed below:
1. Financial data and assumptions that are required to populate the financial model will be provided by management.
2. We have assumed that our deliverable will be the output of the financial model together with an assumptions document that sets out the basis upon which the key items in the model have been forecast.
3. We have not made any allowance for a review or audit of the financial and operating information that is required to support the forecasts.
4. We have assumed that we will have sufficient access to relevant personnel, financial and other records, including historical financial statements and related information and reconciliations, existing budgets or forecasts and other matters relevant to our staff being able to deliver the services considered above.
Your Client Service Team
The following is the team who will be working with you. They have been chosen because of their experience in the preparation of financial models.
…
Ian Stewart, Executive Director…Ian will be the Partner in Charge of this engagement.
Emilio Pfirter, Manager…
Lucas Schirato, Assistant Manager…
Other members of Pitcher Partners Consulting team may be used where it is cost effective to do so.
Communication
In delivering our Client Service Agreement with you, we promise to:
ŸListen to what you want, clarify your expectations, and define your needs. We will work together with you to understand what it is that your business needs.
ŸThink about solutions and adding value. We will plan the execution of your project to ensure it is completed in the most effective way.
ŸTalk about progress so that there are no surprises. We will communicate with you throughout the progress of this engagement and engage you in any feedback you may wish to provide.
ŸDeliver quality outputs on time, and on budget. We will complete all deliverables as outlined in this proposal within expected timeframes and cost estimates.
Fees
Our fee levels are carefully considered to allow for high levels of Partner and senior staff involvement and are determined on the basis of the time spent by the staff members concerned, costed at their respective hourly rates.
Our fees for the provision of service will be in the order of $15,000 (GST exclusive).
…
Should you have any queries in relation to the above, please do not hesitate to contact me.
Yours sincerely
Ian Stewart
Executive Director
Enc: Pitcher Partners Terms and Conditions
The final page of the modelling agreement acknowledged that its “understanding of this engagement is consistent with the above scope and objectives in this engagement letter, and the attached standard terms and conditions.” The attached terms and conditions included the following:
These terms apply to your engagement of Pitcher Partners Consulting Pty Ltd and our associated companies and entities (“PP” [the second respondent], “PPCON” or “we” or “our” or “us”) for the Services undertaken for you and/or your client and associated parties (“Client” or “you”). These terms continue to apply for all Services for which we are, or may, in the future, be engaged, unless otherwise agreed in writing or otherwise required by law. These terms and our letter of engagement form the entire agreement between us relating to the Services…
3 way modelling: Versions 1-12
On the same day that NBS executed the modelling agreement (19 February 2014), Mr Schirato wrote to Mr Joe Calabro telling him that he was “[w]orking on the [modelling] numbers as we speak”.
On 24 February 2014 two versions of the modelling, versions 2 and 3, were produced. In the course of cross-examination, Mr Joe Calabro said that if Mr Stewart had then advised him of the amortisation error, he would not necessarily have tried to “get out of” the region 15 contract. Mr Calabro said that he would instead have “approach[ed] government and got their view on it first” and he “wouldn’t just take it for granted they would say no.” As Mr Calabro said in cross-examination, an additional $660,000 per year on the transfer-in buses capital costs in the region 15 contract would have resulted in an overall price “definitely a way – a long way under” the incumbent operator’s then current contract price. Mr Calabro also testified that, if the government had said they were not interested in negotiations about it, “we would walk away…ending the contract”.
At 4:56pm on 24 February 2014, during the course of performing, or assisting with the performing of the modelling services, Mr Pfirter wrote to Mr Joe Calabro and asked him these questions:
1.The new transfer in buses, how are you going to finance the $16m odd for the buses coming from Busways? 180 months and 5% should be right? (180 being same period used for cash inflow purposes therefore I want to be consistent and interest rate based on other clients in Melbourne who I understand are getting 5.9% or something at the moment)
2.The $2m odd being the Equity value on the busway buses, how are you going to be paying that? Financed I guess or any other arrangements?
By early the next morning, 25 February 2014, version 4 of the modelling had been produced.
Before turning to the correspondence about the various versions of the 3 way model that followed, it is important to keep in mind the critical changes that were incorporated into the modelling between versions 4 and 6. Between versions 4 and 5, the assumed interest rate was changed and the assumed term was reduced from 15 years to 9 years, to reflect the term of the region 15 contract. By version 6 the actual lease repayments that were in fact to be made were incorporated into the modelling using a “goal seeking” function. It was, as will become apparent, by these simple changes to the figures inserted in the appropriate columns of the modelling documents that the amortisation error was revealed.
On 25 February 2014 Mr Pfirter wrote to Mr Joe Calabro in these terms: “Joe Just to refresh your mind I thought about [re sending] you the email sent to you last year when we got region 15. The numbers in the 3 way will be option D which is what you won”. It is therefore obvious that Mr Pfirter started the modelling work using the costings contained in the tender bid.
Later that day, Mr Joe Calabro wrote an email to Mr Pfirter in which he informed him that he had spoken to Westpac that day regarding the transfer-in buses, and that he had told the bank that NBS would have some cash flow analysis for them shortly, something Mr Calabro said the bank was “keen” to see.
The next day Mr Pfirter wrote to Mr Joe Calabro and told him that they could not access the TfNSW data room so they would not “be able to take payments for transfer in Busways buses from there”. The email continued:
I have calculated all payments for you in the 3 way model anyway, we can discuss if you want after I get the model back from Ian’s review.
The “Ian” referred to was Mr Ian Stewart.
That evening Mr Joe Calabro replied to Mr Pfirter’s email telling him that he had found the information about the transfer-in buses in the data room, quipping “[n]ot very good looking. Just went into data room now and presto”. Mr Calabro attached to his email the information that he had extracted from the data room entitled “Contract 15 – Vehicle Termination Payment (planned valuation date: 1 June 2014)”. The document that Mr Calabro attached was explained (by TfNSW) in these terms:
The table below sets out TfNSW’s calculations of the transfer cost (that is, the price to be paid by any Successor Operator) to acquire the buses listed in the table and to assume the lease payment obligations for these buses.
On 26 February 2014, Mr Pfirter wrote an email to Mr Joe Calabro in which he said, among other things: :
“[m]odel is coming great, just waiting for Ian [Stewart] to help me accesing (sic) the data room to see exact payment for transfer in buses …”
On 26 February 2014 Mr Stewart emailed Mr Pfirter, telling him that he “seem[ed] to have lost that cut down 3 way that you sent me. Can you please re-send it?”
The next morning, Mr Pfirter emailed Mr Stewart telling him that he would send a first draft to Mr Stewart that afternoon after he had clarified a couple of questions with Mr Joe Calabro. It is therefore again tolerably clear that Mr Stewart continued to be involved in the continuing iterations of the modelling.
At 9:04am on 27 February 2014 Mr Pfirter sent an email to Mr Joe Calabro in which he said among other things as follows: “I need to ask you couple (sic) of questions over the phone (provably (sic) 20 minutes) before I pass the model for Ian’s review”. At this point in the chronology of the development of the different versions of the model version 4 had been completed, but version 5 had not.
At 9:40am on 4 March 2014, Mr Pfirter emailed Mr Joe Calabro telling him that he would “put the model for Ian’s review tomorrow” and that he would like to ask him a couple of questions over the phone.
The last edition of version 6 of the 3 way model was produced at 11:00am on 4 March 2014. It is common ground at the hearing that versions 5 and 6 of the model revealed the amortisation error and that the effect of the error was obvious. Version 4, which still reflected the figures in the tender bid, and which therefore used the payments to be received from the government to fund the cost of the transfer-in buses as a substitute for the actual lease payments to be made by NBS, calculated total monthly repayments for the transfer-in buses of $161,734. Version 6, which contained a varied interest rate, the correct lease term of 9 years (not 15 years) and a cash outflow figure calculated by reference to the actual lease repayments that were to be made to Westpac, calculated the same monthly repayments at $238,681.
On 10 March 2014, having received an email from Westpac asking if there was any update on the forecasts for region 15, Mr Joe Calabro emailed Mr Pfirter a copy of the email from Westpac about the transfer-in buses asking, “[h]ow are the cash flow forecasts going [?]”.
At 9:18am on 11 March 2014, Mr Pfirter emailed Mr Joe Calabro in these terms: “Only thing I still need to incorporate is the cash movements … $900k (what you’re going to be paid and what you have to pay) which I have to discuss with Ian how to account for it … For (sic) the rest is finished, I’ll send a DRAFT for Ian today for review. Surely he will want to catch up with me tomorrow to discuss”. It was common ground that this email was sent between the creation of versions 6 and 7 of the 3 way modelling, and that the reference to the “$900k” was a reference to the Vehicle Termination Payments required to be paid by NBS to Busways for region 15.
Version 7 of the 3 way modelling was completed on 11 March 2014. Version 8 of the 3 way modelling was completed on the morning of 12 March 2014. Version 10 of the 3 way modelling was completed shortly thereafter.
On 12 March 2014 Mr Pfirter emailed Mr Joe Calabro with a “couple of queries for the cash flow model”. In that email Mr Pfirter told Mr Calabro that Ian had gone through the first review with him, and had come to him with a couple of questions (that are, for present purposes, irrelevant).
By 5:37pm on 12 March 2014, version 11 of the 3 way model had been prepared. On that day Mr Pfirter wrote to Mr Stewart attaching an electronic copy of version 11, telling Mr Stewart that from their discussion, he, Mr Pfirter, had done a number of things to the model, which he described in 4 dot points. The nature of those changes is irrelevant for present purposes.
Another draft of version 11 was produced at 11:26am on 13 March 2014.
At 3:06pm on 13 March 2014 Mr Stewart sent to Mr Pfirter, for his consideration, version 12 of the 3 way cash flow model.
At 10:43am on 14 March 2014 Mr Pfirter sent an email to Mr Stewart attaching the final version of version 12 of the modelling. Among other things, Mr Pfirter told Mr Stewart that “all months are cash positive”.
Amortisation error concealed in final version of 3 way model
Later that morning Mr Pfirter emailed a copy of version 12 of the 3 way model to Mr Joe Calabro. Mr Potter, the expert accountant called by NBS, gave unchallenged evidence that the amortisation error was concealed because of an irregular treatment of depreciation, which had the effect of incorrectly and significantly inflating profitability during the 2015-2018 financial years. The significantly higher actual lease repayments contained in the final version (from version 6 onwards) thus appeared to have no effect on the “bottom line” profitability predicted by the modelling. As Mr Potter explained:
Principal paid on ‘transfer-in’ buses: P & L v cash flow
6.14 The table below compares the depreciation expense reported in the P&L of each version of the Cash Flow Model for the 56 ‘transfer-in’ buses as compared to the principal repayments reported in the cash flow statement of each version of the Cash Flow Model:
Table 43: FY15 ‘transfer-in’ buses depreciation expense v principal repaid Version ($) FYI Depreciation expense ( P & L) FY15 principal repayment (cash flow) Difference v0.02 765,648 625,587 (140,061) v0.03 765,648 707,351 (58,296) v0.04 765,648 790,900 25,253 v0.05 765,648 1,430,441 664,793 v0.06 765,648 1,395,924 630,277 v0.07 765,648 1,395,924 630,277 v0.08 765,648 1,395,924 630,277 v1.00 765,648 1,395,924 630,277 v1.01 765,648 1,395,924 630,277 v1.02 765,648 1,395,924 630,277 Source: Appendix 8, Cash Flow Model principal, interest and depreciation comparison analysis, “Summary” worksheet.
Note: for ease of comparison, I have limited my comments to the FY15 P&L statement/ cash flow statement for each version of the Cash Flow Model. I have reviewed the FY16 to FY18 periods in detail at Appendix 7 and Appendix 8 of this report and confirm that my comments in relation to FY15 also apply to FY16 and FY18.
6.15 I refer to Table 43 and note the following:
6.15.1 The depreciation expense relating to these 56 ‘transfer-in’ buses receded in the P&L of the Cash Flow Model has remained consistent between version v0.02 to v1.02; notwithstanding
As the Court explained in John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1 at [86]-[92]:
The parties accepted that the relevant principles regarding the existence of a fiduciary relationship which does not fall within an established category, and the incidents of such a relationship, are those stated by Mason J in [Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41]. This is so notwithstanding that Mason J was in dissent …
…
Justice Lehane, writing extra-judicially [Lehane, “Fiduciaries in a Commercial Context”, in Finn (ed), Essays in Equity, (1985) 95 at 100], made two points relevant to the present question. The first point is that phrases such as “for or on behalf of” (and “in the interests of”) another person must be understood in a reasonably strict sense, lest the criterion they formulate become circular. No doubt undertaking to act in this way is inherent in the position of trustee administering a trust, director participating in the control and management of a company, partner acting in the conduct of the partnership business and employee acting in the course of the business of the employer, for example. Further, such an undertaking may be found in the facts of a particular case …
But, as Justice Lehane asked…:
[W]hen is a contractual stipulation inserted for the benefit of one party (even if offered by the other party) an undertaking to act for or on behalf of that party and therefore to act, in relation to the contract, solely in the interests of that party? When does an offer to enter into a contract proposed by one party as a deal which will benefit the other (as well as himself) become such an undertaking by the former to the latter?
That leads to Justice Lehane's second point. This is that the reason why commercial transactions falling outside the accepted traditional categories of fiduciary relationship often do not give rise to fiduciary duties is not that they are “commercial” in nature, but that they do not meet the criteria for characterisation as fiduciary in nature …
…
The terms of the contract include not only those expressed, but those implied, particularly those implied pursuant to the principles in Codelfa Construction Pty Ltd v State Rail Authority of NSW.
(Footnotes and citations omitted.)
The nature of the relationship between a professional adviser and its client, including whether the adviser owes any fiduciary duties to the client, depends on the particular facts and circumstances: see Pavan v Ratnam (1996) 23 ACSR 214 at 224-225, where the New South Wales Court of Appeal it held that a fiduciary relationship did not exist between a tax accountant and his client where the accountant advised the client, for the purpose of reducing his tax liability, to invest in property which the accountant proposed to develop.
In this case, as the respondents submitted, the first respondent was engaged by NBS to assist first with the tender process and then to prepare a 3 way cash flow model. Neither the tender agreement nor the modelling agreement contain an undertaking or other agreement that any of the respondents would act for or on behalf of, or in the interests of, NBS in the exercise of any particular power or discretion that would affect the interests of NBS, in the sense that the cases require. The agreements were quite clear in the nature of the undertaking. For example, the tender agreement stated, among other things, that “we consider the scope and objectives of our engagement is to advise NBS with various matters related to the submission of its tender response …” The modelling agreement provided that NBS “is seeking assistance with the preparation of forecasts to obtain a more foreign understanding of the cash flows … The business requires support in the preparation of forecasts that will enable management to forecast the financial statements for NBS”.
In my view, the respondents correctly submit that the parties’ obligations to one another in respect of the engagements were exhaustively contained in the terms of the relevant agreements, and neither of the agreements contained the “critical feature” Mason J referred to in Hospital Products, viz an undertaking or agreement that any of the respondents would act for or in behalf of or in the interests of NBS in the exercise of a power or discretion which would affect the interests of NBS in a legal or practical sense. Again, as the respondents submitted, to superimpose a fiduciary relationship in these circumstances would be contrary to the terms of both the transfer agreement and the modelling agreement.
Further, and in any event, the particular pleaded fiduciary duties (to act with good faith and in the best interests of NBS, to ensure that they did not act for NBS in circumstances where there was a likelihood that their interests may conflict with it and so on (see [268] above)) are not accepted as fiduciary duties because they are impermissibly “prescriptive”. As the plurality explained in Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 at [74]:
…In Breen v Williams [(1996) 186 CLR 71], the point was made, by way of contrast to what is said in some of the Canadian judgments, that fiduciary obligations are proscriptive rather than prescriptive in nature; there is not imposed upon fiduciaries a quasi-tortious duty to act solely in the best interests of their principals. In Breen v Williams, Gaudron and McHugh JJ said [at 113]:
In this country, fiduciary obligations arise because a person has come under an obligation to act in another's interests. As a result, equity imposes on the fiduciary proscriptive obligations - not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed.
For those reasons, I do not accept the contention of NBS that any of the respondents owed to it any of the fiduciary duties pleaded.
Exemplary damages
NBS sought exemplary damages in respect of the action in deceit and the negligence claims. In my view, this is not a case in which there is a need to “punish” Mr Stewart in the sense in which that word is used in the cases (See, eg, Lamb v Cotogno (1987) 164 CLR 1; Gray v Motor Accident Commission (1998) 196 CLR 1). And the first and second respondents themselves, qua partnerships, were not dishonest. The partners are, rather, liable for Mr Stewart’s deceit.
In those circumstances, I decline to make an award of exemplary damages in this case.
Professional Standards Schemes
The parties agreed that if I were to make, as I have, findings of dishonesty in respect of Mr Stewart’s conduct, it is unnecessary for me to consider the detailed and very helpful submissions made by the parties in respect of whether the Professional Standards Schemes impose relevant caps on the quantum of damages recoverable. Accordingly, consistently with the agreement of the parties, I do not deal with those submissions.
DISPOSITION
For the reasons given above, NBS is entitled to judgment against the respondents on its principal claim brought in deceit in the sum of $5,485,416. That sum is to be adjusted to reflect the date of judgment. In those circumstances, I will direct NBS to file and serve a note with the calculation as to the precise sum in respect of which judgment is to be entered.
I will also list the matter for further hearing on any consequential orders to be made, including as to costs and interest.
I certify that the preceding two hundred and eighty-one (281) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Callaghan. Associate:
Dated: 21 December 2018
3
8
4