Re Venture Capital Group Pty Ltd (No 2)

[2015] VSC 319

IN THE SUPREME COURT OF VICTORIA AT MELBOURNE Not Restricted

COMMERCIAL COURT
CORPORATIONS LIST

S CI 2012 03857

IN THE MATTER OF VENTURE CAPITAL GROUP PTY LTD (ACN 111 119 914)
(in its own right and as trustee of the VCG Trust)

BETWEEN:

ALPHATER CONSULTING ENGINEERS PTY LTD (ACN 107 954 629)	Plaintiff
v
MILES ROZMAN & ORS	Defendants

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JUDGE:	Robson J
WHERE HELD:	Melbourne
DATES OF HEARING:	11 & 12 May 2015
DATE OF JUDGMENT:	15 July 2015
CASE MAY BE CITED AS:	Re Venture Capital Group Pty Ltd (No 2)
MEDIUM NEUTRAL CITATION:	[2015] VSC 319

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CONTRACT – Repudiation – Parties entered into a dispute resolution agreement for the plaintiff to sell to the defendants the plaintiff’s interest in a business run by the plaintiff and the defendants – Under the dispute resolution agreement an independent expert was appointed to resolve differences between two valuers of the business, appointed respectively by each party – The plaintiff  unilaterally terminated the appointment of the independent expert on the basis that the independent expert breached the terms of his appointment – Whether independent expert had breached the terms of his appointment – Whether plaintiff had repudiated the dispute resolution agreement in unilaterally terminating the appointment of the independent expert – Whether defendant entitled to accept the termination of the appointment of the valuer by the plaintiff as a termination of the dispute resolution agreement – Held the dispute resolution agreement was validly terminated.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr D B Clough	Lennon Mazzeo
For the Defendants	Mr R A Heath with Mr K R Hickie	B2B Lawyers

TABLE OF CONTENTS

Introduction and background............................................................................................ 1

The defendants’ cross‑claim............................................................................................... 9

The issues in dispute.......................................................................................................... 9

The evidence...................................................................................................................... 10

Engagement of Mr Stout................................................................................................... 28

Conclusion on Mr Parisi’s attitude................................................................................. 29

The use of hindsight in the valuations........................................................................... 29

Changes in circumstances................................................................................................ 30

Court’s power to intervene.............................................................................................. 33

Was the independent expert in breach of the terms of his engagement?................. 35

The proposed meeting...................................................................................................... 36

Opinionated or argumentative material........................................................................ 37

Irrevocably infected........................................................................................................... 38

Did Alphater repudiate the dispute resolution agreement?...................................... 39

Honest misapprehension................................................................................................. 44

Conclusion.......................................................................................................................... 46

HIS HONOUR:

Introduction and background

1. This matter is the continuation of a dispute that first came before me in 2012.  The background facts may be conveniently adopted from the introduction of the interlocutory judgment I previously gave in the matter.[1]

   [1]Re Venture Capital Group Pty Ltd [2012] VSC 654.

1. Mr Parisi is the sole director and sole shareholder of the plaintiff, Alphater Consulting Engineers Pty Ltd (Alphater).  Although Mr Parisi was not a party to the this proceeding in his own right, it was pursuant to his instructions and evidence that Alphater’s claim was brought; as such, these reasons refer to Mr Parisi’s involvement in relevant matters, acting on behalf of Alphater.  Alphater holds an interest in a group of companies and trusts that owns and operates the Moderno Café business and the Bite franchise business.  In January 2010, Mr Parisi was removed as a director of one of those companies, Venture Capital Group Pty Ltd (VCG). VCG is the trustee of the VCG Unit Trust.

1. In March of 2010, Alphater’s solicitors, Lennon Mazzeo, made certain demands on Mr Rozman, the first defendant, who controls VCG.  Those demands included that Mr Parisi be reappointed as a director.  Alphater’s demands were rejected by Mr Rozman in a  letter from his solicitors of 23 March 2010.  The letter stated:

We refer to your letter dated 5 March 2010. 

Our client does not agree that your client owns one third of the units in the VCG Unit Trust.  We are instructed that your client holds 25.5 % of the units.  Your client does hold one of three issued shares in VCG. 

Our client does not agree that it has always been part of any arrangement between our clients and Mr Parisi that Mr Parisi would be entitled to be a director of VCG.  We are instructed that the removal of Mr Parisi as a director was regrettable, but unavoidable given Mr Parisi's conduct in that capacity.

Our client will not rescind the termination of your client’s directorship of VCG. 

We note the threat of legal proceedings seeking remedies including a purchase of your client's interest in VCG. 

We are instructed that our client (or his nominee) agrees to purchase all of your client's interests in VCG, the VCG Unit Trust and all other entities and trusts forming part of the Café Moderno and Bite businesses, at their market valuation.  This will avoid the need for the unnecessary cost and expense of any proceedings.

It seems to us and to our client that in relation to the Section 232 proceeding you have foreshadowed, the real issue in controversy may be the value of your client’s interests. To resolve that issue we propose the following regime for determination of the market valuation:

1. Each of our respective clients engages a valuer to provide a valuation of your client’s interests.

2. Each of our clients’ valuers then meet to attempt to resolve any differences between their respective valuations, and to identify any issues not capable of resolution.

3. Any issues which are unable to be resolved as between our clients’ respective valuers, then be referred to an independent expert for determination and each of our clients be bound by the determination of such expert and the resulting valuation.

Our clients will provide such access to the financial records of the company as your client’s valuer requires for the purposes of conducting the valuation.

We trust that our client’s proposal, which is put on an open basis, provides an acceptable method for the resolution of any dispute.  Alternatively, our client would consider a proposal for a single independent valuer to conduct a binding valuation of your client’s interests. 

If your client rejects our client’s proposal, and elects to commence proceedings under Section 232 of the Corporations Act 2001, then:

(a) our client will make available for inspection the books and financial records by your client under s 198F(2);

(b) this letter will be produced to the court on a question of the costs of those proceedings. 

We would be grateful for your early response in this regard. 

The fact that we have not responded to any particular matter raised in your letter should not be taken as an indication that we agree with any such matter. 

Our client otherwise reserves all his rights.

1. Subsequently, there was an exchange of correspondence between the respective solicitors for the parties and eventually acceptance of the offer made in the letter of 23 March 2010; that Mr Rozman or his nominee would purchase all of Alphater’s interests in the Café Moderno and Bite franchise businesses at their market valuation.

1. Under the agreement, the parties also agreed on a three‑step procedure for determining the market valuation (the dispute resolution agreement).  Mr Parisi appointed Mr Ray Richardson of KSR Partners as his valuer pursuant to step one of the valuation procedure.  Mr Richardson used the financial information as at 30 June 2010 (his valuation is dated 13 April 2011).  Mr Richardson valued the total value of the group at $2,636,000 and determined that Mr Parisi’s interest of 28.125 per cent would be $741,375.

1. The defendants appointed Mr Shankar Bala from S. Bala Chartered Accountants as their valuer.  Mr Bala’s valuation is dated 18 May 2011.  He also used the accounts as at 30 June 2010.  His valuation was an earnings based valuation taking into account  the earnings and looking at the future maintainable earnings based upon the accounts as at 30 June 2010.  Mr Bala concluded that ‘to exit the business at a 25.5% share, Matthew Parisi would be required to contribute $4,382.17.’  Thus, Mr Bala valued the business at -$17,185.

1. After the exchange of the valuations, the parties moved to step two of the valuation procedure which provided that:

Each of our clients’ valuers then meet to attempt to resolve any differences between their respective valuations and to identify any issues not capable of resolution.

1. Step two was observed.  The valuers met, attempted to resolve their differences and identified the issues not capable of resolution.  The parties then turned their minds to step three but were unable to agree on the approach to be taken under step three.  Alphater said that the independent valuer, as the expert, should be limited to solely having regard to the material provided to the two valuers.  The defendants contended that there was no such limitation.

1. As a consequence, Alphater commenced legal proceedings in this court on 6 July 2012 by an originating process in matter no 3857 of 2012. The application sought orders under s 232 and s 233 of the Corporations Act 2001 and at general law alleging oppressive conduct by the defendants in failing to comply with the dispute resolution agreement.

1. The application provided that:

On the facts, statements and supporting affidavit the Plaintiff seeks orders for:

1.Specific performance of the dispute resolution agreement.

2.Orders under s 233 of the Act that the defendants or one or some of them, purchase:

(a)the Plaintiff’s share in the Third Defendant; and

(b)the Plaintiff’s units in the VCG Trust;

for the value determined pursuant to the dispute resolution agreement or, alternatively, for the value determined by an independent valuer appointed by the Court. 

3. Alternatively, orders under s 233 of the Act that the Third Defendant:

(a)       buy back the Plaintiff’s share in the Third Defendant; and

(b)in its capacity as the trustee of the VCG Trust, buy back the plaintiff’s units in the VCG Trust,

for the value determined pursuant to the dispute resolution agreement or, alternatively, for the value determined by an independent valuer appointed by the Court. 

4.Such further or other relief as the Court deems just.

5.        Directions.

6.        Order that the costs of the application be costs in the cause.

1. The plaintiff alleged in particulars of the dispute resolution agreement (filed pursuant to the order of Ferguson J of 17 August 2012), inter alia, that the terms of the dispute resolution agreement were as follows: [2]

   [2]References omitted.

…

2(a)Miles Rozman (or his nominee) shall purchase all of Alphater’s interests in Venture Capital Group Pty Ltd (‘VCG’), the VCG Unit Trust and all other entities and trusts forming part of the Café Moderno and Bite businesses (‘VCG Group’), at their market valuation.

(b)The aforesaid ‘market valuation’ shall be determined as follows:

i)(Stage 1) Miles Rozman, Darren Brierley and VCG, on the one hand, and Matthew Parisi and Alphater, on the other, shall each engage a valuer to provide a valuation of Alphater’s interest in the VCG Group.

ii)(Stage 2) The two valuers shall then meet to attempt to resolve any differences between their respective valuations and to identify any issues not capable of resolution.

iii)(Stage 3) Any issues which are unable to be resolved as between the valuers then be referred to an independent expert for determination and each of Miles Rozman, Darren Brierley and VCG, on the one hand, and Matthew Parisi and Alphater, on the other, be bound by the determination of such expert and the resulting valuation.  

(c)Miles Rozman, Darren Brierley and VCG shall provide to Matthew Parisi and Alphater such access to the financial records of the VCG Group as their valuer requires for the purpose of conducting his valuation.

(d)Until the resolution of the dispute, Miles Rozman, Darren Brierley and VCG undertake:

i)At all times to conduct the VCG in a bona bide manner.

ii)Not to open any other bank accounts in the name of VCG or use for VCG’s benefit any accounts other than the Westpac accounts currently held by VCG, without providing to Matthew Parisi and Alphater 7 days advance notice in writing.

iii)Miles Rozman, Darren Brierley and VCG shall provide to Matthew Parisi weekly accounts extending payment terms with suppliers (if such reports exist), quarterly details of rebates, monthly bank statements and monthly PLU summaries, subject to Matthew Parisi and Alphater providing an undertaking of confidentiality in relation to any reports provided.

iv)At all times allow only the payment of bona fide expenses of VCG from the bank account referred to in the previous paragraph as incurred in the ordinary and proper course of business and not to pay any sum of money to themselves or any other person unless authorised in writing by Matthew Parisi, save that:

1.Miles Rozman and Darren Brierley reserve the right to call for the repayment of funds recently advanced to VCG by them for the purposes of renovation of Chadstone, Armidale and Epping should external finance become available, otherwise loan accounts shall be repaid only on the basis that Matthew Parisi receives the same pro rata payment (in accordance with his unit holding in the VCG Unit Trust) on his loan accounts.

2.Miles Rozman be reimbursed for business expenses incurred by him on the credit card used by him for purchases and expenditures for the VCG Group, subject to Miles Rozman providing relevant documents relating to [sic]

Qualifications 1 and 2 shall be subject to Miles Rozman, Darren Brierley or VCG providing to Matthew Parisi and Alphater (and/or its representatives) relevant documents in relation to such financing, advances and credit card use upon request.

v)To provide access to and copies of the books and records of VCG including its financial records to Matthew Parisi’s and Alphater’s accountants and all legal advisers (for the purposes of any valuation and providing instructions to Matthew Parisi’s and Alphater’s accountant and legal advisers) at the cost of Miles Rozman, Darren Brierley or VCG.

(e)In the event that the matter be referred to an independent expert for determination as referred to in Paragraph (b)(iii) above then:

i)The expert must be a qualified accountant with substantial experience in the valuation of companies and operations similar to those conducted by VCG.

ii)The parties must agree the identity of the expert within 7 days after a final report is obtained from a meeting of the parties’ respective valuers and if the matter is unable to be resolved, failing which the identity of the expert will be determined by the Institute of Chartered Accountants.

iii)As far as practicable the parties and the independent expert be bound by Rule 50 (Referee out of Court) of the Supreme Court (General Civil Procedure) Rules 2005 (Victoria).

(f)Each party is to meet the costs of their own valuation.

(g)The parties’ respective valuations are to be conducted by reference to documents including but not limited to:

i)The VCG books of account up to 30 June 2010.

ii)The documents set out in the facsimile dated 30 November 2010 from KSR Partners to Shankar Balac.

(h)The independent expert’s role is confined to resolving differences between the parties’ valuers solely on the basis of the information that was available to the parties’ valuers and upon resolving those differences thereby determine the value of Alphater’s interest in the VCG Group as at 30 June 2010 (implied term that is obvious and necessary to give business efficacy to the Dispute Resolution Agreement.)

1. The plaintiff in the particulars also set out the correspondence by which they alleged the dispute resolution agreement was constituted.  The defendants admitted that the dispute resolution agreement was constituted by the documents enumerated in paragraphs 1(a) to (k) of the particulars.

1. The defendants also admitted the terms in paragraphs 2(a) to (f) set out above.  They  admitted the term in paragraph 2(g)(ii) but denied the term alleged in paragraph 2(g)(i) and the implied term alleged in paragraph (2)(h).

1. Accordingly, the defendants agreed that a dispute resolution agreement was entered into as alleged by Alphater save that it did not contain the term that the books would be limited to the accounts up to 30 June 2010, and they denied the implied term in paragraph (2)(h).

1. I held that the date of valuation was agreed on by the parties as 30 June 2010.  I also held that there was a binding dispute resolution agreement between the parties.

1. On the issue of the implied term, I held as follows: [3]

   [3]Re Venture Capital Group Pty Ltd [2012] VSC 654 [31]

I now turn to the second question, that is whether there was an implied term to qualify or expand on the third term of the binding dispute resolution agreement.

As mentioned above, the plaintiffs allege that it was an implied term of the agreement that:

The independent expert’s role is confined to resolving differences between the parties’ valuers solely on the basis of the information that was available to the parties’ valuers and upon resolving those differences thereby determine the value of Alphater’s interest in the VCG Group as at 30 June 2010.

In my view, such a term is not necessary to provide commercial efficacy to the agreement.  One can imagine many circumstances in which the independent expert who is called upon to rule on the matters in issue may call for further evidence.  He may want to see source documents, he may be given ledgers, he may want to see the journals.  One can imagine a variety of circumstances where he may call for more material so he is able to resolve the dispute between the respective valuers.

In my opinion, where the parties have agreed that an independent expert should be used to resolve a dispute between the valuations reached by the valuers appointed by each party), there is no need (to give commercial efficacy to that agreement) to confine the independent expert to the material which was before the respective valuers.  The independent valuer  may not need to go beyond that material.  On the other hand, I do not see it necessary to confine him to the material before the valuers if he forms the view that he needs something further to assist him to determine the issue before him.

I think that the concerns of the plaintiffs will be met in substance by my finding that it was a contractual term (or there is an estoppel) which limits the valuation to 30 June 2010.  The valuer obviously cannot take into account evidence that is not relevant to a valuation at that date.  The evidence he relies on must be  relevant to the issue at hand and the issue at hand is the correct valuation as at 30 June 2010.

My ruling only goes so far as to the questions asked of me, and the question asked of me.  My answer to that second question is “no” for the reasons I have given.

1. After my decision, the parties appointed Mr Kenneth Stout of Boutique Corporate Advisory to be the independent expert for the purposes of stage three of the dispute resolution agreement.  For the reasons given in Mr Parisi’s affidavit, which I turn to below, Mr Stout’s appointment was terminated by Alphater which has led to the matter coming back before me.

1. Alphater commenced the current proceeding by an interlocutory process dated 16 December 2014 in proceeding no 3857 of 2012.  By order dated 17 April 2015, Alphater was given leave to file and serve a proposed interlocutory process.  The relief sought by the amended interlocutory process included:

(a)        Declaration that the dispute resolution agreement was not validly terminated by the defendants and remains on foot.

(b)        Declaration that the dispute resolution agreement prohibits the parties from providing opinionated or argumentative submissions or material to the independent expert appointed for the purposes of the third stage of that dispute resolution agreement.

(c)        Declaration that under the dispute resolution agreement any change in circumstances concerning the VCG Group occurring after 30 June 2010 are not relevant to the valuation as at the 30 June 2010 to be conducted by the independent expert appointed for the purposes of the third stage of that dispute resolution agreement.

(d)       Specific performance of the dispute resolution agreement, particularly that the respondents jointly with the applicant, appoint a further independent expert to conduct the third stage of the said dispute resolution agreement and in default of agreement in respect of the appointment of the independent expert, the independent expert shall be appointed by the President for the time being of the Institute of Chartered Accountants.

The defendants’ cross‑claim

1. The defendants instituted separate proceedings in relation to the dispute resolution agreement in matter no 1287 of 2015.  On 30 March 2015, I ordered that the statement of claim filed in proceedings no 1287 of 2015 stand as the defendants’ points of cross‑claim in these proceedings.

1. Under the cross‑claim, the defendants seek the following orders:

(a)        A declaration that the plaintiff and Matthew Parisi (although Mr Parisi is not a party to these proceedings) have repudiated the dispute resolution agreement and the said agreement is at an end.

(b)        Damages for breach of the dispute resolution agreement.

(c)        Interest pursuant to statute.

1. The defendants have discontinued proceeding no 1287 of 2015.

The issues in dispute

1. Accordingly, this proceeding raises the issue of whether the independent expert was observing the agreed procedures for the conduct of stage three.  Alphater claims that the independent expert was not observing, or threatening not to observe, the agreed procedures for the conduct of stage three and that it was entitled to and did terminate the appointment of the independent expert.

1. Alphater seeks an order requiring the defendants to join with it to appoint an independent expert in accordance with stage three of the dispute resolution agreement.

1. The defendants claim that the independent expert was observing the agreed procedures and did not threaten to do otherwise.  They claim that Alphater, by terminating the appointment of the independent expert, repudiated the dispute resolution agreement.  They claim that defendants accepted the repudiation as terminating the dispute resolution agreement which is now at an end.  The defendants also seek damages.

1. Alternatively, Alphater says that if it was not entitled to terminate the employment of the independent expert, then its conduct in doing so did not constitute a repudiation of the dispute resolution agreement and that the defendants are obliged to join with it to appoint a new independent expert to conduct stage three in accordance with the dispute resolution agreement.

The evidence

1. Alphater relies on the affidavits of Mr Parisi dated 30 October 2014 and 5 November 2014.  Mr Parisi’s affidavit sworn 5 November 2015 supports the interlocutory process the subject of this proceeding.  Throughout that affidavit, Mr Parisi makes observations on the correspondence and the relevant events.  He also makes a number of negative observations about Mr Stout and his conduct in relation to his role as the independent expert.  I will include in the following chronology of events, where relevant, Mr Parisi’s observations.

1. By a letter dated 6 December 2011, Mr Richardson identified what he considered to be the differences between his valuation and that of Mr Bala.  The differences were extensive and extended over some five or six pages.  In an undated letter, Mr Bala responded to Mr Richardson’s letter of 6 December 2011 identifying some six pages of items on which there was a dispute in the valuation.  In any event, the issues between the two valuers were extensive but fully and clearly identified.

1. Following the 2012 decision, in light of my answers to the preliminary questions, the parties embarked on stage three of the valuation process.  In this regard, the evidence shows as follows.

1. The parties appointed Mr Kenneth Stout to act as the independent valuer.  Mr Stout is an experienced valuer, a former partner of Ernst & Young and a former investigating accountant attached to the Victorian State Law Office (Companies Branch).

1. On 11 September 2013, Lennon Mazzeo, the solicitors for Alphater, wrote to Mr Stout (on behalf of their client) and with the consent of the defendants’ solicitors on behalf of their clients.  The letter says that it comprises instructions to Mr Stout on behalf of all parties in the matter.  Mr Parisi refers to this as the letter of instructions.  Subsequently, Mr Stout obtained a signed letter of engagement that referred to and incorporated the letter of instructions.

1. The letter sets out the three stages agreed on by the clients as the binding dispute resolution process.  Mr Stout was advised that the parties had agreed that Alphater’s interest in the VCG business was 25.5 per cent.  The parties acknowledged that the relevant date for the valuation of the VCG Group was and remained 30 June 2010 ‘for the purposes of the agreed dispute resolution process.’

1. Mr Stout was advised that pursuant to stage one, Mr Parisi and Alphater engaged Ray Richardson of KSR Partners Pty Ltd.  Rozman and VCG engaged Shanker Bala.  Mr Stout was advised that Mr Richardson and Mr Bala each provided valuations of the VCG Business as at 30 June 2010, concluding as follows:

Richardson                $  2,636,000.00

Bala  -$      17,185.00

1. The instructions, by way of the  letter of 11 September 2013, stated:

Pursuant to the dispute resolution process, you are instructed to determine all issues which were unable to be resolved by Richardson and Bala and, in doing so, determine the valuation of the VCG Group as at 30 June 2010.

You are to assume that the issues you must determine are those set out in Richardson’s final report dated 6 December 2011 and in Bala’s letter of 19 April 2012.  If you observe differences or unresolved issues between the valuations that are not identified in the final report dated 6 December 2011 or the Bala letter of 19 April 2012, you are to describe and determine those differences or issues in your report.

Where there are loans concerning Alphater in the books of the VCG Group as at 30 June 2010, you should treat such loans as you see fit taking into account any matters you consider to be relevant.

Having determined the valuation of the VCG Group as at 30 June 2010, you are to value Alphater’s interest in the VCG Group, assuming a 25.5% share.

Factual material

These instructions are accompanied by:-

a.The aforementioned valuations performed by Richardson and Bala, respectively.

b.The material to which Richardson and/or Bala had regard for the preparation of their valuations.

c.The aforementioned report dated 6 December 2011 prepared by Richardson, identifying his understanding of the unresolved disputes or differences between him and Bala.

d.The aforementioned letter from Bala to Richardson identifying Bala’s understanding of the unresolved disputes or differences between him and Richardson.

You may take into account any additional factual material which you request to be provided by the parties, provided it is relevant to resolving the differences between the first two valuations (as set out in the aforementioned Richardson report and Bala letter) and, therefore, the valuation as at 30 June 2010 of the VCG Group and Alphater’s interest in it.

Should you wish to discuss any aspect of this letter, please do not hesitate to contact our Mr Nick Mazzeo.

1. A copy of the letter was sent to Mr Matthew Sweeney of the defendants’ solicitors.  Alphater places significant reliance on these instructions.  Alphater says that the instructions do not permit the expert to receive opinions or submissions from either party.  Alphater says that the instructions only permit the expert to take into account additional factual material provided it is relevant to resolving the differences between the first two valuations and therefore the valuation as at 30 June 2010 of the VCG Group and Alphater’s interest in it.

1. The defendants, on the other hand, contend that the instructions contained no prohibition on Mr Stout’s consideration of opinions, arguments or hindsight materials.  An examination of the issues that the independent expert was to resolve suggests that Mr Stout may have been assisted in his task by an examination of the reasoning behind the approaches taken by Mr Richardson and Mr Bala. 

1. By a further letter dated 20 September 2013, Lennon Mazzeo wrote to Mr Stout referring to his email of 11 September 2013.  The letter says that:

Mr Matthew Sweeney, on behalf of B2B Lawyers and the writer have agreed, subject to your willingness to undertake this assignment, to appoint you the independent expert for the purpose of resolving Alphater’s interest in the VCG business.

1. The letter provided other information, including orders made in the Supreme Court and concluded as follows:

Your expert determination will effectively finalise the dispute between the parties given that the parties have agreed to be bound by your determination and the resulting valuation.

1. Subsequently, by letter dated 11 October 2013, Mr Stout raised some questions with the parties.  Mr Stout said as follows:

For the purpose of the matters outlined in your joint letter to me of 11 September 2013 and per your previous subsequent email received 20 September 2013, I set out a series of questions for both you and your client to answer so that a ‘scope of the tasks to be performed by the independent expert [IE] are to your full understanding.

I would like to obtain an understanding and acceptance from you both as to the process for the IE to utilize for this assignment.

1.Do the parties agree that the assessment of value is to be ‘as at’ on one date; and that ‘subsequent events’ (events known to have occurred after the valuation ‘as at’ date opinion) are to be ignored totally.  (This means events relating to granting of or use of premises or obtaining leases are to be ignored as part of the task).

Is this acceptable to both parties?

2.Is it expected that the IE call both parties to address (in the presence of each other) the IE on issues considered relevant by the IE before concluding his, IE opinion.

3.The exact nature of what is being valued and when is blurred.  The S. Bala valuation refers to “Matthew Parisi Business Interest” in the Group comprising 6 Trusts for Matthew’s interests  (25.5% Share) to exit the business.

3.1The KSR Valuation refers to 4 Cafes, one franchise (5 businesses – not 6) and plant and equipment in storage.

3.2In your joint instructions 11 September 2013 on page 3 you request two tasks ‘….determine the valuation of the VCG Group as at 30 June 2010…’ and further having determined that value I am asked to determine a second value namely ‘…. Alphater’s 25.5% value within that the group….’

There is a difference in valuation of an interest in a group and finding someone who wants to buy that minority (to exit the group).

What are the instructions for IE regarding assumptions (the possibility of buying that interest considered a minority interest) and what dividend entitlements flow historically to unit holders within the group?

4.The 30 June, 2010 Financial Statements for various entities were used as the financial statements as at 30 June, 2010 and do both parties agree that ‘cash trading’ element is to be totally ignored and the reported financial statements as at 30 June, 2010 be solely used rather than statements closer to valuation date (say 31 March, 2011) and or adjusted for the possibility of cash trading.

In other words, is it to be submitted by both parties to the IE that more recent financial statements (managed accounts for trading post 1 July, 2010 to 31 March, 2011) be ignored and rely on the earlier agreed date to be 30 June 2010 with no recognition for subsequent events or elements of any cash trading.

…

1. The three key questions arising from Mr Stout’s letter of 11 October 2013 can be summarised as follows:

(a)        Whether, in conducting the valuation, he should ignore events subsequent to the valuation date.

(b)        Whether Mr Stout could call on both sides to address questions he considered relevant to his valuation task. 

(c)        Whether he should consider financial statements post‑dating the valuation date.

1. In a written response of 28 October 2013 to Mr Stout’s first question, Alphater said:

We confirm that you are to determine the valuation of the VCG Group as at 30 June 2010 (“relevant date”) however all information (past and future) should be taken into account in valuing the business as at the relevant date.

1. In response to the second question identified above, Alphater said:

If you believe that a conference with the parties will assist you in completing your determination then our client is  amenable to attending your offices in the presence of the other parties for the purpose of dealing with any matters you consider relevant.

1. In response to the question about the use of post valuation date financial statements, Alphater said:

This is a matter for your discretion but the valuation should be conducted on the basis that you have available all information you consider relevant, provided that the valuation is conducted as at the relevant date.

1. Alphater concluded:

The valuation date has been determined by agreement.  You are simply to value the VCG Group as at the agreed date, with full information at your discretion, and assume that the Alphater/Parisi interest is 25.5% of the whole.

1. In their written response of 15 November 2013 to Mr Stout’s first question, the defendants said:

There was no specific direction or agreement about subsequent events and the extent to which they may be relevant and taken into account.  That is a valuation question you may consider in determining the valuation at the relevant date, and in doing so you may invite submissions to the extent you consider appropriate.

1. In response to the second question, the defendants said that it was a matter for Mr Stout.  In relation to the third question, the defendants said that it was a valuation question for the valuer, and on which he could invite submissions from the parties if he saw fit.

1. By letter dated 21 November 2013, Alphater’s solicitors wrote to Mr Stout stating that ‘it seems to us that the status of your queries is as follows’ and then set out the following table:

Your query	Our response	B2B’s response	Status
1.  Are subsequent events to be ignored?	2.  All past and future information should be taken into account as you see fit	A matter for you	Effectively resolved
…
4.  Is ‘cash trading’ to be ignored and is regard to be had to statements after 30 June 2010?	You should use all information you consider relevant	A matter for you	Resolved
…

1. The letter concluded with the following:

As a general comment, we reiterate your instructions that the issues you must determine are those set out in Richardson’s final report dated 6 December 2011 and in Bala’s letter of 19 April 2012, and thereby determine the valuation of the Group as at 30 June 2010.  Further, if “you observe differences or unresolved issues between the valuations that are not identified in [those documents], you are to describe and determine those differences or issues in your report”. Your task, therefore, is to resolve the differences between the initial valuations in order to determine the valuation of the Group as at 30 June 2010.

1. On 18 February 2014, Mr Stout emailed Lennon Mazzeo proposing a meeting of the parties; both lawyers and their respective clients and/ or advisors at his office.  He asked them to provide “any additional information that [they] may consider relevant to the period of time being examined.”

1. Mr Stout said that ‘[t]he process for the meeting is that each side will be asked questions by me and once answered, the other side can make any comment they believe necessary.’ 

1. Mr Parisi says that he believes that Mr Stout did little or nothing pursuant to his engagement until 18 February 2014, when Mr Stout sent identical letters to each party requesting a joint meeting of the parties.  Mr Parisi refers to the letter of 11 September 2013 as the letter of instructions.

1. Subsequently, Mr Stout circulated an extensive agenda for a meeting on 12 March 2014.  The agenda shows that Mr Stout wished to raise some of the matters on which Mr Richardson had relied (for example, references to ‘Rule of Thumb’ and ‘Industry Benchmark’). The agenda also reflected a desire to resolve the issue of the use of events subsequent to the valuation date and to seek ‘submissions … if any, from [the] Parties’ on relevant agenda items.

1. On 20 February 2014, Alphater’s solicitors confirmed their availability to attend the proposed meeting.  At that stage, neither party objected to any proposed agenda items or Mr Stout’s 18 February proposal for the conduct of the meeting and provision of “any additional information that [the parties] … may consider relevant.”

1. However, in a letter dated 25 February 2014, Alphater’s solicitors objected to the defendants submitting further information to Mr Stout unless he had specifically requested such information and it was relevant to the valuation of the interest as at 30 June 2010.  The objection was based on the instructions and in particular that ‘it was agreed that the expert take into account any additional factual material which he requested be provided by the parties, provided it was relevant to resolving the differences between the first two valuations.’  Alphater’s lawyers also indicated that Alphater did not intend to provide further factual information to Mr Stout unless he requested it.

1. By letter dated 5 March 2014, Mr Stout wrote to the solicitors for the parties to confirm his understanding of the terms of his engagement and the nature of the services he would provide.  The letter was headed ‘Engagement Agreement – Expert Report.’

1. Under the heading of ‘purpose and scope’ Mr Stout said:

We refer you to your letter of instructions dated 20 September 2013 & 28 October 2013 where we have been requested by you … to conduct a review regarding the valuation of the VCG Group as at 30 June 2010 …”.

1. The two letters referred to are the letter of 20 September 2013 (that is referred to as the letter of instructions) and the letter of 28 October 2013 answering the questions Mr Stout had asked.  The engagement agreement was signed by both solicitors on behalf of their clients.  Mr Stout refers to this agreement as constituting his agreement with Alphater and the defendants.

1. The joint meeting took place on 12 March 2014.  On that occasion, the parties put forward different views concerning the material to which Mr Stout could have regard for the purposes of the stage three valuation.[4]  Mr Parisi says that he attended the joint meeting on 12 March 2014.  Mr Parisi was critical of the conduct of the meeting by Mr Stout. 

   [4]The plaintiff’s position is that the events of this meeting do not give rise to any variation or amendment of the dispute resolution agreement or the instructions.

1. Mr Parisi says that at the meeting also present were Mr Stout, his assistant Eliza, Mr Parisi’s solicitor Nick Mazzeo, his barrister Daniel Clough, the defendants’ solicitor Matthew Sweeney and, of the defendants, Miles Rozman and Darren Brierley.  Mr Parisi says that Shanka Bala, the defendants’ accountant and valuer, was also present.

1. Mr Parisi objected to the presence of Mr Bala at the meeting.  Mr Parisi says that he believes that neither he or his lawyers had received any notice that Mr Bala would be present at the meeting. 

1. Mr Parisi says that at the commencement of the meeting his lawyers objected to Mr Bala’s presence.  My Parisi says that Mr Sweeney argued that Mr Stout’s agenda was replete with accounting issues and the meeting could not proceed without Mr Bala.  Mr Parisi says that his lawyers told Mr Stout that they might not continue the meeting on that basis.  Mr Parisi says that he and his lawyers left the meeting room to discuss the situation.

1. Mr Parisi states that upon re-entering the meeting room, his lawyers said that the process did not enable Mr Stout to inform himself from the opinions of others, particularly those of the initial valuers, but rather only from factual information.  Mr Parisi says that his lawyers said that the process did not entitle valuers to elaborate on their reports. Mr Parisi says that his lawyers said that Mr Stout could request information about factual matters but if he wished to ask a question of an expert then he should put it in writing and his solicitors would respond giving Alphater’s position with regard to it.

1. Mr Parisi says that Mr Sweeney argued that Mr Stout should be able to ask anything regarding accounting principles.  Mr Parisi says that his lawyers objected, stating that those were matters of expert opinion.  Mr Parisi says that his lawyers then said that they would not proceed with the joint meeting unless Mr Stout confined himself to requests for factual information from Mr Rozman or Mr Brierley directly. 

1. Mr Parisi says that Mr Stout said that he would continue the joint meeting on the basis that he would ask questions concerning factual matters only and put questions to the experts on notice, to be set out in writing for consideration. Mr Parisi says that, accordingly, he and his lawyers remained and participated, as did the defendants and their lawyers.

1. Mr Parisi says that sometime at an early point during the meeting, there was an occasion in which Mr Stout asked Mr Bala directly about a factual matter concerning the business.  Mr Parisi says that his lawyers objected and required Mr Stout to direct his questions to either Mr Rozman or Mr Brierley.  Mr Parisi says that thereafter, Mr Stout directed his questions to those persons.

1. Mr Parisi says that Mr Bala had no cause to, and did not, contribute to the meeting substantively.  Mr Parisi deposes that during the meeting, Mr Stout put various questions on notice and said that he would put them in writing as requested.

1. On 18 March 2014, Mr Stout formally sought from both Alphater and the defendants material to assist him in carrying out his valuation task.  Mr Stout also sought from each of Alphater and the defendants information and explanations of matters relied on in their separate reports.  For example, Mr Stout sought information on  Mr Richardson’s opinion concerning the applicable ‘industry benchmarks’ and ‘rule of thumb’ as well as other information.

1. Under the heading ‘The Objectionable Material’, Mr Parisi says that by a letter of 18 March 2014, Mr Stout made written requests of the parties.  Mr Parisi says that it had been his understanding that Mr Stout would set out specific questions he had concerning matters of opinion, for Mr Parisi and his lawyers’ consideration.  Mr Parisi says that he did not do this but instead Mr Stout invited either party to assist with reasons or better explanations behind the points of disagreement that were  shown in Mr Bala’s undated letter.

1. Mr Parisi says that he considered Mr Stout’s request to be directly contrary to the position that his lawyers had expressed at the joint meeting.  Mr Parisi says that he believes that Mr Stout had done little or nothing towards the preparation of his report by that point in time and was seeking to have the parties provide extensive argumentative submissions.

1. Mr Parisi says that he believes Mr Stout’s approach inevitably would have led to a potential endless series of opinions, arguments and responses.  Mr Parisi says that he considered it was Mr Stout’s simple task under the letter of instructions for him to come to his own opinion, on whatever relevant factual information he required, in order to resolve the differences between the two valuations that the parties had obtained.

1. In response, by letter dated 21 March 2014 to Mr Stout, on Mr Parisi’s instructions, Alphater’s solicitors agreed that the parties should supply documents and explanations as requested.  The letter said:

Whilst our client agrees that the parties should supply the documents and explanations expressly requested by you at paragraphs 1 to 10 (inclusive), we believe that any explanations should be no more than a more detailed description of what Mr Bala or Mr Richardson meant and the evidence on which they based the relevant statement.

Further, we maintain that there should be no occasion for the parties to engage in argumentative submissions (accounting or legal).  Further, neither Mr Bala nor Mr Richardson, nor the parties’ lawyers, ought to engage in any attempts to alter, improve or re-argue their opinions.

1. Mr Parisi says that on 2 April 2014, Mr Richardson wrote to Mr Stout, providing a response to Mr Stout’s queries in his letter of 18 March 2014.  Mr Parisi says that he believes that the letter from Mr Richardson was confined to the factual material concerning the assumptions and documents that Mr Richardson had in fact relied on while preparing his valuation.

1. Mr Parisi says that, similarly, he had no objection to a letter from Mr Bala of 4 April 2014, which was confined to factual material concerning the assumptions and documents that he had relied on while preparing his valuation.

1. On 4 April 2014, the defendants’ solicitors sent an extensive bundle of documents to Mr Stout (bundle) addressing the matters arising out of the meeting held on 12 March 2014 and Mr Stout’s letter of 18 March 2014.  The bundle contained, inter alia, company accounts and a report prepared by Deloitte (the Deloitte Private report). 

1. Mr Parisi says that while most of the material was factual, it included various opinionated summaries of the material.  Mr Parisi says that it also included a letter from GR Sincock of Deloitte Private to the defendants’ lawyers, which stated various expert opinions critical of his valuer’s valuation.

1. Mr Parisi says that he considered that this opinionated material was irrelevant to Mr Stout’s task and likely to prejudice Mr Stout against Alphater’s interests.  Mr Parisi says that he believes that the defendants, by providing that opinionated material to Mr Stout, breached the dispute resolution agreement and subverted the letter of instructions.

1. Mr Parisi says that, accordingly, he instructed Alphater’s lawyers to write to Mr Stout and the defendants’ lawyers on 8 April 2014 asserting that the bundle supplied by the defendants’ solicitors on 4 April 2014 was plainly outside the terms of the dispute resolution agreement.  They confirmed that at the meeting of 12 March 2014, Mr Parisi objected to any argumentative submissions, whether accounting or legal, and said that they proceeded with the meeting on the basis that Mr Stout could take into account any additional factual material he requested be provided by the parties, provided that it was relevant to resolving the differences between the first two valuations or a detailed description of what Mr Bala or Mr Richardson meant and the evidence on which they based the relevant statement.

1. Alphater’s solicitors also stated that, while it had no objection to Mr Stout considering the company accounts in the bundle, it did object to him considering the other material, including the Deloitte Private report. Alphater’s solicitors also requested that Mr Stout refrain from considering any of the material contained in the bundle (apart from the company accounts) until they had the opportunity to provide Mr Stout, with more specificity, the details of the objectionable material.

1. During the cross-examination of Mr Parisi, Mr Heath of counsel produced an email from Mr Stout to ‘Kate’ (being the legal secretary to Mr Mazzeo of the solicitors for the plaintiff) dated 8 April 2014 with the timestamp of 8.58 pm. The email was also copied to Mr Sweeney of the solicitors for the defendants.  Mr Stout wrote as follows:

Good evening all,

I am out of the office on Friday 11 March 2014 as I will be traveling with my family in order to attend a Friday afternoon wedding.

Accordingly if material is being prepared for a Thursday afternoon delivery to my office then I will not be accessing it until Monday 14 April. Thus if it assists anyone I will not be actioning any material as submitted thus far until Monday next 14 April 2014.

I leave it to the parties to argue the point over the issue noting as I have said previously that a valuation opinion is an opinion statement & not a statement of fact; if the two valuations opinions were akin to a “roadworthy of a vehicle” I am saying in my professional opinion neither opinions as assembled thus far passed the roadworthy process thus I was seeking assistance with points and material in order that a roadworthy opinion could be expressed by me on the opinions as assembled especially on those points where agreement had not been reached when the experts had met.

I await responses from the parties on the documents as assembled and as is flagged.

…

1. On 9 April 2014, the defendants’ solicitors wrote to Mr Stout, disputing Alphater’s position (as set out in the letter dated 8 April 2014) and stating that he should complete the valuation as he saw fit.  This letter was copied to Alphater’s  solicitors.  It said further that:

You may consider such of the material as we  have provided as you consider relevant or appropriate. If Mr Parisi’s representatives wish to respond further to any of the material provided on behalf of our client on 4 April 2014, then they should identify those matters promptly for consideration, given your previous indication that you would not consider material provided after 4 April 2014. We will respond further as necessary in relation to any further response which is provided to you, as foreshadowed in the Lennon Mazzeo letter dated 8 April 2014.

1. On 9 April 2014, on Mr Parisi’s instructions, Alphater’s solicitors wrote again to Mr Stout. The letter refers to the letter of the defendants’ solicitors to Mr Stout dated 9 April 2014 asserting that Mr Stout’s role was ‘simply to resolve differences between the Bala Valuation and the Richardson Valuation’.  The letter goes on to state as follows:

… if you have regard to the Objectionable Material you will be in breach of the Terms of Engagement.  We ask that you desist from reading the Objectionable Material and that you destroy copies of it.  We reserve our client’s rights to take further action if it appears that you have placed any reliance on it in your report.

1. Mr Parisi says that, in that letter, his lawyers reminded Mr Stout that the terms of his engagement confined him to taking into account factual material relevant to the valuation of the business of the VCG as at 30 June 2010.  Mr Parisi says that his lawyers said further that Mr Stout was not entitled:

[To] take into account either parties’ attempts to embellish, add to or improve their original valuations, whether by:-

(a)       further argument;

(b)raising issues not dealt with in the original valuations; or

(c)the opinions of other experts.

1. Mr Parisi says that his lawyers put Mr Stout on notice that if he had regard to the objectionable material then he and his lawyers considered that he would be in breach of his terms of engagement.

1. On the same day, in a subsequent letter to the defendants’ solicitors, Alphater’s solicitors, on Mr Parisi’s instructions,  alleged that they had engaged in ‘a gross breach of the dispute resolution agreement and an act of bad faith’.  Alphater reserved the right to take action for breach of the dispute resolution agreement and under provisions of the Civil Procedure Act2010 (Vic).

1. Mr Parisi says that Alphater’s lawyers referred in particular to the letter from Deloitte Private and pointed out that the defendants had given no prior indication to Alphater’s lawyers or him that they intended to provide such a document to Mr Stout.  Mr Parisi says that Alphater’s lawyers asked the defendants’ lawyers to write to Mr Stout to withdraw the objectionable material.

1. Mr Parisi says that on 9 April 2014, the defendants’ lawyers wrote to Mr Stout stating that they did not agree that the material provided by them to Mr Stout was outside the terms of any agreement.  Mr Parisi says that the defendants’ lawyers asserted that Mr Stout was entitled to take into account such materials provided to him as he saw fit.

1. On 11 April 2014, the defendants’ solicitors wrote to Mr Stout asserting that all the material provided on 4 April 2014 was responsive to the matters raised by Mr Stout as to requiring further material.  The defendants’ solicitors said that they apprehend that Alphater’s solicitors were contending that Mr Stout was only entitled to take into account factual material and was not entitled to call for further submissions, material, assistance or information in relation to any of the matters he was required to determine. 

1. The defendants’ solicitors submitted:

That proposition is in our view plainly wrong.  The fact that the letter of engagement refers to additional factual material being able to be considered does not preclude you seeking to explore with the parties the issues between the valuations or calling for any material you see fit to assist you in relation to those issues.  There is no statement in your letter of engagement to the effect that you are not permitted to call for submissions or further material which you consider may assist you in relation to the questions between the two valuations which you are required to determine.

1. The defendants’ solicitors invited Mr Stout to continue the valuation task as he saw fit ‘having regard to such of the materials as you have called for as you consider relevant’.

1. Mr Parisi says that, in that letter, the defendants’ solicitors further asserted that Mr Parisi had made no objection to any of the agenda items for the 12 March 2014 joint meeting. Mr Parisi denies that assertion.  Mr Parisi says that his lawyers said to Mr Stout at the joint meeting that they would not proceed unless Mr Stout confined himself to requests for factual information directly from Mr Rozman or Mr Brierley.

1. On the same day, the defendants’ solicitors wrote to Alphater’s solicitors asserting that Mr Stout was entitled to call for submissions in addition to factual material.

1. Mr Parisi says that, on 16 April 2014, Alphater’s lawyers, on his instructions,  wrote to Mr Stout and the defendants’ lawyers correcting the defendants’ lawyers’ assertion that they had not objected to Mr Stout’s agenda for the meeting on 12 March 2014.  Mr Parisi says that his lawyers noted that Mr Stout had not requested any of the objectionable material.  Mr Parisi says that Alphater’s lawyers asked Mr Stout to confirm in writing whether he considered he had requested any of the objectionable material, whether he had read any of it and whether he intended to rely or otherwise have regard to any of it in the preparation of his report.

1. Mr Parisi deposes that for many weeks he and Alphater’s lawyers heard nothing from Mr Stout.  Mr Parisi says that on 25 June 2014, Mr Stout wrote to the parties and said:

(a)he had made an open invitation to the parties to bring any person to the joint meeting who they felt would or could assist them;

(b)he would have allowed for the joint meeting to be reconvened “to allow for both parties to be better presented if they so desired;”

(c)the agenda for the joint meeting “clearly made references to the parties to make submissions;”

(d)in his letter dated 18 March 2014, he had asked the parties “to formally present and or better explain or answer points that may assist [him]”;

(e)in his letter dated 18 March 2014, he had made his “offer” for either party to assist “with reasons or better explanations behind the points of disagreement” in the initial valuations;

(f)he had “not considered in any detail the B2B Lawyers material as supplied on 4 April 2014;”

(g)he offered the parties to attend a second joint meeting “to explain to me why the material as presented to me by B2B Lawyers of 4 April 2014, pursuant to the Valuer’s request of the parties dated 18 March 2014, is not relevant material for the purposes of the engagement scope of 5 March 2014 given to the Valuer by the parties;”

(h)he would refrain from further work until the second joint meeting was held.

1. Mr Parisi says that he believes that Mr Stout’s letter confirmed that he had adopted the defendant’s erroneous interpretation of the letter of instructions and that his ‘open invitation’ and ‘offer’ to the parties to make whatever opinionated and argumentative submissions they saw fit would lead to a relentless and expensive cycle of submissions and expert reports. 

1. Mr Parisi says that he considered that process was contrary to the essential purpose of Mr Stout’s role in the third stage of the dispute resolution agreement, which was simply to resolve differences between the first two valuations, expressly confined to considering factual matters relevant to the valuation of the business as at 30 June 2010 and not to conduct the valuation afresh.

1. Mr Parisi further says that he believes that Mr Stout’s letter confirmed he had read the objectionable material, even if he had not considered it ‘in any detail’.  Mr Parisi says that it seemed obvious from his letter that he had considered it would be proper for him to rely on the objectionable material unless Alphater convinced him otherwise.  Mr Parisi says that he believes it was likely that Mr Stout had already been influenced by the objectionable material and that the words and tenor of his letter demonstrated that Mr Stout was tending to align himself with the defendants.

1. Mr Parisi says that he believes that Mr Stout’s offer of a second joint meeting, for the purpose of having the parties explain to him why the objectionable material was or was not relevant within the terms of his engagement, demonstrated that he fundamentally misconceived  his role. 

1. Mr Parisi says that, in effect, Mr Stout was proposing to assume the position of determining the scope of his own engagement.  Mr Parisi says that the plaintiff’s lawyers had already set out in writing the details of why he and they considered Mr Stout’s approach exceeded the ambit of his engagement under the letter of instructions.  Mr Parisi also says that even if his proposed second joint meeting was not misconceived, it would have been a futile and expensive exercise.

1. Mr Parisi says that, finally, he was concerned that Mr Stout had apparently done nothing of substance in the preparation of his report since his engagement on 11 September 2013, let alone in the six weeks after the most recent correspondence to him from the parties.  Mr Parisi says that Mr Stout was proposing yet more delay (another month) for a further joint meeting and evincing a clear preference for receiving argumentative and opinionated submissions from the parties without parameters and with no end in sight.

1. Mr Parisi says that he believes that Mr Stout’s conduct, culminating in his letter of 25 June 2014, demonstrated that he had not complied with, and would not comply with, the letter of instructions in accordance with its clear terms as Mr Parisi understood them or, in any event, within a reasonable time.

1. Mr Parisi says that, accordingly, on 30 July 2014, he instructed Alphater’s lawyers to write to Mr Stout and the defendants’ lawyers, terminating Mr Stout’s contract with Alphater on the grounds that he had repudiated the letter of instructions.  Mr Parisi  says that he and his lawyers did not seek consensus with the defendants as he and his lawyers did not perceive any prospect of achieving it.  Mr Parisi says that, in his view, Mr Stout had conducted himself as the defendants wished.

1. By a letter dated 30 July 2014, Alphater’s solicitors informed Mr Stout that by accepting and reading the materials, the dispute resolution process had been ‘irrevocably infected’.  They alleged that Mr Stout had fundamentally fallen outside the terms of engagement by accepting and reading those argumentative submissions from the defendants. 

1. Further, Alphater’s solicitors said that they did not agree with Mr Stout’s proposal for the parties to attend another meeting bringing with them whatever they want, effectively in order to explain to him why the objectionable material was not relevant under the terms of engagement.  They contended that his proposal misconceived his role.

1. Alphater’s solicitors contended that it had always been their position that the terms of engagement did not extend to Mr Stout receiving argumentative submissions from either party.  Nor did they extend to him putting out general invitations for the parties to provide whatever further information they saw fit. 

1. They asserted that for those reasons Mr Stout had repudiated his terms of engagement and Alphater accepted that repudiation and the terms of engagement were now terminated. 

1. On the same day, Mr Stout responded to that letter.  Mr Stout said that he had not ‘opened nor read that material in any detail’.  According to the explanation, having received the materials, he did no more than open the front cover of the folder in which they arrived.

1. By letter dated 5 August 2014, the defendants’ solicitors accepted what they described as repudiatory conduct on the part of Alphater.  As a result, they brought the dispute resolution agreement to an end. 

1. It has been necessary to consider in some detail Mr Parisi’s evidence.  In doing so there is some repetition in considering the correspondence between the parties.  Nevertheless, Mr Parisi’s evidence does disclose his disapproval of Mr Stout and a desire to remove him as the independent expert.

Engagement of Mr Stout

1. Mr Parisi identifies the letter of instructions of 11 September 2013 as the agreement between the parties and Mr Stout.  Mr Stout, on the other hand, considers the terms of engagement contained in the letter of 5 March 2014 as being the governing document.

1. Although the terms of engagement differed from the letter of instructions, nothing turns on the difference between the two in resolving the issues before me.

Conclusion on Mr Parisi’s attitude

1. I find that Mr Parisi had lost confidence in Mr Stout acting as the independent expert before terminating Mr Stout’s appointment.  Mr Parisi believed that Mr Stout had unreasonably delayed carrying out his duties, was conducting himself as the defendants wished and favoured taking into account opinion evidence. 

1. I infer that Mr Parisi did not wish for Mr Stout to continue as the independent expert although under the dispute resolution agreement Alphater was bound to accept the role of Mr Stout unless Mr Stout’s appointment was properly terminated.  Instead of asking the court to resolve the issue of whether Mr Stout had breached the terms of his engagement, Mr Parisi took the step of unilaterally purporting to terminate Mr Stout’s appointment. 

1. Previously when a dispute had arisen as to how the independent expert should conduct his duties under the dispute resolution agreement, Alphater had sought the court’s decision.  On this occasion, Alphater eschewed that approach even though the proceeding was still before the court.  I find that it did so as it feared that it would not get the result it wanted from the independent expert.

The use of hindsight in the valuations

1. During the hearing the issue of hindsight and hindsight material was raised.  In particular, was the independent expert entitled to take into account what was  described as hindsight material?  In conducting a market valuation, typically the valuer only takes into account things that were known or anticipated at the date of valuation and ignores information on events occurring after the valuation date.  In some instances where loss or value has to be determined, information that becomes available after the date upon which the loss or value is to be determined may be taken into account.  This may arise where loss and damage is being calculated in legal actions for damages. 

1. Alphater says that it has now ascertained that the bundle of material supplied to the independent expert in the Deloitte Private report did include what is described as hindsight material.  One of the declarations sought is on the issue of whether the valuer was entitled to take that information into account.

1. Whether the dispute resolution agreement as amended by the agreement of the parties permitted the use of hindsight in carrying out the valuation of the business has been complicated by the instructions given to the independent expert by the parties.  Mr Stout asked the parties to confirm that hindsight material was irrelevant.  In their response, the parties, however, on one view, appear to have left it open for Mr Stout to take into account hindsight material.

1. The resolution of the issue is not necessary as for the reasons given below I find that the dispute resolution agreement has been validly terminated.  Accordingly, it is unnecessary to decide whether, if it had remained on foot, that hindsight material could be taken into account.

1. If I am wrong in my decision that the dispute resolution agreement is at an end, then for the following reasons I would find that the essential instruction for the independent valuer was to resolve the issues between the two valuations.  These were ‘market’ valuations as at 30 June 2010.  Market valuations do not involve the use of hindsight.

Changes in circumstances

1. The dispute resolution agreement required a market valuation as at 30 June 2010.  The defendants concede that as a general rule, the only information that can be considered is that which was known, or which reasonably could have been known, as at the valuation date.  The defendants contend that when preparing a market valuation at a specific date, valuers should not take hindsight material into account (ie material concerning things that:  (1) occurred after the valuation date and (2) had not been anticipated at that date).

1. The principles concerning the use of hindsight material were summarised by the Full Court of the Federal Court of Australia in Propell National Valuers (WA) Pty Ltd v Australian Executor Trustees Ltd.[5]  There are many approaches that can be taken to assessing value.  In insurance cases and elsewhere, a distinction is often drawn between the market value of an item and the value to the owner.  The land or property may have some particular features which means its value to the owner is greater than could be achieved on the market.  In Commonwealth v Arklay,[6] the High Court held that under the Lands Acquisition Act 1906 (Cth) the value of land was to be assessed as the value to the owner. The court held that where the particular piece of land had no special suitability for some business or activity carried on by the owner and has no added potential if put to some better use, the value on a free market is usually its market value. The market value was described as that laid down in Spencer v The Commonwealth.[7]  The Court (Dixon CJ, Williams and Kitto JJ) said:

Shortly stated what is required is ‘an estimate of the price which would have been agreed upon in a voluntary bargain between a vendor and purchaser each willing to trade but neither of whom was so anxious to do so that he would overlook any business considerations’: Commissioner of Succession Duties (SA) v Executor Trustee & Agency Co of South Australia (1947) 74 CLR 358, 367.

[5][2012] FCAFC 31; (2012) FCR 158.

[6](1952) 87 CLR 159.

[7](1907) 5 CLR 418.

1. The defendants referred to an exception arising where the standard of value is ‘real value’.  The High Court of Australia has recognised and explained the concept of ‘real value’.[8]  The defendants submit that it picks up fair market value adjusted for specific facts not known or disclosed as at the valuation date, but where such facts have since been discovered to be accurate.  It has been held that this concept applies to the valuation of shares, business interests, land and annuities.

   [8]HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 630 at [40]; Kizbeau Pty Ltd v W G & B Pty Ltd [1995] HCA 4; (1995) 184 CLR 281 at [16]; and Potts v Miller [1940] HCA 43; (1940) 64 CLR 282 at 299 per Dixon J.

1. In Kizbeau Pty Ltd v WG & B Pty Ltd,[9] in explaining this concept, the High Court said as follows:

… although the value is assessed as at the date of the acquisition, subsequent events may be looked at in so far as they illuminate the value of the thing as at that date.

[9](1995) 184 CLR 281, [16].

1. In such cases, the use of hindsight material is appropriate to ascertain ‘real value’.  In McCathie v Federal Commissioner of Taxation,[10] Williams J explained this concept in the following terms:

The court has to ascertain the real value of the shares at the date of date of death, and the market value is not always the same as the real value (Potts v Miller (1940 64 CLR 282, 299.

….

Values must be calculated in the light of circumstances which existed on the material date ... but subsequent events can be taken into account in order to determine the proper weight to attach to such circumstances.  Subsequent sales are just as admissible in evidence as prior sales, provided that in all the circumstances they are comparable.  If between the material date and the date of subsequent sale, supervening events occur which alter conditions previously existing, the subsequent sales would not be comparable and would be useless ...  The whole tendency of the courts is to admit evidence of any events prior to the date of trial which throw any real light on the issues.

[10](1944) 69 CLR 1, 16.

1. Accordingly, although values must be calculated in light of circumstances that existed on the material date, subsequent events can be taken into account in order to determine the proper weight to attach to such circumstances.

1. By way of contrast, where a claim relates to the conduct of a valuer at a particular point in time, hindsight plays no part whatsoever.[11] 

   [11]Propell National Valuers (WA) Pty Ltd v Australian Executor Trustees Ltd [2012] FCAFC 31; (2012) 202 FCR 158,[73]–[81].

1. In my opinion, the answer to the issue of the use of hindsight material is given by the express provision in the dispute resolution agreement that the valuation was to be a ‘market valuation’ as at 30 June 2010.  In those circumstances the relevant test requires the valuer to ignore hindsight.  A market valuation presupposes a buyer and a seller are armed with the relevant information at the time.  Any use of hindsight would not be consistent with a market valuation of a business.

Court’s power to intervene

1. The function of an expert as distinct from an arbitrator has been considered in McGrath v McGrath[12] and Badgin Nominees Pty Ltd v Oneida Limited.[13]  An independent expert is not subject to the Commercial Arbitration Act.  The functions of an expert are governed by the contract between the parties and the expert that call for the services of an expert to be used. 

   [12][2012] NSWSC 578.

   [13][1998] VSC 188.

1. In 500 Burwood Highway v Australian Unity v Australian Unit Ltd,[14] Vickery J considered in some detail the circumstances in which the court will intervene to overturn an expert determination.  His Honour said:

   [14][2012] VSC 596 500 (Burwood Highway v Australian Unity).

An expert appointed under a contract is in a different position to an arbitrator and has a distinctly different range of duties. In Beevers v Port Philip Sea Pilots Pty Ltd (“Beevers”), Dodds-Streeton J described the differences in the following terms:

A valuer acting as an expert unlike an arbitrator is generally not obliged to receive submissions from the parties.

An arbitration is characteristically quasi-judicial and the parties intend that they should have the right to be heard if they so desire.

It is clear that, whereas a primary function of an arbitrator is to hear and resolve opposing contentions, in contrast, an expert is appointed to appraise value of loss or damage ‘by use of some special knowledge or skill ... without being required to hear the parties.

It has been held that, due to the distinction between the arbitral and expert functions, a report by an expert will not be vitiated by the appearance alone of partiality.

In Beevers Dodds-Streeton J referred to Macro v Thompson (No. 3) (“Macro”) with approval. Macro involved a valuation of shares in family companies was, under a pre-emption clause in the articles, committed to the companies’ auditor acting as an expert, rather than an arbitrator. Robert Walker J stated that:

[a]n expert entrusted with the duty of issuing certificates under contractual arrangements between two other parties is under a duty to act fairly and impartially, and the other parties implicitly contract on that basis.

Robert Walker J accepted that

[o]n the authorities as a whole I accept the submission made by Mr Rhys that when the court is considering a decision reached by an expert valuer who is not an arbitrator performing a quasi-judicial function, it is actual partiality, rather than the appearance of partiality, that is the crucial test.

His Honour adopted that view because –

[t]o hold otherwise would mean that auditors who have had a longstanding professional relationship with an association with one party to the contract might be unduly inhibited in continuing to discharge their professional duty to their client, by too high an insistence on avoiding even an impression of partiality.

In Macro, as noted by Dodds -Streeton J in Beevers, Robert Walker J found that the auditor (while not guilty of fraud or collusion or any conscious and positive cooperation in forwarding the interests of one party) was extremely imprudent in seeking advice and information from the purchaser’s solicitor, with whom he discussed figures. The auditor allowed the solicitor ‘to obtain a position of psychological ascendancy over him’ which the solicitor seemed to exploit.

Nevertheless, Robert Walker J, despite finding that “[the auditor] should have taken a much more independent line from the outset”, on the balance of probabilities was:

not persuaded that [the auditor] yielded sufficiently to [the solicitor’s] influence as to invalidate his valuation on the ground of partiality.

In the recent case of McGrath v McGrath (“McGrath”)  Pembroke J cited with approval the observations of the English Court of Appeal in Barclays Bank v Nylon Capital which are to similar effect:

As I have said, there is no procedural code for expert determination, in contradistinction to arbitration. The activities of an expert are subject to little control by the court, save as to jurisdiction or departure from the mandate given. Unless the parties specify the procedure, the expert determines how he will proceed; it is rare for what might be perceived as procedural unfairness in an arbitration to give rise to a ground for challenge to the procedure adopted by an expert: see Kendall, Freedman & Farrell, Expert Determination, 4th ed (2008), ch 16.[15]

[15]500 Burwood Highway v Australian Unity, [164]–[167], (citations omitted).

1. In Beevers v Port Philip Sea Pilots Pty Ltd[16] Dodds-Streeton J referred to the circumstances when a court may intervene in a valuation by an independent expert.  Her Honour said:

Historically, there has been a considerable degree of diversity in judicial identification of the deficiencies or flaws sufficient to vitiate an expert valuation.  The fundamental principle endorsed in modern Australian authority is that an expert valuation will be binding if it is within the terms of the contract.  Conversely, if an expert valuation can be said to depart from the terms of the contract, it will invite curial review and intervention.  The fundamental principle is very general, and its application will, in each case, depend on the terms of the particular contract.  The decided cases provide guidance on the construction of a contract under which an expert is appointed to determine a value or price.  An expert’s determination on discretionary matters is not ipso facto immune from review, but where, by the contract, such matters are entrusted to the expert without the prescription of criteria or restrictions, whether express or implied, it has frequently been inferred that the parties intended to be bound by the expert’s bona fide judgment, even if it is in some way erroneous.  On the other hand, it has been inferred that the parties would not intend to be bound by gross errors of objective fact or mechanical calculation.  Further, the expert’s determination may fail to satisfy a term of the contract because, when construed in context, the term is held to bear a special meaning which was not addressed. [17]

[16]Beevers v Port Philip Sea Pilots Pty Ltd [2007] VSC 566.

[17]Beevers v Port Philip Sea Pilots Pty Ltd [2007] VSC 566, [295].

1. This passage was cited with approval by Vickery J in 500 Burwood Highway v Australian Unity.[18]

   [18]500 Burwood Highway v Australian Unity, [268].

1. In accordance with these authorities, the court’s intervention may have been sought if the expert had departed from the terms of his engagement under the dispute resolution agreement.  Rather than seek the assistance of the court, in this case Alphater formed the opinion that the expert had departed from the terms of his engagement under the dispute resolution agreement, and terminated the expert valuer’s appointment. 

Was the independent expert in breach of the terms of his engagement?

1. Alphater claimed that it was unilaterally entitled to terminate the appointment of the independent expert for two reasons.  First, that the independent expert had had regard to information supplied by the defendants that was not information of solely factual matters but extended to information on opinions and arguments in support of the issues for which the defendants contended.  Secondly, that the independent expert had offered to hold a further meeting where the parties could bring with them whatever they wanted in order to explain why the objectionable material was not relevant under the terms of engagement.

The proposed meeting

1. In my opinion, the independent expert was not in breach of his terms of engagement by offering to hold another meeting.  Mr Stout had been informed that the parties took a different view as to whether or not he was entitled to have regard to material sent to him by the defendants. 

1. Mr Stout was contractually bound to carry out his terms of engagement.  In doing so it is implicit that he could hear contending views on what does or does not fall within his terms of engagement.  Of course, he cannot decide that something which falls outside his terms of engagement falls within it.  But to avoid falling outside the terms of his engagement, it is only sensible and reasonable that he is entitled to hear the opposing views on the issue.  Surely, he cannot be in breach of the terms of his engagement for wishing to hear submissions on why he would be in breach of the terms of his engagement if he took a certain course. 

1. Mr Stout was aware that the parties differed on whether or not he could take into account submissions on matters of opinion.  He had been sent a bundle of information that Alphater objected to him reading but the defendants insisted that he was entitled to read it.  Mr Stout offered the parties to hold a meeting to seek to resolve the issue.  It was open for Alphater to reject the offer of a meeting.

1. Alphater says that the independent expert was not entitled to decide whether the material in the bundle was relevant to his decision or not.  The position is not so simple.  As I have stated above, the independent expert was entitled to hear submissions on whether it was relevant or not.  If after hearing submissions, he decided that the material was relevant when under the terms of his engagement the material was relevant, then there would be no error on his part in having regard to the material.  If, on the other hand, he decided that it was relevant, when under the terms of his engagement the material was not, then he would have acted contrary to his instructions.  That may have led to his decision being made in breach of the dispute resolution agreement.  It may not have, if he did not rely on the material.

1. In my view, the independent expert was not acting in breach of his instructions in proposing a meeting to hear submissions on whether or not the bundle of material should be taken into account by the independent expert.  I do not consider that Mr Stout acted in breach of the terms of engagement by making the offer that he did.

Opinionated or argumentative material

1. The dispute resolution agreement provided for ‘any issues’ which were unable to be resolved as between the valuers to be referred to an independent expert for determination.  That is, the independent valuer was to resolve ‘any issues’ that were unable to be resolved between the two valuers.  The clause proceeded to provide that the parties ‘be bound by the determination of such expert and the resulting valuation’.  Thus, the parties agreed that the result of the expert resolving ‘any issues’ between the two valuers would lead to a ‘resulting valuation’.

1. It is clear that the independent expert was not to conduct his own independent valuation but rather engage in a process resolving ‘any issues’ that gave rise to a resulting valuation.  There were certain constraints on the independent expert.  For example, if he did not agree with the approach on a particular issue that the two valuers had not differed on, the independent expert could not substitute his own opinion.  Also if he disagreed with a factual finding that both valuers did not disagree on, he could not substitute his own finding.

1. There is no express provision in the dispute resolution agreement that prevents the independent expert from asking for more information if it is necessary for him to resolve ‘any issue’ as between the two valuers.  Further, there is no express provision that prevents the independent expert seeking representations by the parties on whether or not there is further information that he could obtain on ‘any issue’.  The primary function of the independent expert was to resolve disputes.  Insofar as the information or submissions sought were for that purpose, I do not see any reason why a term should be implied or construed that limits the ability of the independent expert to do so.

Irrevocably infected

1. Alphater further contends that the independent expert had fallen outside the terms of engagement by accepting and reading the argumentative submissions received from the defendants. 

1. In his letter of 25 June 2014, Mr Stout said that he had not considered in any detail the material as supplied by the defendants’ solicitors on 4 April 2014.  Later in the letter he said that he had not considered the material.

1. Nevertheless, Alphater relied on Mr Stout’s statement that he had not considered the material in any detail.  Alphater contended that the dispute resolution process had been irrevocably infected by him having received and looked at the objectionable material.  They considered that Mr Stout had fundamentally fallen outside the terms of engagement by doing so.

1. In my opinion, Mr Stout had not  fallen outside the terms of engagement in receiving and looking at the objectionable material.  In any adversarial process, it is likely that one party or another may seek to rely on material that is irrelevant.  The usual course is for the tribunal to hear submissions and make a determination or ruling.  If inadmissible material is received and relied on, then the decision may or may not be tainted.  However, the mere receipt of material and its consideration does not irrevocably taint the process.  The tribunal can be invited to reject the material.  If it does so, then no harm may be done. 

1. Even in jury trials, a jury is often instructed to ignore certain irrelevant evidence.  In the case of an independent expert, I do not see why the receipt of material by the independent expert and the independent expert not considering it in any detail irrevocably taints the expert process. 

1. The independent expert offered to hear submissions from the parties on why the material was irrelevant.  With the agreement of both parties he had previously held a meeting of the parties at which he asked for further information, which the parties agreed to provide to the independent expert.  There was no suggestion by the parties that the information should not be provided to him until each party had seen and vetted the information to be provided by the other.  In receiving the material of 4 April 2014, the independent expert acted according to his instructions and the agreement of the parties.  In my opinion, the independent expert’s conduct in not considering the material supplied (including the objectionable material) in any detail, did not taint the function he was engaged to perform.  The independent expert did not act outside his authority under the terms of his engagement.

1. In my opinion, Alphater was not entitled to terminate Mr Stout’s appointment.  In my opinion, Alphater was in breach of the dispute resolution agreement in doing so. 

Did Alphater repudiate the dispute resolution agreement?

1. The principles governing repudiation of a contract were conveniently set out by Finn J in GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd,[19] as follows:

(i)A party will have repudiated a contract if, by words or conduct, it evinces an intention no longer to be bound by it or if that party shows it intends to fulfil the contract only in a manner substantially inconsistent with its obligations and not in any other way:  Shevill v Builders Licensing Board;  Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd.

(ii)The party’s conduct is to be judged objectively by reference to the effect it would be reasonably calculated to have upon a reasonable person:  Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd;  Satellite Estate Pty Ltd v Jaquet.

(iii)A party that acts on a genuine but erroneous view of its obligations under the contract will not for that reason alone have repudiated it.  That party may still be willing to perform the contract according to its tenor;  to recognise its heresy;  or to accept an authoritative exposition of the contract:  DTR Nominees Pty Ltd v Mona Homes Pty Ltd;  Woodar Investment Development Ltd v Wimpey Construction UK Ltd.  But persistence in an untenable construction will ordinarily be regarded as repudiatory:  Summers v The Commonwealth;  and see Chitty on Contracts.[20]

[19][2003] FCA 50 (GEC Marconi v BHP).

[20]Ibid, [889]-[891], (citations omitted).

1. In GEC Marconi v BHP, Finn J found that GEC Marconi had repudiated a contract between BHP and GEC Marconi.  Finn J found that GEC Marconi did not act in good faith in erroneously insisting upon a requirement of BHP that it was not entitled to insist on.  In doing so, Finn J found that GEC Marconi evolved a ‘strategy’ in renegotiating the agreement for its own advantage as the current contract was disadvantageous to GEC Marconi. 

1. Finn J found that GEC Marconi sought to ‘exploit opportunities’ available to it, or manufactured by it, to create an environment favourable to the end it sought.  Finn J found that GEC Marconi did not have a ‘genuine and reasonable belief’ that BHP was in fact required to do what GEC Marconi was insisting on. 

1. In considering whether Alphater repudiated the dispute resolution agreement, the court must look at all the relevant circumstances of the case.[21]  Repudiation has been considered by the Court of Appeal.  In R & A Cab Co Pty Ltd v Kotzman,[22] Ashley JA (with whom Osborn JA agreed) said:

   [21]Shevill v Building Licensing Board, 644.

   [22][2008] VSCA 68, [44]–[49].

The appellant’s case rested, as I have said, solely upon the submission that the respondent had repudiated the contract.  I should shortly state some of the key principles which emerge from the authorities.

First, in Shevill and Anor v The Builders Licensing Board  Wilson J said that –

Repudiation of a contract is a serious matter and is not to be lightly found or inferred:  Ross T. Smyth & Co., Ltd. v. T. D. Bailey, Son & Co. In considering it, one must look to all the circumstances of the case to see whether the conduct “amounts to a renunciation, to an absolute refusal to perform the contract”:  Mersey Steel and Iron Co. v. Naylor, Benzon & Co.

In the same case, Gibbs CJ observed that a binding contract -

… may be repudiated if one party renounces his liabilities under it – if he evinces an intention no longer to be bound by the contract (Freeth v. Burr) or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way.

Second, whether a party’s conduct amounts to repudiation is not ascertained by an inquiry into the subjective state of the mind of the party in default; it is to be found in the conduct, whether verbal or other, of the party in default which conveys to the other party the defaulting party’s …intention not to perform it or to fulfil it only in a manner substantially inconsistent with his obligations, and not in any other way.

Third, it has been stated very often that the whole circumstances of the case must be examined in order to see whether there was repudiation.  Lord Keith of Kinkel put it this way in Woodar Investment Development Ltd v Wimpey Construction UK Ltd:

My Lords, in deciding the issue of repudiation which arises in this appeal, the guiding principle is that enunciated by Lord Coleridge CJ in Freeth v Burr.

“In cases of this sort, where the question is whether the one party is set free by the action of the other, the real matter for consideration is whether the acts or conduct of the one do or do not amount of an intimation of an intention to abandon and altogether to refuse performance of the contract.”

The matter is to be considered objectively – per Bowen LJ in Johnstone v Milling:

“The claim being for wrongful repudiation of the contract it was necessary that the plaintiff’s language should amount to a declaration of intention not to carry out the contract, or that it should be such that the defendant was justified in inferring from it such intention.  We must construe the language used by the light of the contract and the circumstances of the case in order to see whether there was in this case any such renunciation of the contract.”

The importance of looking at the whole circumstances of the case was emphasised by Lord Selborne LC in Mersey Steel & Iron Co Ltd v Naylor, Benzon & Co and by Singleton LJ in James Shaffer Ltd v Findlay Durham & Brodie.

Fourth, qualifying to some extent the principle noted at [47], in some circumstance, ‘a mere honest misapprehension, especially if open to correction, will not justify a charge of repudiation’.  The proposition has typically fallen for consideration where the defaulting party has acted in reliance upon an erroneous interpretation of the contract.  In that particular context, the bona fides (or otherwise) of the defaulting party is a relevant factor.  In Australia, as in England, it has been suggested that an aggrieved party should take steps to persuade the mistaken party of its error if it wishes to rely upon that other party’s conduct as a repudiation of the contract.[23]

[23]R & A Cab v Kotzman, [48].

1. Kellam JA agreed with the conclusion of Ashley JA and cited with approval the judgment of Lord Coleridge in Freeth v Burr[24] and added that it was approved in Mersey Steel and Iron Co Ltd v Naylor Benzon and Co[25] and in Laurinda Pty Ltd v Capalaba Park Shopping Centre & Co.[26]

   [24](1874) LR 9 CP 208, 213.

   [25](1884) 9 App Cas 434.

   [26](1989) 166 CLR 623, 647–8.

1. All the circumstances of the case include the attitude and intention of the contract breaker as conveyed to the other contracting party.  What is conveyed is ascertained on an objective basis.  The subjective intentions of the party alleged to have repudiated the agreement are not relevant unless conveyed to the other contracting party.

1. In considering whether the exception of ‘honest misapprehension’ applies, however, the court is entitled to and should consider the subjective intentions of the party alleged to have repudiated the agreement.

1. The critical question in determining whether Alphater repudiated the dispute resolution agreement is whether, in terminating (or purporting to terminate) Mr Stout’s appointment, Alphater evinced an intention no longer to be bound by the dispute resolution agreement or an intention only to fulfil that agreement in a manner substantially inconsistent with its obligations.  I find that, in all the circumstances of the case, it did so.

1. Stage three of the dispute resolution agreement prescribed the referral of outstanding issues to “an independent expert” (emphasis added) and contemplated that the parties “would be bound by the determination of such expert and the resulting valuation.”  The purpose of the dispute resolution agreement, and Mr Stout’s appointment in particular, was to “effectively finalise the dispute between the parties.”  Mr Stout’s appointment went to the heart of the dispute resolution agreement.  In terminating his appointment, the plaintiff prevented its performance.

1. The termination of Mr Stout’s appointment amounted to a renunciation of the dispute resolution agreement that could not be remedied by the substitution of a new independent expert.  Stage three was designed to finalise the parties’ dispute.  So much is evident in the parties’ express agreement to be bound by the expert’s determination.  In these circumstances, I cannot accept that there existed an implied term or agreement (for which Alphater seeks specific performance) that the parties should be entitled or required to appoint a new independent expert in circumstances where one party has unilaterally terminated Mr Stout’s appointment.  There is no term to this effect in the dispute resolution agreement.  If the agreement operated in this manner, the appointment of the independent expert itself (let alone the obligation to abide their decision) would not be meaningfully binding on the parties.  If there was to be an arrangement between the parties to appoint a new independent expert, this would be a fresh agreement.

1. In this case, the relevant circumstances that should be taken into account in assessing whether Alphater repudiated the dispute resolution agreement also include the fact that the parties had already been to court for directions on the construction of their dispute resolution agreement in a proceeding that was still before the court and were able to do so again.  I deal with this further below.

1. Further, the action of Alphater in terminating the appointment of the independent expert in circumstances where he had not read the material to which the plaintiff objected in any detail and had offered to call a meeting to resolve the use of the material, displayed an intention by Alphater to get rid of the duly appointed independent expert rather than an intention to comply with the contract. 

1. The failure of Alphater to avail itself of the assistance of the court is a significant matter in my view.  The independent expert was not intending to make a decision.  He offered a meeting on whether the material was relevant or not.  The independent expert was not about to do something that threatened the proper exercise of his functions.  He had been told not to read the material objected to and he said that he would not.  There was no good reason why the defendants could not have been consulted about the issues Alphater had and the matter resolved in court.  Further, even if Mr Stout made a final determination, it would have still been open for either party to come to the court and make submissions regarding that final determination.

1. The actions taken by Alphater were not open to correction.  Mr Stout’s termination went to the heart of the dispute resolution agreement.  The parties had agreed on the independent expert and gone to the trouble and expense of presenting material to Mr Stout. 

1. I find that Alphater’s conduct in all the circumstances conveyed to the defendants that Alphater no longer intended to be bound by the dispute resolution agreement and use, as required by the third step of that agreement, the independent expert agreed to by the defendants.

1. Subject to the issue of ‘honest misapprehension’, I find that in terminating Mr Stout’s appointment Alphater repudiated the dispute resolution agreement.

Honest misapprehension

1. The question then arises whether Alphater acted on an honest misapprehension of its obligations under the dispute resolution agreement or whether it could still perform that agreement “according to its tenor.”

1. Alphater claims that if it did act in breach of the dispute resolution agreement it was due to an honest misapprehension of its understanding of the contract and that accordingly it had not repudiated the dispute resolution agreement.

1. As indicated above, the bona fides and good faith of Alphater is a relevant consideration.  In considering whether Alphater did act bona fide and in good faith the court may have regard to whether or not Alphater’s actions were reasonable.

1. I have found that Alphater did not wish Mr Stout to continue as the independent expert for several reasons including that Alphater expected Mr Stout to not make a decision that Alphater sought. 

1. I find that the termination of Mr Stout’s appointment is not feasibly open to correction and that the parties can no longer perform the agreement ‘according to its tenor’. The dispute resolution agreement contemplated that the parties would appoint an independent expert and abide their determination. Another independent expert could be appointed, but this would amount to a fresh agreement and would involve the defendants incurring far more expense than they had anticipated in entering into the dispute resolution agreement.  Such an appointment would also be unfair on the defendants as Alphater would have succeeded in avoiding Mr Stout make the decision.

1. I find that Alphater’s actions were not reasonable.  It did not warn the defendants of its intention to terminate the appointment of Mr Stout.  The defendants were not given any opportunity to persuade Alphater that its view that Mr Stout was acting outside of the terms of his engagement were misplaced, or to discuss whether the dispute resolution agreement allowed for a new expert to be appointed.  Further, as I have said, it was open to Alphater to approach the court as the implementation of the dispute resolution agreement was still before the court in this proceeding.  That Alphater’s attitude did not amount to an honest misapprehension of its obligations is an inference all the more readily drawn in these circumstances where Alphater instead took unilateral action and asserted its own ‘untenable construction’ of the agreement on the defendants by terminating Mr Stout’s appointment and seeking to replace him.

1. I find that Alphater did not have a mere ‘honest misapprehension’ that Mr Stout had breached the terms of his appointment and that it was entitled to terminate him under the dispute resolution agreement.

1. Accordingly, I find that the circumstances of this case are not sufficient for Alphater to avoid the conclusion that it did repudiate the dispute resolution agreement by its conduct in unilaterally terminating the appointment of Mr Stout.

Conclusion

1. For the above reasons I find:

(a)        that Alphater repudiated the dispute resolution agreement.

(b)        that the defendants were entitled to and did accept the repudiation and the dispute resolution agreement has been terminated.

(c)        that the defendants are entitled to damages to be assessed if not agreed.

(d)       Alphater’s interlocutory process should be dismissed.

1. I will hear the parties on the question of costs.