Two Lands Services Pty Limited v Cave

[2003] NSWSC 922

CITATION:	Two Lands Services Pty Limited v Cave [2003] NSWSC 922
HEARING DATE(S):	17, 18 December 2002 20, 21 May 2003
JUDGMENT DATE:	14 October 2003
JURISDICTION:	Equity Division
JUDGMENT OF:	Master McLaughlin
DECISION:	(1) Upon enquiry, I find that the amount of profits obtained by the Defendant from his conduct in engaging in employment or any other contractual relationship with an organisation known as The Mortgage Professionals, whereby he conducted, solicited or otherwise promoted a business of mortgage origination was $238,765; (2) I order that the Defendant pay the costs of the Plaintiffs of the foregoing enquiry; (3) The exhibits may be returned.
CATCHWORDS:	Inquiry as to profits - Expert evidence - Methodology and calculations - Commission in respect to mortgage origination - Account for profits is a remedy which is notoriously difficult in practice - What is required will not be mathematical exactness, but only a reasonable approximation.
CASES CITED:	Warman International Limited v Dwyer (1995) 182 CLR 544
PARTIES :	Two Lands Services Pty Limited (First Plaintiff) Two Lands Group Pty Limited (Second Plaintiff) Gregory Robert Cave (Defendant)
FILE NUMBER(S):	SC 3148/99
COUNSEL:	S.J. Burchett (Plaintiffs) J. Dupree (Defendant)
SOLICITORS:	McCabe Terrill, Lawyers (Plaintiffs) Russo and Partners, Solicitors (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

MASTER McLAUGHLIN

Tuesday, 14 October 2003

3148/99 TWO LANDS SERVICES PTY LIMITED and ANOR -v- GREGORY ROBERT CAVE

JUDGMENT

1 MASTER: This is an inquiry as to profits, pursuant to order 3 of orders made on 9 May 2000 by Santow J. That order is in the following terms,

3. An enquiry be held by the Master as to the amount of profits obtained by the Defendant from his conduct in:


(a) taking the Plaintiffs’ list of referrers with whom he had dealt and built up a relationship during his employment with the Plaintiffs, a copy of which is exhibit PX2, or any copy of it or information extracted from it;

(b) using that list or any information contained in it to contact and solicit business from those referrers;

(c) soliciting business from or conducting business with:

(i) any person (including any company, firm or other entity), who during his employment with the Plaintiffs referred a client for the Plaintiff’s mortgage origination business,
(ii) any person (including any company, firm or other entity), who during his employment with the Plaintiffs could reasonably have been expected to refer a client to the Plaintiffs in the foreseeable future for such business;
(iii) any person, who is listed in category A of the Plaintiffs’ list of referrers, a copy of which is exhibit PX2;
(iv) any persons, with whom the Defendant had any contact in the course of his employment and who has subsequently referred clients to the Plaintiffs’ mortgage origination business.
(v) in particular, John Harrison, John Shirlaw, David Mah Chut, Vince Russo, Ashley White, Anthony Kanaris and David Williams.


(d) engaging in employment or any other contractual relationship with an organisation known as The Mortgage Professionals, whereby he conducted, solicited or otherwise promoted a business of mortgage origination.

(e) taking from the Plaintiffs and using the Plaintiff’s Standard Loan Assessment form, a copy of which is exhibit PX5.

2 The substantive proceedings arose out of a contract of employment between Two Lands Group Pty Limited, the Second Plaintiff, and Gregory Robert Cave, the Defendant, dated 6 July 1998. By that contract the Defendant was employed as a “finance consultant” in a mortgage origination business, which relied heavily upon an identified group of individual accountants as “referrers” of business.

3 The proceedings were instituted consequent upon termination of the Defendant’s employment with the Second Plaintiff and his commencement of employment with an organisation known as “The Mortgage Professionals”, which carried on a similar competing business to that of the Plaintiffs. The First Plaintiff, Two Lands Services Pty Limited, is a wholly owned subsidiary of the Second Plaintiff, Two Lands Group Pty Limited. (I note that the First Plaintiff, Two Lands Services Pty Limited, has now changed its name to Exception Finance Pty Limited.)

4 The relevant facts are set forth in the reasons for judgment of Santow J published on 10 February 2000.

5 I have had the benefit of receiving a chronology and a written outline of submissions from Counsel for the Plaintiffs. Those documents will be retained in the Court file.

6 It should at the outset be recorded that it is accepted by the Plaintiffs that there is insufficient information available to determine the amount of profits obtained from the specific conduct of the Defendant set forth in paragraphs (a) to (c) and paragraph (e) of order 3. The Plaintiffs have chosen to rely only upon the conduct of the Defendant described as order 3(d), rather than to pursue what they describe as the obviously more difficult process of assessing profits under the other paragraphs of order 3, especially in circumstances where, so it is submitted, the Defendant’s discovery has proven inadequate, and his response to subpoenas was inadequate and incomplete. (Santow J in his reasons for judgment, paragraph 39, said that the Defendant’s discovery had proven to be unreliable as a measure of the full extent of the business that he had taken from the Plaintiffs, utilising the Plaintiffs’ list and referrers.)

7 The Mortgage Professionals (in respect to the Defendant’s conduct with which entity order 3(d) relates) was a firm conducted by the Defendant personally, of which he had the control and in which he held the sole interest.

8 It should be here observed that an inquiry of the nature committed to me by the order of 9 May 2000 for an account for profits is, according to the High Court of Australia, a remedy which is ancient and notoriously difficult in practice (Warman International Limited v Dwyer (1995) 182 CLR 544 at 556; see, also, Kerly, An Historical Sketch of the Equitable Jurisdiction of the Court of Chancery (1890), 148-149; Meagher, Gummow and Lehane, Equity Doctrines and Remedies, 4 ed. (2002), Chapter 25, especially 869f).

9 In Warman International Limited v Dwyer the Court (consisting of Mason CJ, Brennan, Deane, Dawson and Gaudron JJ) said, at 558,

The assessment of the profit will often be extremely difficult in practice; accordingly it has been said that “[w]hat will be required on the inquiry…will not be mathematical exactness, but only a reasonable approximation” ( My Kinda Town Limited v Soll [1982] FSR 147 at 159 per Slade J). What is necessary however is to determine as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty ( Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 110 per Mason J (as he then was)).

10 The evidence at the inquiry before me consisted of evidence from Julio Labraga, director of the Plaintiffs, and expert evidence presented on behalf of each party, together with a considerable quantity of documentary material. It is noteworthy that the Defendant himself did not give evidence at the inquiry.

11 On behalf of the Plaintiff expert evidence was given by Alan Gordon Weeks, chartered accountant, who is a partner of Deloitte Touche Tohmatsu. That evidence consisted of a report dated 22 April 2000, AGW 1 (annexed to his affidavit of 23 April 2002), and a report dated 6 December 2002, AGW 2 (annexed to his affidavit of 6 December 2002).

12 On behalf of the Defendant expert evidence was given by Christopher Charlton, chartered accountant, in a report dated 27 September 2002 (annexed to his affidavit of 13 November 2002). The second report of Mr Weeks, AGW2, was largely in response to Mr Charlton’s report. Mr Weeks was cross-examined at length concerning his two several reports, and the conclusions and opinions expressed by him therein. The Plaintiffs did not cross-examine Mr Charlton on his report.

13 Mr Weeks was requested by the solicitors for the Plaintiffs to prepare a report calculating the profits earned by the Defendant during what was described in his report as “the relevant period”, that being the period 6 May 1999 until 6 May 2000. Mr Weeks has estimated the profits obtained by the Defendant from his employment with The Mortgage Professionals during that period. The profits calculated by Mr Weeks fall into two categories, being, firstly, up-front commission, and, secondly, trailing commission. In his report Mr Weeks describes up-front commission as relating to commission received upon the acceptance of a loan (paragraph 5.1), whilst he describes trailing commission as being calculated against the outstanding loan amount on a daily basis (paragraph 5.8).

14 Trailing commission was somewhat more fully described by Mr Charlton (paragraph 5.6) as commission which continues to be paid so long as the client retains the loan with the particular lender. Once the client refinances elsewhere or the loan is repaid, the trailing commission ceases. The trailing commission decreases as the debt decreases, and the amount of the trailing commission is calculated against the outstanding loan balance. That description appeared to be accepted by Mr Weeks.

15 As I have already observed, Mr Weeks was cross-examined at length, that cross-examination extending over three days. Much of that cross-examination was in my conclusion misdirected. For example, Mr Weeks was cross-examined to the effect that, although it would have been a simple exercise for the Plaintiffs to have made inquiries of the persons expressly identified in order 3(c)(v) as to whether the Defendant had been soliciting business from them, the Plaintiffs did not do so. It will be appreciated that the Plaintiffs do not in the present inquiry seek to rely upon any profits obtained by the Defendant from his conduct other than that conduct described in order 3(d) (in respect to The Mortgage Professionals), and expressly do not seek to claim any profits which might have been obtained by the Defendant from his conduct identified in paragraphs (a),(b),(c) or (e) of order 3. It follows, therefore, that the cross-examination of Mr Weeks as to why he did or did not direct his calculation of profits to any of the activities other than those relating to The Mortgage Professionals is irrelevant to the inquiry being conducted by me.

16 In his first report, AGW 1, Mr Weeks set forth the methodology which he applied to his calculation of up-front commission and trailing commission earned by the Defendant from his association with The Mortgage Professionals.

17 Mr Weeks stated (paragraphs 5.13 and 5.14) that he believed it reasonable that the Defendant would have incurred certain expenses in earning commission, and that such expenses might include motor vehicle expenses and telephone expenses; however, he had not been provided with any details regarding such expenditure by the Defendant. Accordingly, he treated the amount for expenses as being nil.

18 Mr Weeks calculated the upfront commission as being an amount of $119,518. In respect to trailing commission, he presented four scenarios (dealing with repayment over periods of ten years, fifteen years, twenty years and twenty-five years), and, for each of those scenarios, gave an estimation of future trailing commission to which the Defendant would be entitled in respect to the relevant period. The estimations of such trailing commission for each of the four scenarios were respectively $137,852, $144,835, $148,456 and $150,650.

19 In paragraph 7.1 Mr Weeks expressed the opinion that he had not been provided with sufficient information to enable him fully to conclude on the value of the commissions earned by Mr Cave, and he indicated the nature of additional information which he desired.

20 Mr Weeks concluded (paragraph 9) that on the information presently available to him his reasonable estimate of the profits obtained by the Defendant from engaging in employment or other contractual relationship with The Mortgage Professionals by conduct of the business of mortgage origination for the relevant period with $250,000. It would appear that in arriving at that estimation Mr Weeks has adopted scenario 1 in respect to trailing commission, and that he has accepted an amount for up-front commission of $119,518 and for trailing commission of $137,852 (resulting in a total commission entitlement of $257,370).

21 It was conceded by Mr Weeks that, in order to calculate the profits made by the Defendant during the relevant period arising out of trailing commission, it was necessary to know what mortgages were on foot during the relevant period (T37, 20 May 2003). Nevertheless, Mr Weeks was not given that information in his instructions, and did not seek that information. However, he agreed that it would have been a relatively easy exercise to work out which mortgages were on foot and what were not during the relevant period. Ultimately, during the course of his cross-examination, Mr Weeks agreed (T38) that he made a presumption concerning the calculation of trailing commission, without any factual basis to support that presumption, and that that presumption was in favour of the Plaintiffs (T39).

22 Mr Charlton in his report of 27 September 2002, presented on behalf of the Defendant, set forth in paragraph 5 his methodology in respect to up-front commission and trailing commission.

23 Mr Charlton (paragraph 5.7) stated his belief that it was reasonable that the Defendant incur certain expenses in earning commission, and that those expenses would include motor vehicle, referral fee, telephone, client promotions, stationery, computer, taxi, conference expenses, postage, banking, accounting fees. Mr Charlton stated (paragraph 5.8) that he had been provided with details regarding the Defendant’s expenditure during the relevant period. He calculated and categorised that expenditure in schedule 3 to his report. Those expenses totalled, upon Mr Charlton’s calculations, $35,578. Mr Charlton calculated the up-front commission as totalling $69,289.26 and the trailer commission as totalling $58,660.28, resulting in a total for both categories of commission of $127,949.54. From that figure he deducted expenses of $35,578, leaving a profit of $92,371.54. That amount was the estimation by Mr Charlton of the profits made by the Defendant in respect to his activities and relationship with The Mortgage Professionals of the nature set forth in order 3(d).

24 In response to Mr Charlton’s report Mr Weeks provided a further report, being AGW 2.

25 Chapter 2 of that report reviews Mr Charlton’s report, and comments upon the contents thereof. I have already observed that in his first report Mr Weeks calculates up-front commission in an amount of $119,518. However, in his second report, Mr Weeks (at paragraph 2.7) reviews the calculation of up-front commission, and adopts the methodology for the calculation of up-front commission which has been followed by Mr Charlton. Upon the assumption made by Mr Weeks in respect to the level of borrowings from a certain category of customers remaining consistent with the level of borrowings from another category of customers, Mr Weeks then recalculates the up-front commission in a higher figure than that in his earlier report, and now estimates that the total up-front commission received would be $144,352. That is an increase of $24,834.

26 In respect to trailing commission Mr Weeks in his second report again comments upon the methodology adopted and the conclusions expressed by Mr Charlton, and estimates that the trailing commission received in the thirty months up to June 2002 in respect of all customers would be $122,208. From that figure Mr Weeks calculates an average monthly trailing commission of $4,073.60, and applies that average monthly trailing commission to a period of 48 months from 1 January 2000 to 31 December 2003, being in a total amount of $195,533. He then discounts that figure in accordance with a methodology and a formula which he sets forth in paragraph 2.15. At paragraph 2.16 he estimates the present value of the estimated trailing commission as being $193,327.

27 It will be appreciated that that latter figure is $55,475 greater than the estimated trailing commission expressed by Mr Weeks in his first report (paragraph 6.1). Concerning that difference Mr Weeks in his second report makes the following statement (paragraph 2.16),

I note that the amount of $193,327 is higher than the range of trailing commission calculated in my first report, being $137,852 to $150,670. I am unable to reconcile the difference.

28 Mr Weeks in his second report also returns to the topic of expenses incurred in earning commissions, and comments upon the methodology and calculations set forth in Mr Charlton’s report. At paragraphs 2.24 and 2.25 Mr Weeks expresses his conclusion, as follows,

In my opinion, based on the criteria and assumptions set out in the preceding paragraphs, the amount of expenses that is properly substantiated by the documentation in Exhibit C [ sic ] to the Charlton report is $7,774.96.

On the basis of the analysis set out in the preceding paragraphs, in my opinion, the amount that should be allowed for expenses incurred in earning the commission income is $7,775.

29 Whilst the Defendant challenged the qualifications and expertise of Mr Weeks entitling him to offer opinion evidence of an expert nature, I am satisfied that he is qualified to advance that opinion evidence. It is, of course, then for the Court to determine what weight should be given to that opinion evidence.

30 Further, it was submitted on behalf of the Defendant that Mr Weeks had estimated profits rather than determined profits. The distinctions between the two phrases appear to me, in the context of the nature of the inquiry being conducted by the Court (“as to the amount of profits obtained by the Defendant from his conduct in…”), to be more of terminology than of substance. (I note, in passing, that Charlton, the expert relied upon by the Defendant, expressed his final conclusions (paragraph 9) under the hearing “Estimation of Profits”.)

31 In general, I prefer the methodology and conclusions of Mr Weeks in his first report, to those of Mr Charlton (or to those of Mr Weeks himself in his second report).

32 There are, however, two areas in which it seems to me there is ground for challenge to the evidence of Mr Weeks. The first is in respect to calculating profit obtained by the Defendant. As I have already observed, in his original calculation of profit Mr Weeks did not deduct any expenses whatsoever (T24, 20 May 2003). Mr Weeks recognised the appropriate formula for calculating profit as being (T22) “to calculate income and deduct expenses to arrive at profit”. Mr Weeks at paragraph 5.13 of AGW1, stated that he believed it reasonable that the Defendant would have incurred certain expenses in earning commission, and that such expenses might include motor vehicle expenses and telephone expenses. However, he had not been provided with any details concerning such expenses, and in the absence of information concerning such expenses he attributed a nil value to those expenses (T23). Mr Weeks quantified the profits earned by the Defendant during the relevant period as being $250,000. I consider that, in the absence of any appropriate deduction for expenses, that amount is unrealistic and incorrect.

33 The second area of legitimate challenge to the evidence of Mr Weeks is in respect to commission calculated in his second report. In AGW 2 Mr Weeks calculated the profits from up-front commission as being $144,352, an increase of $24,834 upon his earlier estimation; and calculated trailing commission as being $193,327, an increase of at least $55,475 upon his earlier estimation, but he was unable to reconcile the difference between his earlier estimation of trailing commission and his later estimation.

34 In the absence of any basis for the increase in the amount of trailing commission, I prefer the earlier estimation by Mr Weeks of the amount of $137,852 for trailing commission. I also observe that his increased calculation for up-front commission was based, not upon his own methodology and calculations, but upon the methodology and calculations of Mr Charlton, with which Mr Weeks did not, in fact, agree. It seems to me, therefore, that the calculation of up-front commission based upon the methodology and calculations of Mr Weeks himself should be accepted (those bases resulting in the figure of $119,518 set forth in his earlier report).

35 Mr Weeks, having made no allowance for expenses, which he recognised must have existed and must have been incurred, proceeded in AGW 1 to calculate the totality of commissions at $250,000. However, in my conclusion, it is appropriate that that figure should be reduced by the deduction therefrom of an amount in respect to expenses. Mr Weeks recognised that expenses in an amount of $7,775 should be allowed. I am not in agreement with the estimation by Mr Weeks of that amount. It seems to me that that figure does not represent actual expenses incurred (as recognised by and substantiated to Mr Charlton, paragraphs 5.7 and 5.8, in an amount of $11,235), but is based upon a theoretical approach to, and the application of guidelines in respect of, claims for expenses under income tax legislation.

36 On the other hand, I do not accept the calculation by Mr Charlton in respect to trailing commission and expenses associated therewith. It seems to me that there can have been little if any expenses incurred by the Defendant in respect to his entitlement to or his receiving of a trailing commission. The expenses were incurred in respect to the activities which resulted in him becoming entitled to the up-front commission. Therefore, concerning expenses, I do not agree with either the amount of $35,578 estimated by Mr Charlton or the amount of $7,775 estimated by Mr Weeks. The appropriate amount to be deducted for expenses is, in my conclusion, the actual expenses of $11,235 shown in Schedule 3 to Mr Charlton’s report.

37 It follows, therefore, that the appropriate calculation for the profits of the nature described in order 3(d) is the figure of $250,000 estimated by Mr Weeks in his first report, less expenses of $11,235, resulting in a profit of $238,765.

38 In my conclusion, therefore, the amount of profits obtained by the Defendant from his conduct in engaging in employment or any other contractual relationship with The Mortgage Professionals, whereby he conducted, solicited or otherwise promoted a business of mortgage origination, is $238,765.

39 I note that order 7 of the orders made by Santow J on 9 May 2000 is in the form of a notation that,

7. Prima facie the costs of assessment by the Master should be paid by the Defendant. That matter is left to the Master to determine having regard to the circumstances before him or her.

40 The amount of profits determined by me is slightly less than that originally submitted by the Plaintiffs (and substantially less than the amount alternatively submitted by the Plaintiffs). It is considerably more than the amount submitted by the Defendant. In the light of the view expressed by His Honour in his reasons for judgment, as set forth in order 7, I consider it appropriate that the Defendant should pay the costs of the Plaintiff of the inquiry conducted by me. However, I have not heard any submissions as to costs, and an opportunity should be allowed to the parties to make such submissions, if they so desire.

41 Accordingly, unless within seven days of the date hereof either party arranges for the matter to be listed before my Associate for argument as to costs, I make the following orders:

(1). Upon enquiry, I find that the amount of profits obtained by the Defendant from his conduct in engaging in employment or any other contractual relationship with an organisation known as The Mortgage Professionals, whereby he conducted, solicited or otherwise promoted a business of mortgage origination was $238,765.

(2). I order that the Defendant pay the costs of the Plaintiffs of the foregoing enquiry.

(3). The exhibits may be returned.

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Last Modified: 12/05/2003