FEDERAL COURT OF AUSTRALIA Murphy v Overton Investments Pty Ltd [2000] FCA 368 EDVIDENCE – opinion rule – whether evidence of an accounting expert wholly or substantially based on the knowledge of that expert Evidence Act 1995 (Cth), ss 76 & 79 Trade Practices Act 1974 (Cth) Murphy v Overton (Windeyer J, Supreme Court of NSW, 10 December 1998, unreported), referred to JOHN JAMES MURPHY v OVERTON INVESTMENTS PTY LIMITED N 159 OF 1999 DAPHNE MURPHY v OVERTON INVESTMENTS PTY LIMITED N 946 OF 1999 NEVILLE CARNEGIE v OVERTON INVESTMENTS PTY LIMITED N 857 OF 1999 EMMETT J 17 MARCH 2000 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 159 OF 1999 BETWEEN: JOHN JAMES MURPHY APPLICANT AND: OVERTON INVSTMENTS PTY LIMITED RESPONDENT N 946 OF 1999 BETWEEN: DAPHNE MURPHY APPLICANT AND: OVERTON INVSTMENTS PTY LIMITED RESPONDENT N 857 OF 1999 BETWEEN: NEVILLE CARNEGIE APPLICANT AND: OVERTON INVSTMENTS PTY LIMITED RESPONDENT JUDGE: EMMETT J DATE: 17MARCH 2000 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The applicant tenders a report of Mr Greg Hayes of Messrs Hayes Knight, accountants and business advisers, dated 14 March 2000. Counsel for the respondent objects to that report. 2 Mr Hayes is a senior partner of Hayes Knight and has been in practice for 20 years as a public accountant. Prior to that he worked for a State Government Authority and a diversified public company. He has the degree of Bachelor of Business and is a Fellow of the Australian Society of Certified Public Accountants, a Fellow of the Taxation Institute of Australia, Fellow of the Australian Institute of Management, a Member of the Institute of Company Directors and a Member of the Financial Planning Association. He is the author of practice management and business consulting manuals currently used by over 600 accountants throughout Australia and New Zealand. He is the co-author of a goods and services tax consulting manual. He has held various positions with Hayes Knight, has spoken regularly at conferences on business consulting practice management, on taxation issues and has a wide range of directorships. I accept that Mr Hayes is adequately qualified as a public accountant and has adequate qualifications to analyse financial records. 3 In his report Mr Hayes indicates that the matters upon which his opinion was requested, and upon which he reports, are as follows: "Question 1 To what extent, if at all, are the increases in items of expenditure by the Maintenance Fund only able to be explained by changes in policy by Overton as to what items of expenditure it attributed to the Maintenance Fund as distinct from the non-Maintenance Funds of Overton? ……………………… Question 2 What items of expenditure not included in the Maintenance Fund budget for 1991-2 (the budget upon which Overton made its estimates to each of the Murphy's [sic] and Brassingtons) should have been included in the Maintenance Fund budget if Overton was to ensure that all items of expenditure recoverable under Clause 5 of the Leases was included in the estimates to each of the Murphys and Brassingtons? ……………………… Question 3 What items of expenditure not included in the Maintenance Fund budget for 1990-1 (the earliest budget presently available to the applicants who make the assumption that there were no items of expenditure included in Maintenance Fund budgets prior to 1990-1991 which were not included in the maintenance fund budget 1990-1991) should have been included in the maintenance budget if Overton was to ensure that all items of expenditure recoverable under Clause 5 of the Leases was included in the estimate to the Carnegies?" 4 The answers to those questions are said to be relevant to the allegations made on behalf of the relevant applicants that, from the establishment of the Heritage Retirement Village until 27 November 1996, Overton Investments Pty Limited ('Overton') followed a policy of not passing on to Lessees a substantial level of outgoings for which the Lessees were liable under their respective leases, and excluding a substantial level of outgoings recoverable under the leases from its estimate. It is alleged that the failure to inform the applicants of that fact constituted a contravention of the Trade Practices Act 1974 (Cth). 5 Under section 76 of the Evidence Act 1995 (Cth): "Evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed. However, under section 79 of the Act: "If a person has specialised knowledge based on the person's training, study or experience, the opinion rule [i.e. the rule in section 76] does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge." 6 Whether or not Overton followed a policy and whether or not that policy changed, is a matter that will depend upon reasonably complex facts, evidence in respect of which no doubt will, in the fullness of time, be led by the applicants. In so far as policy signifies some subjective approach on the part of those responsible for the management of Overton, that does not appear to me to be a matter within the expertise of a public accountant. 7 I have seen no evidence of any expertise on the part of Mr Hayes that would enable him to express an opinion as to whether or not a particular policy had been adopted by Overton. On the other hand, Mr Hayes does have the qualifications to analyse financial records and to prepare comparative tables in relation to those financial records. I do not consider that he has any particular qualifications to answer question one. 8 In his report, Mr Hayes sets out certain assumptions that he was asked to make in carrying out the task set for him. Generally those assumptions are the conclusions that follow from the decision of Windeyer J in the Supreme Court of NSW, adopting the report of Mr P Taylor SC, (10 December 1998, unreported) concerning the items of expenditure that are recoverable by Overton from Lessees. In answering question one, Mr Hayes sets out a number of comparable tables dealing with particular items of expenditure. For example, his first table under the heading "Accounting & Audit Fees", shows the accounting and audit fees for the years ended 30 June 1988 to 1999 inclusive and their allocation between maintenance and non-maintenance accounts. He includes similar tables under the headings "Salaries", "Superannuation & Workers Compensation", "Staff Amenities, Recruitement [sic], Training & Uniforms", "Telephone", "Printing, Postage & Stationery", "Payroll Processing Expenses", "Disbursements - Outgoing & Functions", and "Kitchen Purchases, Crockery & Cutlery Replacement". Those tables and that part of the report that describes and explains the tables is material which, in my view, is well within the expertise of Mr Hayes. 9 However, in addition to the tables and explanatory material, Mr Hayes has also made comments in his report by way of answering question one. For example, in the preamble to his answer to question one, Mr Hayes says as follows: "Subject to my previous comments and based on a review of the supporting information provided and detailed in Annexure A, it would appear that the following expense items have been subject to a change in policy by Overton Investments Pty Limited in relation to the apportionment of these expenses between the maintenance accounts and the non-maintenance accounts. Identified items are listed hereunder." In so far as Mr Hayes was saying simply that the comparison of the successive years shows that different proportions of the expenditure in question were included in the maintenance and non-maintenance accounts year by year, such an observation may well be unexceptionable, but that, of course, is precisely what the tables demonstrate. His opinion adds nothing to the table. 10 In so far, however, as the comment is a comment about some internal decision-making process of Overton, assuming that to be relevant, as it appears to be having regard to the pleading to which I have just referred, I do not consider that Mr Hayes has the expertise to express such an opinion. That is a matter for the Court to draw a conclusion about on the basis of all of the admissible evidence. 11 There are other observations made by Mr Hayes that go beyond his expertise. Comments such as "it is evident that there has been a change in the allocation of charges applied" and "there appears to be a deliverate [sic] change in the allocation of expenditure between the Maintenance and Non-Maintenance accounts" add nothing to the table if they say no more than that the proportions changed from year to year, but if those observations are intended to say something more concerning the internal decision-making process of Overton, then they are inadmissible. Either way, they should not be admitted as the evidence. 12 Questions 2 and 3 are in substance the same as each other, differing only in relation to the budget in question. In answer to each of questions 2 and 3, Mr Hayes has prepared a table. His description of the table is the same for each relevant period, and is as follows: "On the following page is a table, which compares Overton's total expenditure amount in the 1991/92 financial period with the amount that was allocated to the Maintenance account and the amount that was budgeted for in the Maintenance account." Such a table is clearly within the expertise of Mr Hayes in that it is simply an extraction of items from various accounts, being the profit and loss account of Overton for the 1991/92 year, the maintenance account for that year and of the budget for the maintenance fund for that year. The table itself is unexceptionable. 13 However, Mr Hayes goes on to say, in further answer to question 2: "Expense categories that are highlighted and marked with a single asterisk in the 1991/92 budget column are items that were incurred and could reasonably be expected to have been recoverable against the Maintenance fund under Clause 5 of the leases. Expense categories that are highlighted and marked with a double asterisk in the 1991/92 budget column are items that were incurred and, based on my analysis of Question 1, could reasonably be expected to have been more fully recoverable against the maintenance fund under Clause 5 of the leases than was budgeted at the time." 14 Mr Hayes does not say in his report by what standard he judged what could "reasonably be expected to have been recoverable". If what he is saying is that the items marked were items that, according to the judgment of Windeyer J, were items that were recoverable, that is not a matter within his expertise. It is a matter for me to read the report of Mr Taylor, and the orders of Windeyer J adopting that report, in order to determine what has been decided, as between these parties, are the amounts that, under the terms of the Leases, Overton is entitled to recover from the Lessees. That is a question of law. It may be that that is all Mr Hayes was endeavouring to do in the paragraphs I have just stated. However, that is not what he says. I do not consider that he has the qualifications to express an opinion by reference to some unspecified standard of what might reasonably be expected to have been recoverable. Once that material is excluded from the report, the assumptions cease to have any relevance. 15 It would have been useful to determine the proportion of, for example, the 1991 profit and loss account, which, according to the determination of Windeyer J, was recoverable as a matter of law from the Lessees. I would regard that as a fairly mechanical exercise. Mr Hayes, however, does not attempt such an exercise. Whether I shall have evidence as to that aspect, I do not at this stage know, but it does not help to have Mr Hayes' view as to what could reasonably be expected to have been recoverable. 16 In the circumstances, I consider that I should not admit the report and I reject its tender. I would admit a report that excludes those parts of the report that I have identified by marking on a copy the parts that I would exclude. I have indicated those passages in the course of argument. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 4 April 2000 Counsel for the Applicant: Mr G A Moore Solicitor for the Applicant: The Aged Care Rights Service Counsel for the Respondent: Mr J Kelly SC & Mr A McInerney Solicitor for the Respondent: Gadens Lawyers Date of Hearing: 17 March 2000 Date of Judgment: 17 March 2000