Southernwood v Brambles Limited (Ruling No 1) [2022] FCA 1036

FEDERAL COURT OF AUSTRALIA

Southernwood v Brambles Limited (Ruling No 1) [2022] FCA 1036 File number(s): VID 972 of 2018

Judgment of: MURPHY J

Date of judgment: 30 August 2022

Catchwords: EVIDENCE – admissibility of expert evidence – specialised knowledge of a valuer.

Legislation: Evidence Act 1995 (Cth) ss 79, 80

Cases cited: AAPT Ltd v Cable & Wireless Optus Ltd (1999) 32 ACSR 63 Australian Cement Holdings Pty Ltd v Adelaide Brighton Ltd & Anor [2001] NSWSC 645 HG v The Queen (1999) 197 CLR 414 Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 Stuart v Rabobank Australia Ltd [2021] FCA 1388

Division: General Division

Registry: Victoria

National Practice Area: Commercial and Corporations

Sub-area: Regulator and Consumer Protection

Number of paragraphs: 26

Date of hearing: 30 August 2022

Counsel for the Applicants: Mr B Quinn QC, Mr W A D Edwards, Mr T Chalke and T Rawlinson

Solicitor for the Applicants: Maurice Blackburn Lawyers and Slater & Gordon Lawyers

Counsel for the Respondent: Mr M Borsky QC, Mr K Loxley and Ms S C B Brenker

Solicitor for the Respondent: Allens

REASONS FOR JUDGMENT VID 972 of 2018

BETWEEN: HOLLY SOUTHERNWOOD First Applicant

WILLIAM VINCENT KIDD AND MARY AGNES AS TRUSTEES FOR THE MAGNESS-BENNETT SUPERANNUATION FUND Second Applicant

AND: BRAMBLES LIMITED Respondent

MURPHY J: 1 This securities class action is in the fourth week of a five week trial. The applicants seek to rely upon the report of Tony Samuel, a forensic accountant and valuer, dated 2 March 2022. In the report Mr Samuel provides his opinion on the following questions: (a) Did the information available to Brambles Limited (Brambles) at the time it prepared its budget for the financial year ended 30 June (FY) FY2017 (FY2017 Budget) provide a reasonable basis for its projected increase in: (i) revenue; (ii) underlying profit (ULP); and/or (iii) return on capital invested (ROCI); in FY2017 compared with FY2016 for: (A) the North American Pooled Pallets Business; (B) the North American Whitewood Pallets Business; and (C) the North American Operations? (Question 1); and (b) Did the information available to Brambles provide a reasonable basis to support the: (i) August Sales Revenue Forecast; (ii) August ULP Forecast; (iii) August ROCI Forecast; and (iv) Medium-Term Targets, at each of the following dates; (A) 18 August 2016 (Question 2); (B) 20 October 2016 (Question 3); and (C) 16 November 2016 (Question 4)? 2 Brambles submits that Mr Samuel's opinions, as to whether the information available to Brambles provided a reasonable basis for its FY17 budget and forecasts are not wholly or substantially based on his specialised knowledge as a valuer, fall outside the exception in s 79 of the Evidence Act 1995 (Cth) (the Act), and the report is therefore inadmissible. Brambles also contends that, notwithstanding professing to give his opinion as a valuer, Mr Samuel's methodology did not in fact apply his specialised knowledge, and thus the report is inadmissible. 3 It is uncontentious that Mr Samuel provided his opinions as a valuer. Brambles accepts that Mr Samuel has specialised knowledge as a valuer, and describes him as a "highly credentialled forensic accountant and valuer". It accepts that he has specialised knowledge sufficient to permit him to provide an admissible opinion as to damages, valuation issues or accounting issues, but it argues that the opinions he provides in the present case are of an entirely different character. 4 On Brambles' argument, "valuation" is not a field of specialised knowledge that equips Mr Samuel to opine on the reasonableness of Brambles' budget or internal forecasts, less still to descend to the specifics of quantifying risks and opportunities and opining as to how such risks and opportunities ought be applied in near-term business forecasting. It argues that the disconnect or gap between Mr Samuel's specialised knowledge and the opinions he expresses is confirmed because: (a) at paragraphs 124 and 125 of the report, he admits that the Australian valuation standards do not address the reasonableness of budgets or forecasts; and (b) at paragraphs 127 and 137 of the report, he uses cash flow forecasts (which are relevant to valuation, as they provide a means of determining market value) as an analogy to devise a standard against which he can then assess the reasonableness of the respondent's budget and forecasts. 5 Brambles contends that the skill set of a valuer - determining a point in time value of a business or an asset - is inapposite to determining the reasonableness of the company's budgeting process and outcome. While accepting that the valuation process may involve a forward-looking aspect, such as performing a discounted cash flow analysis to calculate net present value, it submits that valuation is a fundamentally different exercise to the preparation of annual budgets and quarterly forecast by business. 6 It argues that in opining on the reasonableness of Brambles' budgets and forecasts, Mr Samuel strayed "outside his lane" by venturing an opinion outside of his specialised knowledge, which tended to invest his opinions with "a spurious appearance of authority", citing HG v The Queen (1999) 197 CLR 414 at [44] per Gaudron J. 7 Brambles further argues that, notwithstanding that he professed to give his opinion as a valuer, the methodology Mr Samuel used did not apply his specialised knowledge. For this argument it relies on Mr Samuel's statement at paragraph 27 where he said that: I have expressed my opinions: (a) as to a "reasonable basis" having regard to whether the information available to Brambles supported the FY2017 Guidance; and (b) on the basis of the information available to me. For the reasons set out in Section III, I have: (i) focused on key assumptions on which the FY2017 Budget and forecasts in the FY2017 Guidance were based, as evident from the materials available to me; (ii) sought to identify objective support for those assumptions; and (iii) quantified the consequences of objective analysis which would affect the budget and/or forecasts on which I have been asked to comment. It also relies on paragraph 31 where Mr Samuel said that he approached Question 1 by reviewing changes made between versions of the budget prepared by CHEP USA and CHEP Global and the final budget presented to the Board, to consider whether "objective support" existed for the increase in revenue, ULP and ROCI. 8 Brambles submits that such an approach does not require the application of valuation or forensic accounting expertise. It says that whether or not Brambles' documents support its assumptions in the proceeding is a matter for submissions and the application of specialised knowledge to found an admissible opinion requires something beyond the product of the observations of a "non-participating onlooker", citing Australian Cement Holdings Pty Ltd v Adelaide Brighton Ltd & Anor [2001] NSWSC 645 at [6] per Barrett J. It must involve a process of reasoning based in the expert's specialised knowledge, which it did not, citing Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 at [85] per Heydon JA. 9 Brambles also relied upon: (a) AAPT Ltd v Cable & Wireless Optus Ltd (1999) 32 ACSR 63, in which Austin J refused to admit the evidence of an accountant skilled in company valuations and financial analysis when the evidence concerned the expected content of takeover documents. His Honour said (at [13]) that the valuer "purported to speak from a 'commercial perspective' rather than strictly from a financial perspective" and gave opinions about what he regarded as proper or standard or reasonably expected disclosures and practices for takeover documents when he had no recent experience in the field; and (b) Stuart v Rabobank Australia Ltd [2021] FCA 1388, in which Halley J considered the admissibility of an opinion of an economist who opined on whether Rabobank acted reasonably or unreasonably in varying the applicants' credit accounts and responding to their financial difficulty (at [120]). Halley J held the report to be inadmissible for reasons including that: (i) the questions the economist was asked to address were inherently fact specific and "the focus on reasonableness [in Questions 4 and 5] required the making of normative judgements. These are fundamentally matters for the Court." (at [123]); (ii) the expert's specialised knowledge as an economist was of limited, if any, relevance to the questions he was asked to address in his reports. Specifically, it was not established that he had any specialised knowledge based on his training, study and experience with respect to banking practice and procedure (at [124]); and (iii) it did not appear that the economist was applying specialised knowledge based on his training, study and experience. Rather, it appeared that he was expressing "general opinions" divorced from that training, study and experience (at [129]). Brambles submits that the same criticisms can be made of Mr Samuel's report in this proceeding.