Industrial Court of New South Wales CITATION: Kennett & Anor v Mayrana Pty Limited & Ors (No 6) [2007] NSWIRComm 234 MATTER NUMBER IRC 3679 OF 2003 _________________________________ KEITH FRANKLIN KENNETT First Applicant KF KENNETT NOMINEES PTY LIMITED (ACN 007 739 568) Second Applicant MAYRANA PTY LTD (ACN 101 363 688) First Respondent GARRATT'S LIMITED (ACN 000 003 725) Second Respondent CHRISTOPHER CAMPBELL Third Respondent PARTIES: MICHAEL TRAYNOR Fourth Respondent MATTER NUMBER IRC 3680 OF 2003 _________________________________ MYONG HO PAK Applicant MAYRANA PTY LTD (ACN 101 363 688) First Respondent GARRATT'S LIMITED (ACN 000 003 725) Second Respondent CHRISTOPHER CAMPBELL Third Respondent MICHAEL TRAYNOR Fourth Respondent FILE NUMBER(S): IRC 3679 and 3680 of 2007 CORAM: Schmidt J CATCHWORDS: Evidence - objections to expert's report - expert's opinions - reasoning process - expertise - section 79 of the Evidence Act 1996 - expertise not established - part of report not received - hearsay - section 60 of Evidence Act 1996 - proof of assumptions - section 136 of the Evidence Act 1996 - balance of report received - limit on use of hearsay evidence LEGISLATION CITED: Evidence Act 1996 Australian Securities & Investments Commission v John David Rich & Ors [2005] NSWCA 152 Barbosa v Di Meglio [1999] NSWCA 307 CASES CITED: Lee v The Queen (1998) 195 CLR 594 Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 Rhoden v Wingate [2002] NSWCA 165 Sydneywide Distributors v Red Bull Australia Pty Limited (2002) 55 IPR 354 HEARING DATES: 12 September 2007, 13 September 2007 DATE OF JUDGMENT: 13 September 2007 APPLICANTS: Dr JP Berwick of counsel SOLICITORS: GH Healey & Co FIRST AND SECOND RESPONDENTS: Mr AJ Bulley of counsel SOLICITORS: Gray & Perkins LEGAL REPRESENTATIVES: THIRD RESPONDENT: Mr BKB Cross of counsel SOLICITORS: Thomson Playford FOURTH RESPONDENT: Mr PW Taylor SC with Mr PL Carr of counsel SOLICITORS: DLA Phillips Fox JUDGMENT: - 14 - INDUSTRIAL COURT OF NEW SOUTH WALES CORAM: Schmidt J 13 September 2007 Matter No IRC 3679 of 2003 KEITH FRANKLIN KENNETT AND ANOTHER v MAYRANA PTY LTD AND OTHERS Application under s.106 of the Industrial Relations Act 1996 Matter No IRC 3680 of 2003 MYONG HO PAK v MAYRANA PTY LTD AND OTHERS Application under s.106 of the Industrial Relations Act 1996 REASONS (No 6) [2007] NSWIRComm 234 1 During the course of the hearing, I dealt with the objections to an expert's report of Mr Robert Benjamin Prior, exhibit 57, tendered by the applicants, indicating that I would give reasons for the conclusions reached. These are those reasons. 2 The opinion Mr Prior expressed in the report was that: It seems to the Writer that Mr Traynor's opinion as expressed in the due diligence report (P&L Statement) and in the absence of proper explanation was unreliable, unsafe, unfair and wreckless. 3 The opinion was formed by way of a reply to an affidavit sworn by Mr Traynor on 27 March 2007. That affidavit was to be tendered in the applicants' case, in order to explain the opinion Mr Prior had formed, the report being unintelligible, without the affidavit to which it was responding being put before the Court. The report was structured as a commentary on Mr Traynor's affidavit, it being stated that: The Writer only comments on those parts of Mr Traynor's Affidavit of 27 March 2007 that are directly relevant in his calculation of the net profit of Excelsior College Pty Ltd for the financial year ended 30 June 2002. 4 The net profit of Excelsior College Pty Ltd for the financial year ended 30 June 2002 was dealt with by Mr Prior, because it was a part of the formula which the parties had agreed, in order to calculate the sale price of the College. Mr Traynor had conducted a due diligence exercise for the purchaser of the College and his advice had included conclusions as to net profit. 5 The objections to Mr Prior's report went to matters of relevance; the absence of any opinion, the absence of relevant expertise and hearsay, amongst other matters. Opinions 6 I was unable to accept that the report did not express opinions, as was argued for the respondents, having in mind what was observed by the Court of Appeal in Barbosa v Di Meglio [1999] NSWCA 307. At [33], Priestly J discussed an expert report in his minority judgment. Mason P agreed with this aspect of his Honour's judgment (at [15]): [33] This paragraph contained the substance of the appellant's argument in the case. Very often, experts' opinions are the conclusions they reach after a process of reasoning which, when stated, takes the form of an argument, in the sense of the statement of a reasoning process. The submissions to the trial judge never seem to have taken account of this not very subtle point. They seemed to assume that an "argument" by an expert could not be the foundation of an opinion but somehow invalidated it and turned the expert into an advocate. No doubt sometimes such an argument may be faulty, with the result that the opinion may not be accepted as well founded. Also, it may be expressed in the vernacular of the expert's own area of knowledge, which may sometimes irritate a judge who expects all evidence to be given in conformity with regular court procedure. Nevertheless, if the argument (reasoning process) is sound and supports the opinion and the opinion is one in an area within which the person expressing it is acknowledged as an expert, then the argumentative (or reasoning) aspect of the formation of the opinion cannot of itself be a reason for excluding the argument or belittling the opinion. (It will of course be a different matter if the argument is unsound.) Nor, if the way in which the expert opinion is expressed does not conform to the judge's ideas of proper form, should that by itself be a reason for not considering whether or not it has substance. Expertise 7 Mr Prior's accounting qualifications were not in issue. What was argued not to have been established, was that Mr Prior had the requisite specialised knowledge, to give opinion evidence in relation to the functionality of one of the databases which the College operated - the CMS database. 8 Section 79 of the Evidence Act 1996 provides: 79 Exception: opinions based on specialised knowledge If a person has specialised knowledge based on the person's training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge. 9 On his evidence, Mr Prior had undertaken studies at TAFE and Masters degree level, in information technology, including database technologies. In 2004, he had completed the Master of Business (Information Innovation) degree at RMIT, which included a subject, Digital Information Innovation in Business, at the conclusion of which students were expected to be able to 'understand the technologies which are available for organizations to capture unstructured documents in flat file, relational and object oriented databases'. The affidavit evidence also dealt with various work Mr Prior had performed in connection with various computer systems, dating between 1985 and 2001. No reference was made, however, to any work relating to flat file databases. 10 In his report, Mr Prior sought to express the opinion, based on his 'training, education and experience' that: 'Flat File databases inherently suffer from: · Low reliability · Low integrity · Data redundancy · Lack of integration capability with other systems; Eg financial systems. · Flat file databases are however easy to understand and relatively cheap to design and implement relative to relational databases. 11 Also in evidence was advice given by Mr Prior to the applicants' instructing solicitors in September 2007, that he was 'not a database expert'. He recommended that a database expert be retained. Despite this, his view was that he was qualified 'to reliably comment, as part of my Expert report, on the systems environment at Excelsior College in 2002.' 12 In a further report, exhibit 58, Mr Prior said: My research also confirmed the advice provided to me by Mr Brash that the inventor of the CMS database system sold it as he claimed. (See attached documentation) If the CMS system was in fact a flat file system as I was told it could not, in my opinion, be considered reliable under any reasonable circumstance. It is recommended that MXL be requested, under subpoena if necessary, to provide details of the underlying design of the CMS, including whether or not it was flat - file. A database expert should then be asked to review and comment on the system. 13 Over the respondents' objections, further oral evidence was called from Mr Prior as to his expertise in flat file databases. Mr Prior explained his understanding of flat file databases. He said, however, that he had no work experience with flat file databases; he had never seen the College's databases and that in his own assessment, he was a competent technician. He explained that he had described himself as not being an expert in databases, because he was not a 'thought leader'. In further explanation, he said that he used this term, because that was the terminology used in this industry. 14 On the basis of this evidence, I concluded that Mr Prior, even by his own assessment, was not qualified to give expert evidence on the inherent defects of flat file databases. This part of his report was thus not received. As Heydon J observed in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705: 86 That statement of the law corresponds with the views of Black CJ, Cooper J and Emmett J in Ocean Marine Mutual Insurance Association (Europe) OV v Jetopay Pty Ltd [2000] FCA 1463 at [21]-[23]: "[21] The primary judge considered that it was permissible to examine the reports and draw inferences from the form and contents of them. His Honour considered that it was permissible to take into account: § the factual context in which a report was produced; § the description and designation of the person making the report; § the contents and language of the report and the nature of the assertions made in it; § he form of the report; § the expressed qualifications of the person making it as set out in the report. [22] However, it is not permissible to conclude from those matters alone that an author of a report has any specialised knowledge, except to the extent that the report states (or it otherwise appears from admissible evidence) what that knowledge is. Nor is it permissible, by reason of those matters alone, to conclude that any specialised knowledge that the author of a report has is based on any training, study or experience of the author. Thus, it is not permissible to conclude, simply because a person expresses an opinion on a particular subject, referring to particular technology, that that person has any specialised knowledge in relation to that subject. There must be specific evidence as to specialised knowledge of the person in relation to that subject and as to the training, study or experience upon which that specialised knowledge is based. [23] The further requirement that an opinion be based on specialised knowledge would normally be satisfied by the person who expresses the opinion demonstrating the reasoning process by which the opinion was reached. Thus, a report in which an opinion is recorded should expose the reasoning of its author in a way that would demonstrate that the opinion is based on particular specialised knowledge. Similarly, opinion evidence given orally should be shown, by exposure of the reasoning process, to be based on relevant specialised knowledge." The last quoted paragraph was applied by Einstein J in Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 123 at [19]. Evidence not complying with the principles described in it might be inadmissible as irrelevant (s 56(2)), as not complying with s 79, or on discretionary grounds (s 135). However, no objection was taken to Professor Morton's evidence, so the only issue for this Court is its weight. 15 The onus fell on the applicants to demonstrate Mr Prior had the relevant specialised knowledge. The onus was not met and this part of the report was therefore not received. Hearsay 16 Mr Prior's report indicated that in part, his opinion was based 'on inquiry'. Who such inquiries had been made of, when they were made and what he was told, was not revealed in the report. The results of the inquiry were merely summarised in this way: § The CMS system had a long history of implementation administrative difficulty at Excelsior College. § Excelsior College management had serious disputes with the CMS vendor as to treatment of commissions deducted at source. This led to material errors. § The trust balances report was either never or rarely correct. § The CMS was barely brought on line and functional before the ESOS regime changed in about June 2000 when a trust account was no longer required. Thereafter no attempt was made to manage the trust account drawn down function. Procedures became more relaxed although Mr Brash did the best he could in a busy environment where he often worked long hours. § The CMS was a flat file database system. It was later upgraded to a web and server based relational system. 17 There were other objections to the way in which the reasoning process had been exposed. In Makita at [85], it was observed that: In short, if evidence tendered as expert opinion evidence is to be admissible, it must be agreed or demonstrated that there is a field of "specialised knowledge"; there must be an identified aspect of that field in which the witness demonstrates that by reason of specified training, study or experience, the witness has become an expert; the opinion proffered must be "wholly or substantially based on the witness's expert knowledge"; so far as the opinion is based on facts "observed" by the expert, they must be identified and admissibly proved by the expert, and so far as the opinion is based on "assumed" or "accepted" facts, they must be identified and proved in some other way; it must be established that the facts on which the opinion is based form a proper foundation for it; and the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached: that is, the expert's evidence must explain how the field of "specialised knowledge" in which the witness is expert by reason of "training, study or experience", and on which the opinion is "wholly or substantially based", applies to the facts assumed or observed so as to produce the opinion propounded. If all these matters are not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge. If the court cannot be sure of that, the evidence is strictly speaking not admissible, and, so far as it is admissible, of diminished weight. And an attempt to make the basis of the opinion explicit may reveal that it is not based on specialised expert knowledge, but, to use Gleeson CJ's characterisation of the evidence in HG v R (1999) 197 CLR 414, on "a combination of speculation, inference, personal and second-hand views as to the credibility of the complainant, and a process of reasoning which went well beyond the field of expertise" (at [41]). 18 In Sydneywide Distributors v Red Bull Australia Pty Limited (2002) 55 IPR 354, Weinberg and Dowsett JJ observed at [87], in relation to the approach of Heydon J in Makita: It may well be correct to say that such evidence is not strictly admissible unless it is shown to have all of the qualities discussed by Heydon JA. However many of those qualities involve questions of degree, requiring the exercise of judgment. For this reason it would be very rare indeed for a court at first instance to reach a decision as to whether tendered expert evidence satisfied all of his Honour's requirements before receiving it as evidence in the proceedings. More commonly, once the witness's claim to expertise is made out and the relevance and admissibility of opinion evidence demonstrated, such evidence is received. The various qualities described by Heydon JA are then assessed in the course of determining the weight to be given to the evidence. There will be cases in which it would be technically correct to rule, at the end of the trial, that the evidence in question was not admissible because it lacked one or other of those qualities, but there would be little utility in so doing. It would probably lead to further difficulties in the appellate process. 19 In Rhoden v Wingate [2002] NSWCA 165, the Court of Appeal discussed how questions such as this are to be approached: 84 The next expression which the trial judge found "very general and unspecific" was "However, various physical evidence did not support this". The paragraph in Mr Jamieson's report using that expression is: "It was clear that if one took the witness statements on face value, the driver's version (the Volvo being close to the centreline) should be accepted. However, various physical evidence did not support this. That evidence involved: § the isolated nature of the damage described to the right rear quarter of the Volvo, suggesting an obtuse angle impact, § the mark on the westbound side of the carriageway suggesting the motorcycle was on its correct side of he road at the moment of impact." That makes it entirely clear what Mr Jamieson was referring to: the damage to the car and the gouge mark. 85 Contrary to the trial judge's view, Mr Jamieson thus made the material he was relying on in forming his opinion about the accident – the facts he was assuming - tolerably clear. But was there sufficient independently admissible evidence of that material to enable Mr Jamieson's opinions to remain the evidence? This was an issue to which little attention was given by trial counsel or the trial judge: it was much more significant on appeal. In effect, the key parts of Mr Jamieson's reasoning, leaving aside his criticisms of the reliability of the eye witnesses whose evidence was never tendered in its own right, and taking into account his knowledge of the general layout of the area, were: (a) the damage to the right rear quarter of the defendant's car suggested an obtuse angle impact; (b) if there was a gouge mark on the westbound side of the carriageway and if it had been made during the accident, that suggested that the point of impact was there and that the motorcycle was on the correct side of the road; (c) the damage to the two vehicles, and the movement of the car after impact, suggested an impact speed as low as 60 kilometres per hour. 86 When assessing the admissibility of expert opinions, it is not the case that an opinion is only admissible if at the close of the case of the party relying on it the evidence establishes each of the assumptions on which it is based on the balance of probabilities. The primary evidence relating to those assumptions might be controversial. Which parts of the primary evidence are to be accepted, and what the correct conclusions from the primary evidence are, are matters for the trier of fact at the end of the trial. The opinion evidence may be admitted if there is evidence which, if accepted, is capable of establishing the truth of the assumptions. On the appeal the defendant put no submission suggesting that the test was more onerous for the plaintiff in this case. For present purposes let it be assumed that it is not less onerous. 87 Was there evidence, at the close of the plaintiff's case, which, if accepted, was capable of establishing the truth of the assumptions underlying Mr Jamieson's opinion? 20 I took the view, in light of the authorities, that the appropriate course in this instance was to admit the report and to consider, in due course, whether the applicants had led evidence which established the assumptions on which Mr Prior's report was based and if so, the weight which his opinions might properly be accorded. At that point, matters of the kind discussed by Heydon J in Makita at [87] to [89] will arise for consideration: 87 There is no doubt about Professor Morton's authority, experience, qualifications and skill. It is also the case that Professor Morton's report is quite lengthy and detailed. But, given that the court is not obliged to take the opinion of an expert as conclusive even though no other expert is called to contradict it, can it be said that Professor Morton's report goes beyond a series of oracular pronouncements? Does it usurp the function of the trier of fact? More vitally, did it furnish the trial judge with the necessary scientific criteria for testing the accuracy of its conclusions? Did it enable him to form his own independent judgment by applying the criteria furnished to the facts proved? Was it intelligible, convincing and tested? Did it go beyond a bare ipse dixit? Did it contain within itself materials which could have convinced the trial judge of its fundamental soundness? 88 It is significant that the trial judge himself did not identify any scientific criteria within the report for testing the accuracy of its conclusions. The trial judge summarised Professor Morton's evidence ([125]-[134]) and accepted his conclusions ([203]-[204]). But he did not analyse Professor Morton's conclusions. Perhaps he did not feel the need to do so, in view of the fact that no expert was called in opposition to Professor Morton, and in view of the fact that the cross-examination of Professor Morton was not lengthy. However, it remains the case that the trial judge did no more than accept the conclusions as they were stated. 89 In the course of argument on the appeal, attention tended to be directed to particular aspects of Professor Morton's evidence in isolation. Though Professor Morton's views often go to ultimate issues, they are not on that ground inadmissible: Evidence Act 1995 (NSW) s 80. However, even though Professor Morton's evidence was uncontradicted, the trial judge was not bound to accept it, and nor is this Court, particularly where it was on ultimate issues: Brodie v Singleton Shire Council (2001) 75 ALJR 992 at [355] per Callinan J. Counsel for the plaintiff correctly said that an assessment of the merits of Professor Morton's evidence called for consideration of it in detail and as a whole. 21 This also accorded with the approach of the Court of Appeal in Australian Securities & Investments Commission v John David Rich & Ors [2005] NSWCA 152: 136 The issue for a trial judge is whether the opinion expressed to be based on the facts proved or assumed is correct. In determining this issue, the judge will have regard, amongst other things, to the reasoning process (based on those facts) used by the expert. The mere fact that the expert's opinion is based on facts that are assumed (and not proved) at the time the expert gives evidence is no reason to exclude the evidence at that stage. The assumed facts may be proved later by other evidence. The fact that the opinion was initially formed or later reinforced by reference to other facts, not said by the expert in his evidence to be proved or assumed, is irrelevant to the question of admissibility. Once the opinion is capable of being based on the proved facts, it is admissible. The fact that the expert's opinion was at one time – or even still is – reinforced by undisclosed facts and reasoning processes is irrelevant to the admissibility of the opinion (although these matters may go to weight). Section 60 of the Evidence Act 22 It is also convenient to observe that for the applicants, it was submitted by Dr Berwick that s 60 of the Evidence Act was relevant to the question of the admission of the report, it providing: 60 Exception: evidence relevant for a non-hearsay purpose The hearsay rule does not apply to evidence of a previous representation that is admitted because it is relevant for a purpose other than proof of the fact intended to be asserted by the representation. 23 Reliance was placed on the discussion in Odgers Uniform Evidence Law, Seventh Edition, at [1.3.940], particularly the authorities referred to in footnote 113. Reference was also made to Lee v The Queen (1998) 195 CLR 594. There the High Court dealt with s 60, concluding that it did not permit a confession made in an out of court statement, which was itself a report of what another had said, to be used as proof of the truth of what was reportedly said, and that evidence of the statement was not admissible as evidence of its truth. It follows that there are the limitations in s 60, in the case of second hand, or more remote hearsay, the High Court having said at 603-4: [39] At common law, a previous inconsistent statement put to a witness was evidence only of the fact that the witness had made an inconsistent statement; it was not evidence of the truth of the contents of that earlier statement ( Taylor v The King (1918) 25 CLR 573). It was evidence that went only to credit. The Law Reform Commission was very critical of this rule which, it said, imposed a "schizophrenic task" on the tribunal (Australia, The Law Reform Commission, Evidence , Report No 26 Interim (1985), vol 1, par 334) and its recommendations for change of the law must be understood in the light of its trenchant criticism of this aspect of the common law. Similarly, its recommendations must be understood in the light of its criticism of the result that follows from the application of the common law rule against hearsay to the evidence of experts. At common law, an expert (such as a medical practitioner) may give evidence about the factual basis for the opinion expressed (such as the history given by the patient) only as evidence showing the foundation for that opinion, not as evidence of the truth of the facts recounted (See, eg, Ramsay v Watson (1961) 108 CLR 642 at 647-649, per Dixon CJ, McTiernan, Kitto, Taylor and Windeyer JJ.) [40] It is then clear that s 60 was intended to work a considerable change to the common law. But there is no basis, whether in the considerations which we have mentioned as having influenced the Commission or otherwise, for concluding that s 60 was intended to provide a gateway for the proof of any form of hearsay, however remote. As has been indicated earlier in these reasons, that that was not intended is made plain by the terms of s 59 to which s 60 is an exception. 24 In my view, in this case, s 60 of the Evidence Act provided no answer to the necessity of the applicants meeting the ordinary onus which falls upon them, of establishing an evidentiary basis for assumptions made by Mr Prior in his report, including those contained in his summary of the results of his inquiry. 25 As Heydon J observed in Makita: 64 The basal principle is that what an expert gives is an opinion based on facts. Because of that, the expert must either prove by admissible means the facts on which the opinion is based, or state explicitly the assumptions as to fact on which the opinion is based. If other admissible evidence establishes that the matters assumed are "sufficiently like" the matters established "to render the opinion of the expert of any value", even though they may not correspond "with complete precision", the opinion will be admissible and material: see generally Paric v John Holland Constructions Pty Ltd [1984] 2 NSWLR 505 at 509-510; Paric v John Holland Constructions Pty Ltd (1985) 59 ALJR 844 at 846. One of the reasons why the facts proved must correlate to some degree with those assumed is that the expert's conclusion must have some rational relationship with the facts proved. Section 136 of the Evidence Act 26 Finally, I note that it was submitted that parts of Mr Prior's report would not be received, on the basis that the discretion under s 136 of the Evidence Act would be exercised. I accepted that submission, in so far as it was necessary to limit the use which could be made of Mr Prior's hearsay evidence, such as the summary of the inquiry he had made. I took that course, consistently with the view I had otherwise reached, that as a matter of justice between these parties, the assumptions of fact on which Mr Prior's opinion was based, must be established in the ordinary way. ------------------------ DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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