Sold a lemon: using a partisan expert may cost you more than just their fees

Wednesday, 7 November 2018

Fulmer v Thompson [2017] QSC 119

Introduction

Expert witnesses have an obligation to act independently and objectively. This case provides an example of an expert witness who actively strategised with the defendants’ solicitor to shape the defence of the case, which ultimately cost him his credibility.

There were also problems with the reliability and basis of the evidence provided by the expert, including that the accounting documents relied upon by the expert had not been separately accepted as evidence.

Background

The plaintiff, Peter Fulmer, an experienced car salesman, commenced working for Australian Motors, a used vehicle sales business, in 2003. Australian Motors was owned by the third defendant, Caysand No 24 Pty Ltd (‘Caysand 24’).

Mr Fulmer entered into an oral agreement in 2005 whereby he acquired an interest in Australian Motors for $550,000. It was agreed he would pay $150,000 in cash, and his interest would then crystallise once a profit target (the ‘target sum’) had been reached to cover the remaining $400,000. Mr Fulmer entered into a Heads of Agreement on 16 June 2008 to execute the agreement.

At a meeting on 20 January 2010, the owners of the business admitted the target sum had been met. They thereafter failed to honour their end of the bargain and issue him shares in Caysand 24. The defendants argued at trial that the target sum had not been met, contrary to their admission in 2010.
 

The expert evidence

Lack of independence and objectivity
Mr H, an accountant, was responsible for the provision of accounting services to Caysand 24 on an ongoing basis. Mr H was appointed as the expert accounting witness for Caysand 24 for the purposes of these proceedings. Mr Fulmer appointed Mr C as an expert accounting witness.

Justice Henry acknowledged that there “may be benefits and disadvantages in enlisting a professional person with pre-existing involvement as a witness to relevant matters in a case to testify as an expert witness in the case about more broad ranging matters.” He then noted that “the most obvious disadvantage is the risk that a pre-existing professional allegiance to a party may compromise the degree of independence and objectivity with which the expert approaches the task, resulting in evidence so tainted by partisanship as to lack credibility and reliability.”

It emerged at trial that Mr H had actively strategised with the defendants’ solicitor, including on how to shape financial calculations to avoid liability. He also sought feedback about what approach to take to give the opinion desired by the defendants. An email from Mr H to the defendants’ solicitor set out retrospective adjustments which reduced the reported profit of Caysand 24.

Justice Henry stated, “the defendants’ use of an expert they knew would give them the ‘evidence’ they wanted presumably had the secondary benefit of saving money but it came at a different price for their case – a lack of credibility.”

His Honour went on to say that “I stress there is no impropriety in the solicitors of a business liaising with the accountants of the business to ascertain whether there are reasonable prospects of defending a potential or actual claim … Indeed, such a process may be well essential to informing a solicitor what instructions ought to be given to an expert accountant.”

However, where an expert has been actively involved in shaping the case, Justice Henry adds they “will not have the starting advantage of credible objectivity ordinarily associated with professionals.”

As Mr H was the accountant of the defendant when it admitted the target sum had been met on 20 January 2010, Mr H did not have the starting advantage of credibility.

Proof and reliability of information relied upon by Mr H
Justice Henry found there were several issues with the quality of the expert report prepared by Mr H, including that:

• There was no narrative style discussion or analysis of the process undertaken.
• The supporting source material was not clearly identified.
• The report referred to various information and calculations provided by individuals who did not give evidence.
• There was no evidence from Caysand 24 as to whether such information and calculations were the original source and whether the information was maintained in the normal course of business by Caysand 24.

Moreover, the financial statements appended to Mr H’s report included compilation reports indicating the directors of Caysand 24 were responsible for the information. The compilation report indicated there had been no verification or validation procedures carried out by their accountant and that the financial statements should not be relied upon without audit or review. Justice Henry concluded that
“[Mr H’s] report appeared to be founded on a mirage of hearsay figures unaccompanied by any meaningful attempt to identify and provide the relevant source documents of Caysand 24.”

A significant issue regarding the credibility of the information relied upon by Mr H was that no one from Caysand 24 was called as a witness to prove the source documents, not even the financial controller who was responsible for monitoring financial information relevant to the Heads of Agreement.

Justice Henry stated “there might be cases where the source of data annexed to expert reports has not itself been proved or admitted but which may nonetheless be inferred to be admitted from the conduct of the case. Such an inference might, for example, arise from an apparently common ground treatment of documents in evidence on one basis as also admissible pursuant to s 92 Evidence Act 1977 (QLD).”
His Honour went on to say, “In any event the mere successful tender without objection of an expert report containing annexed documents cannot of itself possibly sustain the inference that the source of the data in those documents is thereby proved or admitted.” Accordingly, Justice Henry formed the view that the annexures did not become evidence of the truth merely by their presence in an expert report and only served as evidence of the information the expert assumed to be fact.

In a joint expert report, the expert accounting witnesses agreed on the accuracy of the calculations, but not on the source data used in calculations, as Mr C had reservations about the reliability and correct selection of source data.

Justice Henry concluded that the financial statements and calculations prepared by the defendants of Caysand 24 were unreliable and gave them no weight as evidence. Justice Henry added, “the information they contain involved significant adjustments, explained by a partisan accountant, without proper proof of the source material from Caysand 24, in a case where it was long ago admitted by Caysand 24, when being aided by the same accountant, that the target sum was met.”

Justice Henry dismissed the counterclaim and concluded that the target sum had been met by 20 January 2010 as Mr Fulmer claimed.

Significance

This case provides an interesting example of an expert witness who was actively involved in shaping the defence of the case. The paramount duty of an expert witness is to the court and they must not be an advocate for a party, as required by the Uniform Civil Procedures Rules 1999 – Reg 428 Requirements for report, paragraph 3(e). This is also a requirement of APES 215 Forensic Accounting Services, a professional standard that applies to all Chartered Accountants giving evidence.

It is also apparent from Justice Henry’s judgment in this case that the source of information in documents annexed to an expert report should be capable of being proved during proceedings, and that annexures are not representations of the truth of the information they contain merely because of their presence in an expert’s report.

This case review is an extract from Expert Evidence: Recent Cases Edition 2.

 

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