“Remarkable timing” and “striking similarity”

Background

A company that operated a large e-commerce business selling Chinese-sourced products was hit by resignations: three employees left to join a competitor.

The former employer commenced proceeding against those employees claiming that they had breached their duties to maintain the confidentiality of important information.

As part of its case the former employer arranged for a report “concerning the use and treatment of information pertaining to the identities and details of suppliers in China” from an expert who ran a business helping clients source products from Chinese suppliers and was also the author of a book on the subject.

A “remarkable timeline”

The Court paid attention to a timeline that it described as “remarkable” – the expert had delivered a sixteen page report the day after receiving her letter of instruction.

Under cross examination the expert initially claimed that she had prepared the report “within 24 hours” of receipt of instructions but from her later evidence – described as “unsatisfactory” and “at times confusing” – it became clear not only that the preparation had begun much earlier, but also that the report was “a collaboration” between her, and the lawyers that engaged her.

A “striking similarity”

The Court also recognised what was described as a “striking similarity” between a paragraph in the expert report and a paragraph in one of the witness statements, from which it inferred that the “sentences were drafted by the same person, in this case, one or more lawyers.”

Conclusion on the expert evidence

In New Aim Pty Ltd v Leung [2022] FCA 722 the Court found:

  • It might be “perfectly appropriate” for an expert’s report to be settled in an admissible form by someone other than the expert – especially where the expert was unfamiliar with the form and content requirements – but if so, the fact of such assistance, details of all relevant correspondence, and a summary of any oral advice, should be disclosed.
  • It wasn’t clear who was responsible for drafting which parts of the report, but “most of the report was, at least initially, the product of drafting by the lawyers for the applicant” albeit that it was based on material of a non-specific nature provided by the expert.
  • What had occurred in this case “went well beyond permissible guidance” about admissibility.
  • The Court could not be satisfied that the opinions in the report “truly represented the expert’s honest and independent opinions” and so the report could not be admitted to evidence. The concerns were so pronounced that they also tainted the expert’s oral evidence, which the Court also rejected.

The High Court: Stubbings v Jams 2 Pty Ltd

This week the High Court delivered judgement in Stubbings v Jams 2 Pty Ltd [2022] HCA 6, the final instalment of litigation which addressed whether asset-lending – loans made based on the value of security rather than the capacity of the borrower to repay by instalments – was inherently unconscionable, and the extent to which lenders might rely on certificates of advice.

The answers to those questions are: “no” and “it depends,” turning on quite specific facts.

The Plan

An unemployed man (the Guarantor) wanted to buy a new home to live in, after falling out with his landlord – but he was unable to arrange bank finance.  Supposedly guided by a consultant, he used a shelf company to borrow the whole of the purchase price from a private lender, secured by mortgages over two other properties that he owned in Narre Warren.

The Guarantor’s stated plan was to renovate the two Narre Warren properties and sell them, and then refinance through a bank after two or three months.  The Court found that this plan “was never going to work” – he did not have the money to renovate the properties or pay interest while any renovation was underway, and he did not have a realistic chance of later arranging bank finance either.

The Guarantor’s disadvantage

The Guarantor was described as “completely lost, totally unsophisticated, incompetent and vulnerable…incapable of understanding the risks involved in the transaction” and “precisely the sort of person who needed protection and was vulnerable to being exploited.”

The Lender’s system

The lender was represented by a lawyer who “deliberately avoided knowledge of borrowers’ and guarantors’ personal and financial circumstances.”  Through a system of conduct that was almost the opposite of bank lenders, he:

  • Did not require application forms from borrowers.
  • Did not seek any information about the income of borrower or guarantor.
  • Did not run credit checks.
  • Treated the asset position of the nominal borrower company as irrelevant.
  • Refused to communicate, meet, or negotiate with proposed borrowers.

The Court found that “if enquiries had been made, they would have led to [the lawyer] discovering… that the transactions from the perspective of the [Guarantor] were not merely risky and dangerous but entirely uncommercial and could not in any way have advanced his interests…that the appellant had fundamentally misunderstood the transaction…and that it was possible that [the Accountant] had given [the borrower] and [the Guarantor] no financial advice at all.

Pro forma certificates of independent legal and financial advice

The lawyer prepared pro forma certificates of independent legal and financial advice, and the lender’s claimed reliance on them to the exclusion of any other information except valuations was crucial – but there were three problems with that claimed reliance:

  1. The certificate of legal advice addressed the consequences of default for the guarantor – but did not address the likelihood of default.
  2. The certificate of financial advice which would potentially address the likelihood of default was completed in respect of the borrower shelf company, not the Guarantor.
  3. The certificates could not displace the lawyer’s actual knowledge that “the loans were a dangerous transaction” for the Guarantor who, the Court found, the lawyer knew to be under a disadvantage.

Conclusion

The High Court clearly accepted that there was nothing inherently unconscionable about asset‑based lending.  However, in the circumstances here, the lawyer’s conduct amounted to the unconscientious exploitation of the Guarantor’s special disadvantage, and the Court held that it would be unconscionable to allow the lender to be able to enforce its rights under the mortgages.

The Review of the Australian Banking Code of Practice

Background

The Banking Code of Practice (the Code) issued by the Australian Banking Association (the ABA) is independently reviewed every three years.  The 174 page review conducted by Mike Callaghan AM PSM – an economic consultant and 38 year veteran Treasury official – released on 3 December 2021, and available here, is the first review since the Hayne Royal Commission.

The Code applies to consumers and small businesses, the latter specifically defined as those with annual turnover of less than $10 million and fewer than 100 FTE employees, and less than $3 million total debt to all credit providers (whether fully drawn or not).

Recommendations impacting lending to small business

I have set out below the recommendations which relate to small business lending, together with my comments, in italics:

(60) Part 6 should be extended from referring to ‘lending to small business’ to cover ‘providing banking services to small business.’ The first commitment in this part should be for banks to assist small businesses with their banking services that are suitable to their circumstances.

BNPL products are blurring the line as to what is “lending” and what is not. The proposed recommendation will also make it clear that merchant (i.e., credit card clearing) and foreign exchange hedging arrangements are caught, which seems sensible and uncontroversial.

(61) While it will take time to incorporate the Pottinger Review recommended changes to the definition of small business in a revised Code following the triennial review, ABA banks should commit to introduce the changes as soon as possible.

The change referred to here is to increase the total debt threshold from $3m to $5m, so that larger small businesses are protected by the Code.

Significantly, this would further limit the ability of banks to enforce “non-monetary defaults” (i.e., defaults other than non-payment of principal and or interest).  Currently banks use non-monetary triggers such as financial covenants to monitor the health of businesses with multi-year loans.  If the use of non-monetary triggers is further limited, banks are likely to reduce loan tenor to a standard 12 months, at least for riskier customers.

(62) To help clarify what parts of the Code apply to small business, and to recognise there is a difference in the requirements for lending to small business and lending to individuals, the references to small business lending in Part 5 should be shifted to Part 6 of the Code.

A minor and sensible change

(63) The Code should specify that future earning capacity is taken into account when assessing a small business’s capacity to repay a loan.

Banks will be happy to explain to their customers that they take future earning capacity into account when assessing a loan, and in my experience, this is already well-understood, so this will not be a significant change.

(64) The Code should clarify that a bank’s approval of a small business loan will not be dependent on a third party (such as the small business’s accountant) certifying the capacity of the small business to repay the capacity of the small business to repay the loan.

Some banks ask their customer’s accountant to certify the capacity of a business to repay a proposed loan.

This creates problems where the customer is unwilling or unable to pay the accountant’s fees for doing so, or where the accountant forms the view that the business does not in fact have capacity to repay the loan.  The solution as proposed, however, may convert conditional approvals into unconditional refusals.

(65) Banks should advise a small business if there is likely to be a delay in the initial indication of how long it would take for a decision, the reason for the delay, and give a revised estimate when a decision is likely.

Unexpected delays can sometimes be an important “soft signal” that a customer is not regarded as being as credit-worthy as they (or perhaps the front-line banker) believe.  In practice this proposal is more likely to see lenders formally estimate the longest possible period, to simplify later management of turnaround times.

(66) Banks should commit that if they require additional information when considering a loan application, they will endeavour to ensure that this does not delay the time it will take for the bank to make a decision.

In my opinion rules that would hold lenders to fixed decision periods should be approached with caution! It is always quicker to decline a loan than to approve it, and this proposal risks a default “no” the day before the deadline, to ensure that the target is met.

(67) Banks should commit to tell small business the reason, if appropriate, as to why a loan was declined, along with what would be needed for the application to be reconsidered.

This proposal was pressed by the Australian Small Business and Family Enterprise Ombudsman. It is hard to see how it will result in anything other than generic broad-brush statements, with most businesses being told that “the bank could not be satisfied that the borrower could service the loan.”

Overall

The most significant recommendation is the proposal to extend the small business lending protections from $3m to $5m, and the larger small business borrowers affected by this may be frustrated if it makes it harder to secure longer term loans.

Other recommendations will result in loans being more speedily declined for less creditworthy customers, but it is hard to see them as major, or significant.

Lending to small business would remain conservative: reference to the decision of a prudent banker remains unchanged, and there is no sign of a specific invitation for lenders to “look through” (i.e., make allowance for) external shocks such as drought or flood, or most recently, Covid, which seems a missed opportunity.

The Impact of Singapore’s new Rules on Expert Evidence

Background

On 1 December 2021 Singapore gazetted new Rules of Court, intended to “transform the litigation process by modernising it, and enhancing the efficiency and speed of adjudication, while maintaining legal costs at reasonable levels.”

The new rules apply from 1 April 2022, with a “transitional learning phase” until 30 June 2022.

The new rules follow a consultation process undertaken in late 2018, and a government response to the consultation released on 11 June 2021. You can find my comments on the matters touching the work of expert witnesses in the government response, here.

The current position

Under the current regime:

  • There is no restriction against the use of experts, and no restriction on the assumptions that they are to adopt in undertaking their work.
  • The Singapore Supreme Court has discretion to order experts to undertake “a discussion” and prepare a joint report – but a meeting is not otherwise mandatory, and crucially, the contents of the discussion will not be put before the Court unless all parties agree.
  • The Singapore International Commercial Court Rules provide a default process whereby experts will meet before trial to discuss their reports without lawyers present, and then produce a joint experts’ report. Although the parties are not bound by any agreement between experts, notably, “the Court will be entitled to take cognizance of the expert’s agreement.

The post 1 April 2022 position

The new Rules introduce significant changes, albeit well-telegraphed by the government response discussed above.  In my view, the most noteworthy (with my observations in italics) are:

  1. Expert evidence may not be introduced without Court permission, which will be granted “only if it will contribute materially to the determination of an issue in the case” which cannot be resolved by an agreed statement of facts, or submissions based on agreed facts.

    I suspect that litigators would say that this is the standard they apply today in practice, and so the issue will be whether the Court assesses the question any differently.

  2. The Court will have power to appoint a Court expert or common expert – but the use of a single expert will not be mandatory.

    This is a new power, and potentially very impactful. The key question is how often it will be used – it may be “held in reserve” until the impact of the statement of agreed facts is better understood.

  3. The Court will have power to request that an expert “clarify that expert’s opinion in any aspect.”

    It seems a useful idea for the parties to be able to make a written request, and receive a response in writing, ahead of a trial.  The devil may be in the detail of the clarification request.

  4. The parties are to agree on a list of issues, and a list of agreed facts on which the experts are to rely. If the parties cannot agree, the Court “must decide the list of issues and the common set of agreed facts.”


    It may be frustrating to see experts arrive at different conclusions based on different assumptions – but on some occasions that may serve a useful purpose in helping the Court to understand the significance of those assumptions
    .

    I’d expect this change to have parties working to identify the key assumptions, and the outcomes that result from their adoption, with some hard-fought contests as each side battles to have their preferred assumptions mandated.  That may well mean more, and probably earlier, work for the so-called “dirty” experts (i.e., those not required to preserve their independence).

Compensation ordered against expert witness

Introduction

A “group proceeding” legal action against the auditor, directors and trustee of a failed non-bank lender was settled for $64m, subject to approval by the Court. The Court of Appeal approved the overall settlement and asked the Victorian Supreme Court to review the legal costs as well as the amount of commission claimed by a litigation funder.

What presumably began as a routine approval process uncovered matters which gave rise to very serious concerns about the conduct of the solicitor and the barristers (“the Lawyers”), the litigation funder, and the Legal Costs Expert engaged to express an opinion on the reasonableness of the legal fees.

The Bolitho v Banksia Securities Ltd (No 18) [2021] VSC 666 judgement is long, and the facts are complex.  Others will focus on the duties owed by the Lawyers, but as someone undertaking expert witness work, I am very interested on the issues that resulted in an expert witness being ordered to pay compensation!

The Expert Witness

The Legal Costs Expert witness had issued four reports expressing the opinion that the claimed legal costs “were fair and reasonable,” before issuing a fifth report in which he withdrew those opinions and claimed that he had been misled.

The Court agreed that the Legal Costs Expert had been misled by “grossly improper” and dishonest conduct by which false evidence was “manufactured” to support the barristers’ fee claims, but it made swingeing criticisms of the expert nonetheless:

  • Inadequate disclosure of previous engagements – The Legal Costs Expert did not appropriately disclose previous engagements involving the barristers, which were relevant to an assessment of his independence, and he did not draw the Court’s attention to his limited experience in large commercial litigation, and specifically, group proceedings.
  • Breach of duty to assist the court impartially – The Legal Costs Expert did not undertake a proper independent objective assessment of the facts he was asked to assume, and he failed to seek further evidence or information when he should have done so. His claim that he had complied with the Expert Code of Conduct in this regard, when he had not, misled the Court.
  • Failure to apply specialised knowledge – His reports did not demonstrate the application of any expertise or specialised knowledge. He adopted a “formulaic approach” and did not satisfy himself that the time claimed was both actually spent and reasonably spent – as demonstrated by his failure to identify duplicated work and charges.
  • Failure to promptly respond to new information – Despite becoming aware of material new information the Legal Costs Expert did nothing to correct the misleading statements in the reports that he had prepared until “the eve of the trial” when he issued a fifth report that recanted his earlier opinions. Even then, the fifth report did not “confront the reality that [the expert] had, by his third report, misled the court.”

Conclusion

The Court held that the Legal Costs Expert had breached his duties to the Court and that those breaches “materially contributed” to the loss suffered by investors.  Together with the other parties, the Legal Costs Expert was ordered to pay compensation of $11.7m and to also pay costs on an indemnity basis.

Radical changes to Singapore’s expert evidence rules…won’t proceed

In October 2018 the Singapore Civil Justice Review Committee (CJCR) and Civil Justice Commission (CJC) jointly issued a consultation paper seeking feedback on a number of measures intended to “enhance judicial involvement in civil proceedings to ensure that disputes are resolved efficiently and at a reasonable cost.”

The proposals included measures to mandate ADR, narrow the issues in dispute through better case management, reform discovery procedures, limit the number of applications that parties could file, and – most relevantly for my work – use a single joint expert witness if expert evidence was necessary.

The paper identified three problems said to arise under the current system under which each party appoints its own experts:

  • Party-appointed experts are presented with the case framed from the perspective of those engaging them, which might influence their interpretation of the evidence.
  • The experts often presented “irreconcilable differences in opinion,” which complicated the issues before the court.
  • The preparation and presentation of expert evidence resulted in disproportionately high costs.

In my experience, it is common for party-appointed expert witnesses to arrive at different opinions.  Sometimes that is because they are asked different questions, more usually it is because they are working with different assumptions.

The current position

Rule 5 of order 40A of the current Singapore Rules of Court provide the Courts with discretion to order experts to undertake “a discussion” and prepare a statement – but a meeting is not mandatory, and crucially, the contents of the discussion will not be put before the Court unless all parties agree (my emphasis in bold):

5.—  (1)  The Court may, at any stage, direct a discussion between experts for the purpose of requiring them to —

(a)        identify the issues in the proceedings; and

(b)        where possible, reach agreement on an issue.

(2)  The Court may specify the issues which the experts must discuss.

(3)  The Court may direct that following a discussion between the experts, they must prepare a statement for the Court showing —

(a)        those issues on which they agree; and

(b)        those issues on which they disagree and a summary of their reasons for disagreeing.

(4)  The contents of the discussions between the experts shall not be referred to at the trial unless the parties agree.

(5)  Where the experts reach agreement on an issue during their discussions, the agreement shall not bind the parties, unless the parties expressly agree to be bound by the agreement.

The Practice Directions of the Singapore International Commercial Court go further.  Paragraph 88 sets a default process whereby experts will meet before trial without lawyers present to discuss their reports, and then produce a joint experts’ report setting out:

(a) a list of issues and/or technical issues;

(b) areas/issues where they are agreed;

(c) areas/issues where they disagree;

(d) the reasons, nature and extent of their disagreement; and

(e) any other information which may assist the Court.”

Even though the parties are not bound by any agreement between experts, notably, “the Court will be entitled to take cognizance of the expert’s agreement.

The CJC proposals

Rather than move along the Singapore International Commercial Court pathway, the CJC proposed quite radical changes by which:

  1. Experts would only be used where the Court formed the view that their evidence would “contribute materially to the determination” of issues that were not capable of resolution by submissions or an agreed statement of facts.
  2. The general rule would be that only one common expert would be used (although the Court would also be able to appoint its own expert). The Court would control the appointment and use of the experts, giving directions about “the method of questioning and the remuneration to be paid.”
  3. The parties would be required to agree on the list of issues to be referred for expert evidence and the common set of facts on which the experts are to rely.

Easier said than done?

Producing an agreed list of issues and a common set of facts appears to be a worthwhile objective – but might be easier said than done.   In practice it would be likely to result in extensive use of so-called “dirty” (or “shadow”) experts working to identify the outcomes resulting from various possible counter-factual scenarios, followed by hard-fought battles in Court to attack or defend the preferred counter-factual.

The Ministry of Law response

On 11 June 2021 the Singapore Ministry of Law issued its response to the consultation process. In relation to the expert evidence proposal, it noted that:

A number of parties expressed concerns regarding the proposal for parties to agree and appoint a single joint expert.  In general, parties felt that the current rules pertaining to the adducing of expert witness evidence are sufficiently robust, and that the proposal may increase costs and satellite litigation.

As a consequence, it is now proposed that the rules will be changed to encourage parties to agree on a single expert witness where possible – but not make the use of a single expert mandatory.

 

Virtual Hot Tubbing in the Singapore International Commercial Court, in a Stage 4 Lockdown

“Hot tubbing” is the informal name used to describe expert witnesses giving evidence at the same time, “concurrent evidence” is the formal term. 

Hot tubbing allows counsel to ask the experts to comment on each other’s answers in real time, and judges to develop a conversation between two experts to discuss, for example, how and why they hold different positions.  From my perspective, it works well to help parties to narrow the range of matter in dispute and get to the nub of the issues.

A recent engagement had me giving hot-tub evidence to the Singapore International Commercial Court, by videolink. 

My counterpart was in New York, so we were ‘back-of-the clock’ to each other, which made it impractical to schedule a full day together.  Thankfully, he was unfailingly helpful and collaborative, and we were able to assemble a Joint Report by several shorter sessions together with email.

Ordinarily video evidence would be given from a room under the supervision of a local lawyer, to ensure that a witness is operating under the same conditions as if giving evidence in person.  But with Stage 4 lockdowns in place in Melbourne, it was not possible to leave home or to have someone attend mine.  The solution was to use cameras to provide a view of the door to the room – so that any opening to admit a sneaky witness-coach would be evident, and a view of the desktop – so that the use of notes or materials would be visible too.

The use of technology by the SICC is striking. A draft transcript was available in almost real time – appearing on screen with perhaps a one second delay, and a final transcript circulated each evening.  Any documents referred to were shared on screen, in real time.  Not only was attendance by video link accommodated, the Court was prepared to sit out of normal hours (a 5pm to midnight session on one occasion) to accommodate witnesses in different time zones – very humane!

Singapore has set itself to be an international centre for dispute resolution.  The work that has been done towards that objective is impressive.

My “Hot-Tubbing experience” – giving expert evidence concurrently

One of the more interesting things I have done in the last six months was to ‘hot tub’* – give evidence concurrently with another expert – in the Supreme Court of Victoria.

The standard approach to expert evidence has each side engaging their own expert, who is asked to answer specific questions seen as most central to their own case.  Each expert is cross-examined separately.

The Supreme Court Rules allow the Court to direct experts to confer, and if so, specifically requires them to try to agree.  The experts must then prepare a joint report identifying areas of agreement and areas of disagreement, setting out the reasons for any disagreement.

In the matter I was involved with (which was concerned with compliance with the Banking Code of Conduct) the Court also made orders that that the two experts give evidence concurrently, sitting side by side in the witness box.

Australian Courts are apparently seen as leading the world in the use of concurrent evidence, which has been described as enabling:

“each expert to concentrate on the real issues between them. The judge or listener can hear all the experts discussing the same issue at the same time to explain his or her point in a discussion with a professional colleague. The technique reduces the chances of the experts, lawyers and judge, jury or tribunal misunderstanding what the experts are saying”  Rares J

As well as answering questions from the two barristers and the judge, at times each expert was given the opportunity to comment on the evidence given by the other expert.

The joint nature of the evidence lengthened the time that we were in the witness box to a full day’s hearing.  Even when not being directly questioned it was still necessary to pay close attention because of the possibility of being asked to comment on the evidence given by the other expert.

In my case the other expert was a person I know well, and respect very highly, which in one sense made things easier because we each thought even more carefully before disagreeing with the other!

All in all it was an enjoyable experience, and well worth considering if you have the opportunity.

*”Hot-tub” seems to provoke mirth (!) but it is actually a term used by the Court – see note 3 to Annexure B of the Federal Court Expert Evidence Practice Note (GPN-EXPT).