Yan v Yangdo Pty Ltd [2024] NSWSC 1250
Background
The underlying dispute was between brothers Philip and Kam Wing Yan involving a Deed of Settlement where Ernst & Young (EY) was to value three commercial properties tied to corporate entities and trusts. Initially, EY’s draft report deducted an embedded capital gains tax (CGT) liability but the final report on 30 April 2024 did not. EY later issued a revised report on 3 May 2024, reinstating the CGT deduction, citing an error in the first report.
Philip sought a declaration that the second report was correct and binding, while Kam Wing argued the first report should stand or claimed errors in the second. The main issues were: [a] EY’s task scope; [b] if EY was functus officio after the first report; and [c] whether the second report had a manifest error.
Expert evidence
The brothers issued a joint letter of instruction to expert valuer Mr DM of EY, together with the Deed and the property valuations and confirmed their agreement to appoint Mr DM “as a single expert” to determine these matters.
In his first report, Mr DM did not factor in the ‘embedded’ CGT liability when valuing the Yan Unit Trust and Pengie Pty Ltd because although there was an ‘embedded’ CGT liability linked to the properties, this liability would not affect the valuation due to the structure of the proposed settlement. Mr DM concluded that the plaintiff was to pay $48,844,420 for the defendant’s interest in these entities.
However, in his second report, Mr DM concluded that a ‘willing but not anxious buyer’ would insist on a discount for the embedded CGT liability when acquiring an interest in the Yan Unit Trust or Pengie Pty Ltd. Therefore, he deducted the embedded CGT liability when calculating their market value and as a result, the plaintiff would need to pay $39,012,037 to the defendant for his interest in the Yan Unit Trust and Pengie Pty Ltd.
The court said that the issue is not whether the first report was right or wrong, but whether Mr DM, in making any mistake, was performing the task stipulated by the contract.
The court found that the brothers did not agree to be bound by Mr DM’s interpretation of the Deed. If Mr DM misunderstood the contract’s structure or limitations, the brothers did not consent to a value assessment based on that misunderstanding. While it is unclear whether a different figure would have been reached by properly assessing the ‘net assets’ versus the ‘market value of net assets’, the court held that if a specific method is outlined in the contract, it must be followed. Thus, the first report is not binding on the parties.[105]-[106]
As to the question of whether Mr DM can correct his determination, the court said that an expert’s authority ends once they complete their task, making them ‘functus officio’. This means they cannot change their decision after it’s issued. They may correct clerical errors or clarify ambiguity, but any substantial revision requires both parties’ consent or specific contractual authorisation. If an expert changes their mind after issuing a final decision, it is invalid, as seen in CBI Constructors v Chevron Australia Pty Ltd [2024] HCA 28 and Kurc v Eyecare [2004] VCAT 1139, where revisions without proper authority were not allowed.[107]-[112]
As to the second report’s ‘manifest error’, the court ruled that Mr DM’s task was not purely mechanical but required judgment based on the information in the Deed. His treatment of ’embedded’ CGT in the first report was a reasoned approach, though he later reconsidered it. Changing his mind on such a complex matter doesn’t make the first report’s deduction of ’embedded’ CGT a ‘manifest error’ under the Deed, nor does the second report’s treatment of the issue.[132]
Key takeaways:
- If a contract outlines a specific method or approach for the determination, experts must adhere to it, as failing to do so could invalidate their findings.
- Once a final determination is issued, experts become functus officio and cannot alter their decision unless there is mutual consent or specific contractual authorisation.
- If an expert revises their approach or opinion, they must clearly communicate the reasons behind those changes, as uncertainty or inconsistency can create disputes over whether the revised report is valid.
Read the full decision here.