Ozmen Entertainment Pty Ltd v Neptune Hospitality Pty Ltd [2018] FCA 647

FEDERAL COURT OF AUSTRALIA


File number:	NSD 1424 of 2017

Judge:	BURLEY J

Date of judgment:	2 May 2018

Catchwords:	ADMIRALTY – joint venture to operate hospitality business aboard vessel – agreement to charter and license vessel PRACTICE AND PROCEDURE – interlocutory application adoption of referee’s report

Legislation:	Federal Court Rules 2011 (Cth), r 28.67

Cases cited:	Chocolate Factory Apartments v Westpoint Finance & Ors [2005] NSWSC 784 Shannon (in his capacity as receiver and manager of North East Wiradjuri Co Ltd) v North East Wiradjuri Co Ltd (No 3) [2012] FCA 106

Date of hearing:	2 May 2018

Registry:	New South Wales

Division:	General Division

National Practice Area:	Admiralty and Maritime

Category:	Catchwords

Number of paragraphs:	29

Solicitor for the Plaintiffs:	Holman Webb Lawyers

Counsel for the Plaintiffs:	Mr T Castle

Solicitor for the Defendant:	Barringer Leather Lawyers

Counsel for the Defendant:	Ms C O Gleeson

ORDERS

		NSD 1424 of 2017

BETWEEN:	OZMEN ENTERTAINMENT PTY LTD First Plaintiff KANKI SEA TOURISM HOSPITALITY & ENTERTAINMENT PTY LTD Second Plaintiff
AND:	NEPTUNE HOSPITALITY PTY LTD Defendant

JUDGE:	BURLEY J
DATE OF ORDER:	2 MAY 2018

THE COURT ORDERS THAT:

1. The report of the Referee, Christian Sprowles, dated 6 February 2018 (Report):

(a) be remitted for further consideration of section 3.8, in light of the reasons for judgment given by the Court on 2 May 2018, with Mr Sprowles to provide any amended section 3.8 within 10 days of the date of this order;

(b) otherwise, the Report be adopted in whole pursuant to Federal Court rule 28.67.

2. The court notes the reservation by the applicants of the right to contend at the hearing that, on the proper construction of the Joint Venture Agreement dated 6 January 2016, the amortisation and appreciation of capitalised expenditure and depreciable assets, to which reference is made in paragraphs 1.1, 3.8 and 3.10 of the Report, is not a permissible deduction for the purpose of calculating the net profit of the business under the Joint Venture Agreement.

3. The costs of the Report are in the amount of $27,837.99 (including GST). The applicants are to pay 20 per cent of those costs and the respondent is to pay 80 per cent of those costs, within 14 days.

4. Each party is to pay its own costs of and associated with the reference to the Referee, including costs incurred before the Referee, and the costs incurred in the proceedings in relation to the dispute which gave rise to the reference by the court on 19 December 2017.

Procedural Directions

5. The Applicants to file any reply to the Defence to the Amended Statement of Claim by 30 May 2018.

6. The proceedings be listed for the hearing of the following interlocutory applications on 31 May 2018 (with an estimate of half a day plus);

(a) Security for costs sought by the Respondents dated 22 November 2017;

(b) Payment of shared costs sought by the Respondents dated 19 December 2017;

(d) Appointment of a receiver to the business of the joint venture sought by the applicants.

7. On or before 18 May 2018 each party is to file and serve its submissions (not exceeding 8 pages) on the questions to be agitated at the hearing on 31 May 2018 together with any affidavits on which reliance is to be placed (and identifying any previously served affidavits on which reliance will be placed).

8. On or before 25 May 2018 each party is to file and serve any submissions in reply (not exceeding 5 pages) on the questions to be agitated at the hearing on 31 May 2018 together with any reply affidavits on which reliance is to be placed (and identifying any previously served affidavits on which reliance will be placed).

9. Applicants to supply a court book and bundle of authorities to the Court on or before 28 May 2018.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

Revised from Transcript

BURLEY J:

1. Introduction

1 On 19 December 2017 I made orders that pursuant to Rule 28.62 of the Federal Court Rules 2011 (Cth) (FCR), Mr Christian Sprowles be appointed as referee to conduct an inquiry in relation to all disputes between the second applicant Kanki Sea Tourism Hospitality & Entertainment Pty Ltd (Kanki) and the defendant Neptune Hospitality Pty Ltd (Neptune) about the operating profit of the Seadeck business for each fortnightly period from 26 September 2017 until 19 December 2017 and produce a report (Report) in respect of his inquiry. Those orders were made in the context of a substantial dispute between the parties, inter alia, as to the manner in which the profits and costs of a joint venture that they conduct together under a Joint Venture Agreement dated 6 January 2016 should be addressed.

2 The making of that order was not opposed in principle by either party and it was agreed, as counsel have noted in submissions before me today, so that the Report supplied could provide a template for the manner in which the parties approach the accounting treatment of various issues between them until the final trial in this action. The immediate impetus for the reference to Mr Sprowles concerned profit statements that were provided by Neptune to Kanki pursuant to clause 10 of the Joint Venture Agreement in the period from September until December 2017. The parties had been unable to resolve a number of disputed line items that appeared in those statements and it was, correctly, in my view, considered to be appropriate that an independent accountant adjudicate on the disputed items.

3 Mr Sprowles produced the Report on 6 February 2018. It attaches:

(a) the order of 19 December 2017;

(b) the documents that Mr Sprowles was provided;

(c) his curriculum vitae, which details that he is an experienced insolvency practitioner and has since 2012 been an official liquidator and a registered liquidator;

(d) a notification of dispute provided by the solicitors for Kanki, setting out the disputed items in the profit statements and the reasons for the dispute; and

(e) Mr Sprowles’ invoice for the costs that he has incurred in the amount of $27,837.97 (incl GST).

4 The Report makes clear that Mr Sprowles had conversations with representatives of the parties, including their accountants, in the preparation of his Report.

5 The parties do not dispute that the Report has been carefully and thoroughly prepared and that it resolves a very substantial number of the issues between them. Nor do they dispute that the bulk of it should be adopted. However, they each contend that certain aspects of the Report should not be adopted pursuant to FCR 28.67. I address the live issues between the parties below. Given the nature of the dispute and the importance that the issues be resolved expeditiously in order to enable the Joint Venture Agreement to continue to operate, I provide my decision and reasons in a relatively short form as set out below.

6 At the outset, I should observe that I share the view of the parties that the Report has been comprehensively and carefully prepared and that it succinctly expresses the views of the referee. Mr Sprowles applied his experience and expertise to resolve a large number of issues swiftly and cogently. The relevant principles concerning the approach that the court takes to the adoption of a referee’s Report are not in dispute. They were helpfully summarised by McDougall J in Chocolate Factory Apartments v Westpoint Finance & Ors [2005] NSWSC 784 (Chocolate Factory Apartments) in the context of the Supreme Court Rules and have been regarded to be equally applicable to the equivalent FCR by this court, including Shannon (in his capacity as receiver and manager of North East Wiradjuri Co Ltd) v North East Wiradjuri Co Ltd (No 3) [2012] FCA 106 (Jacobsen J).

7 In Chocolate Factory Apartments McDougall J said at [7]:

The relevant principles, distilled from those decisions, can be stated as follows:

(1) An application under Pt 72 r 13 is not an appeal either by way of hearing de novo or by way of rehearing.

(2) The discretion to adopt, vary or reject the Report is to be exercised in a manner consistent with both the object and purpose of the rules and the wider setting in which they take their place. Subject to this, and to what is said in the next two sub paragraphs, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised.

(3) The purpose of Pt 72 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation, that purpose would be frustrated if the reference were to be treated as some kind of warm up for the real contest.

(4) In so far as the subject matter of dissatisfaction with a Report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh.

(5) Where a Report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the Report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for enquiry and Report.

(6) If the referee’s Report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than “unsafe and unsatisfactory”.

(7) Generally, the referee’s findings of fact should not be re-agitated in the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence.

(8) The purpose of Pt 72 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based.

(9) The Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire.

(10) Even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not be (in the absence of any of the matters referred to in sub para (6) above) a proper exercise of the discretion conferred by Pt 72 r 13 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the Report.

(11) Referees should give reasons for their opinion so as to enable the parties, the Court and the disinterested observer to know that the conclusion is not arbitrary, or influenced by improper considerations; but that it is the result of a process of logic and the application of a considered mind to the factual circumstances proved. The reasoning process must be sufficiently disclosed so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise.

(12) The right to be heard does not involve the right to be heard twice.

(13) A question as to whether there was evidence on which the referee, without manifest unreasonableness, could have come to the decision to which he or she did come is not raised “by a mere suggestion of factual error such that, if it were made by a trial judge, an appeal judge would correct it”. The real question is far more limited: “to the situation where it is seriously and reasonably contended that the referee has reached a decision which no reasonable tribunal of fact could have reached; that is, a decision that any reasonable referee would have known was against the evidence and weight of evidence”.

(14) Where, although the referee’s reasons on their face appear adequate, the party challenging the Report contends that they are not adequate because there was very significant evidence against the referee’s findings with which the referee did not at all deal, examination of the evidence may be undertaken to show that the reasons were in fact inadequate because they omitted any reference to significant evidence.

(15) Where the court decides that the reasons are flawed, either on their face or because they have been shown not to deal with important matters, the court has a choice. It may decline to adopt the Report. Or it may itself look at the detail of the evidence to decide whether or not the expense of further proceedings before the referee (which would be the consequence of non adoption) is justified.

2. Related party transactions

8 One area of dispute concerns three identified transactions which are described by Kanki as “related party transactions”.

9 The first of these is an item of $100,869 that the Report allowed in respect of marketing expenses which were paid to Division Agency Proprietary Limited (Division Agency), a company owned by Mr Scott Robertson who is a shareholder and director of Neptune. The Report records that the invoices for this amount were rendered in respect of marketing, branding, music, promotions and social media management. The dispute notification provided by Kanki indicated that the expense was “not approved as per JV requirements” and indicates that Kanki was not able to accept the cost of line items that were unilaterally incurred by Neptune without its consent.

10 The Report addresses this complaint by observing (in section 3.1) that no copy of any Marketing Plan, Marketing Budget or Marketing Agreement had been supplied by Neptune and noting that services provided by related parties would in the normal case be competitively tendered before engagement. It goes on to record, however; that Mr Sprowles’ enquiries into Division Agency confirm that it is a boutique music agency specialising in events, festivals and touring; that it is not unusual for a business of the type of Seadeck’s to incur marketing expenses; and that the invoices support the marketing services having been provided. Mr Sprowles finds in the Report that he has “no evidence to doubt the services were provided” and concludes that one invoice for $5,000 should be disallowed because it was a discretionary bonus that was paid to a related agency, but otherwise the balance of the amount claimed should be allowed.

11 Kanki submits that in the absence of contracts for the provision of the services, a business plan and any consent for the provision of the costs incurred by Kanki, the whole amount should be rejected. Whilst it does not dispute that Division Agency provided some marketing services to the Seadeck business, it submits that in the absence of any substantiation or independent valuation of the services provided, these costs ought to have been disallowed by the referee and the claim for this amount ought to be remitted to the referee for further consideration.

12 In my view, the challenge for this aspect of the Report has not been made out.

13 It is apparent to me that Mr Sprowles applied his experience and judgment to the issues that were put before him by Kanki concerning the relevant expense concerned. In concluding that he had no evidence to doubt that the services in respect of which the amount was claimed were provided, there is no reason to doubt that Mr Sprowles considered whether it was proper for the amount to be charged to the business, and whether the amount charged was reasonable. Having regard to the whole of the Report, including section 3.1, it appears to me that Mr Sprowles was exercising his own judgment, arising from his years of experience, to decide whether the cost incurred for marketing was proportionate and appropriate. He concluded, notwithstanding the absence of Kanki approval to the expense, that it was (subject only to the disallowance of the discretionary payment). Having regard to the considerations set out in the Chocolate Factory Apartments I am not satisfied that this aspect of the Report should not be adopted.

14 The second so-called related party transaction concerned the payment to Glasshouse Management Proprietary Limited (Glasshouse) of $33,089. Glasshouse is a company owned by Mr David Auld who is not a shareholder or a director of Neptune. Mr Auld was the onsite manager of Seadeck. In section 3.4 of the Report, Mr Sprowles records that, notwithstanding an absence of a contract outlined in the terms of the contracting arrangement with Glasshouse Management, he has been provided with a description of the work done by Mr Auld and supporting invoices which he considers appear reasonable. The Report disallows the discretionary bonus of $5, 000 paid to Mr Auld.

15 In my view, Kanki has not established that this aspect of the Report should not be adopted.

16 The third impugned third-party transactions is a payment of $8,895 in respect of invoices issues by Short St Kitchen Catering & Events Pty Ltd (Short St) for catering services. The Report notes that Mr Gavin Douchkov is a director and shareholder of Neptune and also the owner of Short St. Having regard to this fact, the Report nevertheless finds that the expenses charged “have been validly incurred”.

17 In my view, no error has been demonstrated in this conclusion.

3. Allowance for Amortisation

18 In section 3.8 of the Report a disputed amortisation expense is accepted as validly incurred in the amount of $62,184, but rejected for $31,102. This calculation is based on an amortisation rate of 11.11% which is calculated on an assumed useful life of the Joint Venture Agreement of 9 years. Neptune contends that this amount has been calculated on the basis of a mistake on the part of Mr Sprowles in that he assumes that the useful life of the Joint Venture Agreement is for 9 years because it is anticipated to be for an initial term of 3 years with Neptune having the option to extend the agreement for a further two terms of 3 years each. However, the Joint Venture Agreement provides that Neptune only has the option of one extension of the agreement with a second 3 year extension being available only at Kanki’s option. This means that Mr Sprowles ought to have calculated amortisation on the basis of a rate of 16.67%, being the amount that assumes a useful life of 6 years.

19 Clause 5(d) of the Joint Venture Agreement plainly provides for the option arrangements as described by Neptune. In my view, Mr Sprowles was in error when he assumed two further extensions and that accordingly the useful life of the Joint Venture Agreement was 9 years.

20 In my view, section 3.8 of the Report should be remitted to Mr Sprowles to be amended to correct this error. Having regard to the affidavit evidence of Mr Borella, it appears that Mr Sprowles may wish to alter his conclusion as to a different amortisation rate. However, he should be given an opportunity to consider the position in the light of the corrected facts, as identified above.

4. Rental Allowance

21 In section 3.11 the Report provides that the amount of $5,600 ought to be allowed in respect of office rental for the business, but that a further $4,270 should be rejected. The lessor of the premises is Division Agency and the lease is for $1,600 per week plus GST. Certain floor space is subleased to Neptune who pays 50% of the lease. However, having regard to the occupancy of the premises and the fact that they are shared with Division Agency, Mr Sprowles concludes in his Report that Neptune should only pay for 25% of the rent. Neptune challenges this conclusion and relies on affidavit evidence from Mr Borella as to the floor space occupied.

22 However, having regard to the relevant principles as to the adoption of the Report, in my view, the conclusion expressed in it was open to Mr Sprowles on the basis of the evidence that was before him. In particular, as noted by Kanki in its submissions, the fact that some of the occupants were not only directors or shareholders of Neptune, but also have interests in other companies that operate from the same premises, meant that Mr Sprowles was able to evaluate the occupancy level, not only on the basis of the floor space taken out, but also the likely use by persons occupying the offices.

5. Costs

23 Three aspects of costs arise.

24 The first concerns the conclusion reached in the Report in section 4.2 that Neptune should pay 80% and Kanki 20% of the costs of the preparation of the Report. The rationale provided for this is that; there was a lack of transparency regarding the operating expenses, which is evidenced in the email correspondence attached to the dispute notification; and had the second applicant received supporting documentation for many of the disputed line items, Kanki might have been in a better position to accept the methodology of the accounting treatment used.

25 Neptune submits that the costs (which are, according to an invoice which has been attached to Mr Sprowles Report, $27,837.99 inclusive of GST) should be split evenly between the parties. It submits that in the result of the Report which rejected only $17,579 of the disputed expenses out of a total of disputed expenses of $433, 134, indicates that it ought not to be penalised for costs. Further, Mr Borella’s affidavit evidence indicates that he co-operated to the full extent requested of him by the referee and that there was no lack of transparency in the provision of documents.

26 In my view, the allocation of costs reveals no error of principle or incorrect finding of fact on the part of the referee. I was not taken to the correspondence in the dispute notification to suggest that there was an error in comprehension as to its effect. The fact that Mr Borella cooperated after the appointment of the referee does not address the reasons for the conclusion offered by Mr Sprowles.

27 The second aspect of costs concerns an application on the part of Kanki that Neptune pay 80% of the costs of and associated with the costs of the appointment of the referee. In my view, the appropriate order is that each party pay their own costs of and associated with the appointment of the referee. The appointment was the sensible means to resolve a deadlock to which both parties contributed. Each has had a measure of success in its outcome.

28 The third question concerned the costs of the adoption of the dispute concerning the adoption of the referee’s Report. In my view, those costs should be costs in the cause. However, I have not heard argument in respect of that matter and on the next occasion the matter is before the Court either party may make a brief submission to me concerning their position in respect of what I will consider to be the provisional approach to be taken.

29 I make the following orders;