EXPERT EVIDENCE NOT NECESSARY ON AN QUESTION OF CONSTRUCTION: SNEAKING EXPERT EVIDENCE INTO WITNESS STATEMENTS: EVIDENCE IS STRUCK OUT

February 3, 2017 · by · in Applications, Expert evidence, Experts, Witness statements

We have seen several examples of litigants attempting to give “expert” evidence in their witness statements.  This practice was considered by Master Matthews in Change Red Limited -v- Barclays Bank PLC [2016] EWHC 3489 (Ch). The Master was considering whether expert accountancy evidence was necessary to assist the court with an issue of construction.  The attempt to introduce expert evidence was dismissed. Those parts of the witness statement that attempted to give expert evidence was struck out.

KEY POINTS

  • Expert evidence was not necessary to assist the court with an issue of construction.
  • The claimant attempted to put “expert” evidence into a witness statement. That “evidence” was struck out.

THE CASE

The action was a Part 8 action brought on a question of law as to the true construction of an agreement between the defendant bank and the Financial Conduct Authority. The defendant sought permission to obtain expert evidence on the issue of what was meant by “turnover” and “net interest income”.  The Master was considering whether expert evidence was necessary in circumstances where one party had attempted to put “expert” evidence into a witness statement.

THE JUDGMENT

    1. At the hearing, the claimant told me that it was not seeking permission to adduce any expert opinion evidence at the trial unless the defendant obtained permission to do so, and then it would wish to do the same. On the other hand, the defendant very definitely does want to adduce such evidence. That means that I must consider Part 35 of the Civil Procedure Rules. Part 35 lays down a code for dealing with expert opinion evidence. The purpose is, explicitly, to restrict such evidence to what is, as Rule 35.1 puts it, ‘reasonably required to resolve the proceedings”.
    2. The defendant wishes for permission to adduce in evidence the report of Rachel Sexton of Ernst & Young. In very brief summary, this says that ‘turnover’ is gross income before the deduction of expenses, but that ‘net interest income’ is interest income, less commissions paid to agents, allowances for bad debts, and interest expenses. It also says that, under IAS 39, turnover should be expressed as ‘interest income’ rather than ‘net interest income’. Of course, the significance of that is, the defendant says, that if you look at the calculation for interest income for the claimant for 2007 the figure you get is higher than £6.5 million.
    3. However, although the claimant said at the CMC that it was not seeking permission to adduce expert evidence, the claimant has, without permission, put some opinion evidence before the court in the first witness statement of Mr. Klempka. I am referring particularly to paras. 48, 60 (at least the first two sentences), 62, 69 (the whole of the paragraph except the first sentence), and 79. All of those passages except what is stated in para. 79 appear to be the opinion of Mr. Klempka himself. There is no evidence before the court that Mr. Klempka has any expertise, let alone sufficient expertise, to be giving expert accounting evidence. The witness statement says he is a company director, and I cannot, as at present advised, treat that as a sufficient qualification for giving expert accountancy evidence. I also note, purely in passing, that, of course, if he were sufficiently well qualified as to be able to give expert accountancy evidence, that might bear on the question of whether any company of which he was a director ought not to be treated as a sophisticated customer by virtue of the subjective condition. As I say, that is something in passing.
    4. The question for me, however, is whether the evidence put in by Mr. Klempka in the passages which I have indicated ought to be allowed to stand, absent an application for permission, and permission is being granted. As I have already said, the issue in the case is whether the defendant is obliged to have regard to the claimant’s revised annual accounts for 2007.
    5. At the hearing I looked at some authorities, and in particular at a long passage from the judgment of Hildyard J in the RBS Rights Issue Litigation[2015] EWHC 3433 (Ch) paras.13 to 20. In that passage the judge dealt with a number of other authorities which bore on the question of the court’s approach to giving permission for expert evidence to be adduced. In para.13 he referred to the famous dictum of Evans-Lombe J in Barings Plc v Coopers & Lybrand [2001] PNLR 22, para.45. He referred in para.15 to restrictions from other cases, including JP Morgan v Springwell [2006] EWHC 2755 (Comm) at para.21, and Midland Bank Trust Company Limited v Hetts Stubb & Kemp [1979] 1 Ch 384 at 402. In para.17 he referred to the Australian case of R v Bonython [1984] 38 SASR 45 at 46. Then at 19 and 20 he referred to the decision of Warren J in British Airways Plc v Spencer [2015] EWHC 2477 (Ch) where Warren J proposed a three stage test for the application of Rule 35.1, bringing out, as the judge said, the sliding scale implicit in the assessment of what is ‘reasonably required’ from the essential to the useful.
    6. After the hearing was concluded, and whilst I was considering my notes before giving judgment, I came across two other authorities which seemed relevant. I asked the parties by email if they wished to make any submissions on them. These were Camden v The Inland Revenue Commissioners [1914] 1 KB 641 (CA), a decision which was subsequently taken to the House of Lords and affirmed, but the point about expert evidence was not raised; and LHS Holdings Limited v Laporte Plc [2001] EWCA Civ 278, also a decision of the Court of Appeal.
    7. In the former case a question had arisen about the meaning of the words ‘nominal rent’ in the Finance (1909 -1910) Act, s.12. The appellant, Marquess Camden, by his counsel had asked a land surveyor in the witness box at trial a question as to whether those words ‘nominal rent’ had a particular meaning to land surveyors, but the respondent objected and no evidence was given, therefore, as to any particular meaning. In the Court of Appeal the appellant said he should have been allowed to adduce that evidence. The Court of Appeal said No. I will come back to this case.
    8. LHS Holdings v Laporte was a case of a share sale and purchase agreement, and a question subsequently arose as to the validity and effect of a dispute notice which had been served by the seller under that agreement. In order to be valid, according to the contract, it had to give ‘reasonable details’ of the grounds of dispute. One item that was said to be in dispute was written as follows in the notice, “UK GAAP override not appropriate/improperly applied”. The seller argued that it was appropriate for the court to receive expert evidence as to how an accountant would understand the notice. The Court of Appeal agreed with the trial judge that that evidence ought not to be received. Again, I will come back to that case.
    9. The issue in this case is whether the defendant is obliged to have regard to the claimant’s revised annual accounts for 2007 in considering whether the claimant falls within the scope of the review. Whether the claimant so falls depends on the claimant’s ‘turnover’ (as defined) for the accounting year 2007. The FCA contract refers to the use of the word in s.382 of the Companies Act, which itself refers on to the definition of ‘turnover’ in s.474 of that Act. The claimant here says that turnover for the purposes of the FCA agreement is whatever the claimant puts in its revised statutory accounts as net interest income, as long as, and the claimant does accept this, the revision complies with s.454 and the Revision Regulations. The claimant further says that that is a question of construction of the word ‘turnover’ as used in the FCA agreement. That is, it says, a question for the judge at trial. No expert evidence should be admissible in relation to it.
    10. The defendant therefore says that, if that is the issue, expert evidence showing that from an accounting perspective net interest income does not (or even if it does) equal turnover is both relevant and useful to the court and should be admitted. The problem is that that argument is the argument that was put in Camden v IRC. At p.645 of the report the argument made on behalf of the appellant, Marquess Camden, by Mr Danckwerts KC, is stated as follows:
“The appellant wishes to prove that the words ‘nominal rent’ have, in the profession of land surveyors, a particular meaning, namely a rent not intended to represent the true rental value. If that is established it is for the court to say whether the words have that meaning in this Act.”
    1. At pp.647 to 648 Sir Herbert Cozens-Hardy MR, said this:
“The duty of this court is to interpret and give full effect to the words used by the legislature. It seems to me really not relevant to consider what a particular branch of the public may or may not understand to be the meaning of those words. It is for the court to interpret the statute as best they can. In so doing, the court may no doubt assist themselves in the discharge of their duty by any literary help which they can find, including of course a consultation of standard authors and reference to well known and authoritative dictionaries which refer to the sources in which the interpretation which they give to the words of the English language is to be found. But to say we ought to allow evidence to be given as to whether there is any such technical meaning, to be followed up of course by evidence as to what that special meaning is, would, I think, be going entirely contrary to that which seems to be the settled rule of interpretation.”
    1. Again, at p.649, the Master of the Rolls says:
“I think it would be altogether contrary to principle and of the worst example if we were to allow this present application to succeed by allowing evidence to be given as to the meaning which a certain branch of the community attaches to these particular words, ‘nominal rent’. In my opinion, this application must be refused.”
Both Swinfen Eady LJ, who said, “I am of the same opinion”, and Phillimore LJ, who said, “I agree”, were of the same opinion as the Master of the Rolls, although each gave a short additional judgment.
    1. The same argument, as it seems to me, was also put in the case of LHS Holdings v Laporte in relation, as I have said, to the validity of a notice served pursuant to a contract between the parties. At para.31 of his judgment Jonathan Parker LJ, with whom both the Lord Chief Justice and May LJ agreed (although May LJ did add a short supplemental judgment of his own), said this:
“As to the various items which are in issue on this appeal, Mr. Myers submits at the outset that Rattee J was wrong to exclude expert evidence as to how accountants would understand the UK GAAP rubric in the context of a Dispute Notice. He submits that such evidence is relevant in assisting the court to assess the degree of particularity (or lack of it) imported by that rubric.”
    1. Then at para.36 Jonathan Parker LJ concludes thus:
“So far as expert evidence is concerned, in my judgment the judge was right to exclude such evidence in this case, for the reasons he gave. No expert evidence is required to interpret the acronym ‘UK GAAP’: its meaning is common ground. Nor is the notice framed in technical language. It follows that there is in my judgment no scope for expert evidence as to its meaning. Further, I agree with the judge that the expert evidence on which LHS seeks to rely is relevant only to the question whether the notice sets out ‘reasonable details of the grounds for dispute’ for the purposes of clause 5(C), which is the very question which the court has to decide.”
  1. In my judgment, the accounting treatment of the income of the claimant in this case is not the point. The question is, what does ‘turnover’ in the FCA agreement mean in the context of the claimant’s business, and in particular what was the claimant’s ‘turnover’ in that sense in 2007? In my judgment, the expert accountancy evidence proposed is inadmissible. It goes to the very issue which the judge has to decide, which is the meaning of ‘turnover’. It is for the judge to say what ‘turnover’ means, and not for an accountant.
  2. The defendant says, that is unfair because it will not be able to meet the evidence put in by Mr. Klempka. I agree: it would be unfair not to be able to meet that evidence. But if no expert opinion evidence is admissible then, a fortiori, the non-expert opinion evidence of Mr. Klempka is not admissible either.
  3. So the question arises, what should I do about Mr. Klempka’s first witness statement? I have not heard any submissions on this point, but I will state that I am minded, subject to those submissions, to strike out passages in his first witness statement. They are the passages to which I earlier referred – that is para.48, the first two sentences of para.60, para.62, the whole of para.69 except the first sentence, and para.79. I recognise that that is simply a view that I have formed by reading that one witness statement. It may be that I am going too far; or it may be that I am not going far enough. I must, therefore, hear from the parties as to what they think. We can do that in one of several ways: I can either receive submissions orally now; or I can receive them in writing over the next few days, so that the matter can be concluded before the end of term; or there can be a further hearing fixed at a future date, but in that case I think it would be in the New Year.

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