Admit to obvious errors, or risk a finding of deceit with indemnity costs

Mar 2019 |

Introduction

On 21 December 2018, in Neville’s Bus Service Pty Ltd v Pitcher Partners Consulting Pty Ltd,1 Justice O’Callaghan of the Federal Court of Australia entered judgment for Neville’s Bus Service Pty Ltd (NBS) against Pitcher Partners2 (PP) for approximately $5.5 million for deceit in relation to a simple amortisation error. Significantly, the error was incorrectly included by PP in financial modelling figures it prepared to assist NBS submit a tender bid. On 21 February 2019, it was further ordered that PP pay NBS’s legal costs of the proceeding on an indemnity basis, fixed at just over $3.3 million.

Facts

In 2013, NBS engaged PP to prepare financial data for the purposes of NBS submitting a tender bid to Transport of New South Wales (TfNSW) for a potential bus contract. Unknown to NBS, PP’s data contained an amortisation error that resulted in NBS’s tender bid being $660,000 less profitable per year than expected. NBS won the tender.  

In February and March 2014, NBS sought further cash flow modelling from PP in relation to the TfNSW contract. It was common ground at trial that the cash flow modelling revealed the amortisation error and that the effect of it was obvious. 

NBS entered a contract with TfNSW for the relevant bus services commencing 1 June 2014. 

In August 2014, a newly employed accountant for NBS reviewed the TfNSW bus lease obligations and cash flow and, in doing so, identified the error and raised it with PP.

Shortly prior to trial, PP conceded the conduct causing the amortisation error was negligent, in breach of contract, and amounted to misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law.3

The issues in dispute at trial included the point in time that PP became aware of the error and whether PP fraudulently concealed it.

The decision 

Relevant to the outcome at trial was the Judge’s dim view of the PP director who supervised the work. He was found to be an unsatisfactory witness who evaded questions during examination, sought to conceal the error and deflect responsibility for it. On the evidence available, the Judge found that the PP supervisor must have identified the relevant error:

  1. During February or March 2014 and then knowingly concealed it from NBS during the timeframe in which NBS might otherwise have sought to renegotiate its tender price with TfNSW (prior to entry into the relevant bus contract); and
  2. Again later, after NBS’s accountant raised the potential error with him.

Additionally, during cross examination, the PP supervisor conceded he acted dishonestly by misleading and deliberately not revealing the whole truth to NBS about the error.

Against that background the Judge had no hesitation in finding that the five elements of deceit, as summarised by the High Court in Magill v Magill,4 were made out. Those elements being that the:

  1. defendant made a false representation;
  2. defendant made the representation with the knowledge that it was false, or that the defendant was reckless or careless as to whether the representation was false or not;
  3. defendant made the representation with the intention that it be relied upon by the plaintiff;
  4. plaintiff acted in reliance on the false representation; and
  5. plaintiff suffered damage which was caused by reliance on the false representation.

The Judge also found that:

  • PP did not owe any fiduciary duties to NBS;
  • An award of exemplary damages was not necessary to punish the PP supervisor. The PP partnership and company entities were not themselves dishonest, although the partners were liable for the supervisor's deceit; and
  • Given the findings of dishonesty and deceit, it was unnecessary to determine whether any statutory scheme applied to limit damages – in the absence of fraud, professional schemes established under the Professional Standards Act 2003 (Vic) and the Professional Standards Act 2003 (NSW) may have limited liability to $1 million.

Damages of approximately $5.5 million were awarded to NBS for PP’s deceit, including interest.

In consideration of the finding that PP had been dishonest, deceived NBS, caused NBS to incur unnecessary and significant legal expenses and admitted to the amortisation error only shortly before trial, the Judge ordered PP pay NBS’s costs on an indemnity basis noting that this was a case where such an award was 'close to irresistible'.5 The lump sum ordered for costs allowed 90% of NBS’s professional fees and 100% of disbursements.

Even if the Judge had not allowed indemnity costs for the reasons discussed above, his Honour confirmed he would have allowed indemnity costs6 because NBS obtained a better judgment at trial than the sum for which it had offered to resolve the dispute prior to commencing proceedings.7 The Judge considered that although NBS’s offer was made pre-litigation, pre-discovery, as an all inclusive offer and was followed by later offers not bettered at trial, PP was in a position to assess its prospects when the offer was made.

This decision is subject to an appeal, PP having filed a notice of appeal in the Federal Court on 4 February 2019.8

Comment

This decision is a timely reminder that:

  • A failure to act honestly in the face of discovering an error likely to cause clients to suffer loss and damage may well lead to findings of dishonest, fraudulent and deceitful conduct at trial with significant adverse costs orders. 

  • Such findings have serious ramifications. Professionals will be unable to access statutory schemes that might otherwise have operated to limit liability and insured professionals may fall foul of insurance policy exclusions that do not provide cover for dishonest or fraudulent conduct.

  • If litigation is pursued, parties should ensure witness statements are correct (and not seek to change their recollection of key facts in such statements at the last minute), should consider what admissions are appropriate to make early in the proceeding and witnesses should not be evasive or unresponsive in the witness box.

  • Importantly, on discovering an error, professionals should act honestly and should not seek to conceal the error from clients likely to be impacted by it.

.....

1 Neville’s Bus Service Pty Ltd v Pitcher Partners Consulting Pty Ltd [2018] FCA 2098.
2 The three named respondents were Pitcher Partners Consulting Pty Ltd, the individuals trading as the partnership known as the Pitcher Partners partnership and the individual responsible for supervising the work.
3 Schedule 2 of the Competition and Consumer Act 2010 (Cth).
4 Magill v Magill (2006) 226 CLR 551, 587-588 [114],
5 Neville’s Bus Service Pty Ltd v Pitcher Partners Consulting Pty Ltd (No 2) [2019] FCA 198 [15].
6 As against the first and second respondents at least, in circumstances where the offer had not been made on behalf of the third respondent individual.
7 Pursuant to rule 25.14 of the Federal Court Rules 2011 (Cth).
8 Federal Court of Australia file number VID 66 of 2019.

This article may provide CPD/CLE/CIP points through your relevant industry organisation.

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