BRIAN DLUGASH v. ED MAYERS

IN THE COURT OF APPEAL

1997, No. 137
(Civil)

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J U D G M E N T

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Godfrey, J.A. :

1. This is an appeal by the defendant from a judgment of Mrs. Justice Le Pichon in proceedings concerning the business relationship between the plaintiff and the defendant. The judge analysed the facts with considerable care in her written judgment and I do not propose to take up time in rehearsing them again. Any interested party may refer to that judgment.

2. The crucial matter for us to consider on the present appeal is the performance of his duties by a Mr. Dickson. Mr. Dickson had been invited by the parties, who had fallen out, to provide a just and equitable scheme providing for what I might term their divorce.

3. What had happened was this.

4. There were two companies in which the plaintiff and the defendant were interested, Imcor Limited ("Imcor") and Wise Pearl. Imcor carried on a business in the sourcing, manufacturing, exporting and sale of bags and other similar items in Europe, the United States of America and elsewhere. When the parties fell out, they agreed to enter into a Deed of Submission, dated 30 March 1992, referring their differences to the final determination of Mr. Dickson, who was an accountant with Horwath & Co., the auditors of Imcor.

5. Basically, Mr. Dickson concluded that the defendant should acquire the plaintiff's interest in Imcor, and the plaintiff should acquire the defendant's interest in Wise Pearl. For the purpose of implementing this, the plaintiff and the defendant entered into an agreement pursuant to which Mr. Dickson made a number of interim determinations and a final determination. Mr. Dickson has been referred to as an "expert"; although I have no doubt as to his expertise, the true analysis of what happened was, as I think, that the parties agreed to entrust a third party (namely, Mr. Dickson) with the task of making an agreement for them, since their differences were such as made it impossible for them to come to such an agreement for themselves.

6. In the Deed of Submission, the parties agreed (among other things) that :

"..... the following matters shall be referred to Mr. Dickson for his final determination :-

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6.5 The price, mode of payment, indemnity and other terms in respect of the purchase of one party's interest from the other and in the event of such consideration being by instalments he shall determine what, if any, security shall be required."

7. In his first determination, Mr. Dickson held as follows :

"In accordance with this deed I have determined that the business, the assets and liabilities of Imcor Limited shall be dealt with as follows :

3) The consideration in respect of the above share transfers shall be determined by me based on a fair net asset value derived from the audited financial statements as of 30 June 1992, as may be adjusted to reflect, inter alia, :

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a) to treat as a prepayment a proportion of certain professional charges incurred in May and June, 1992, for the services of Horwath Management Services Limited relating to their review of the company's accounting system and internal controls.

b) profits relating to sales of goods shipped within the month of July, 1992, where the manufacture of such goods was completed as at 30 June, 1992.

c) such other matters as may be brought to my attention by Mr Mayers or Mr Dlugash for consideration." (emphasis added)

8. In a subsequent Agreement of 26 June 1992, the parties agreed as follows :

"3.1 The Consideration payable by EM to BD for the purchase and transfer of the Imcor Shares shall be :-

(a) such amount as shall be equal to 50% of the excess Net Asset Value of the Imcor Shares as shown in the Imcor Accounts as Adjusted by the Auditors over the Net Asset Value of the Wise Pearl Shares as shown in the Wise Pearl Accounts as Adjusted by the Auditors together with;

(b) an amount equal to 20% of the Gross Margin of the Imcor Shares for the period from July 1st, 1992 to June, 30th 1993."

9. An interpretation clause in this Agreement provides as follows :

"1.2 In this Agreement the following words and expressions shall have the following meanings except where the context otherwise requires :-

(b) "Accounts" means the separate audited balance sheets of Wise Pearl and Imcor made up as at the Accounting Date and the audited profit and loss accounts of the Wise pearl and Imcor for the year ended on that date;

(d) "As Adjusted by the Auditors" means such adjustments as shall be determined by the Auditors to be necessary to provide a fair value of the Net Asset Value of Imcor and Wise Pearl as shown in their respective Accounts; (emphasis added)

(g) "Gross Margin" means the excess of net proceeds of sale over the directly related Cost of Goods being the costs incurred by either Wise Pearl or Imcor in the supply of products to third parties and both the Gross Margin and Cost of Goods shall be as determined in his absolute discretion by Mr. Dickson."

10. The case for the defendant, before the judge and before us (although there appears to be some doubt as to whether the judge correctly apprehended the nature of the defendant's case) is that Mr. Dickson fell into error in relation to three specific items to which I will refer as the Resource International payments, the Hansei payments and the insurance premium payment, all of them payments made out of Imcor's funds, and more particularly described in the judge's written judgment. It is said for the defendant that Mr. Dickson had no power to make the adjustments which he did make in relation to these items in assessing the fair value of the net asset value of the Imcor shares. The defendant said these adjustments were not adjustments "necessary" to provide a fair value for the net asset value of the Imcor shares; and that was the only task which Mr. Dickson was empowered to perform.

11. In a helpful, and succinct, argument, Mr. Burns for the defendant invited us to analyse the matter in this way. First, to ascertain what was Mr. Dickson asked to do? Second, what did Mr. Dickson do? Third, did Mr. Dickson make a mistake, or mistakes, in doing it? Fourth, if so, can his errors be challenged in the courts?

12. I am content to adopt this approach. As to the first question, I have to say that, for my part, I am satisfied that what Mr. Dickson was asked to do was to produce a fair value for the Imcor shares based on the net asset value of those shares. As to the second question, I am satisfied he did so. In making the adjustments as he did, the details of which are set out in the judge's judgment, in relation to the Resource International payments, the Hansei payments and the insurance premium payment, he did, in my judgment make adjustments having a relevant bearing on that net asset value. The approach of the defendant, which hinges on the word "necessary", is, in my view, altogether too technical and legalistic. In the context of the agreements between the parties, under which Mr. Dickson was expected at the end of the day to produce a fair and equitable scheme of distribution, he was, I think, quite entitled to make the adjustments so as to reflect what but for the items in question the net asset value would have been. He was not bound to proceed on the basis of what the net asset value actually was for accounting purposes.

13. If I am right so far, that destroys the substratum of the defendant's argument. Mr. Dickson, appreciating what he had been asked to do, proceeded, in my view, correctly to do it. He made no mistake or mistakes. It is therefore unnecessary for us to investigate whether, had he made any such mistakes, those mistakes would be the proper subject of challenge in the courts.

14. For these reasons, I would dismiss this appeal.

Barnett, J. :

15. For the reasons given by my Lord, I too agree that this appeal should be dismissed.

Rogers, J. :

16. I too agree that this appeal should be dismissed.

17. There is no appeal against the findings of fact; nor is there any appeal against the judge's assessment of the evidence.

18. The important point in this appeal, as has been pointed out by Godfrey, J.A. is whether Mr. Dickson did what he was asked to do. In terms of the Agreement, he was required to arrive at the figure of the net asset value of the relevant shares shown in the account "as Adjusted by the Auditors." (It has been conceded that the reference to the auditors is also a reference to Mr. Dickson.) The words "as Adjusted by the Auditors" are defined as meaning "such adjustments as shall be determined by the Auditors to be necessary to provide a fair value of the Net Asset Value of" the relevant company. It is contended that by making the adjustments which had been made in respect of three items Mr. Dickson was not doing what he had been asked. The first is in relation to Resource International, the second is in relation to Hansei, and the third is what has been referred to as the insurance premium for a Miss Marcelo.

RESOURCE INTERNATIONAL

19. In the final determination, which is dated the 28 February 1994, it is stated, in respect of Resource International, "Subsequent information indicates that substantial amounts were expended on establishing a factory in Mexico, and on other items not of benefit to Imcor Limited".

20. As is set out at page 29 of the judgment, no documentary evidence was provided as to that expenditure. In his witness statement Mr. Dickson said, and this was referred to by the judge, the deduction of 50% of this expenditure was "arbitrary" in nature. I understand the word "arbitrary" to mean, in the context, a broad approach based on such information as Mr. Dickson had to hand. In my view, what Mr. Dickson was doing in this respect was properly assessing what he thought the fair value of the net asset value should be in the light of the information which he had as to the proper expenditure of the company.

HANSEI

21. In relation to Hansei, this item appears to be related to raw material.

22. In the second interim award it is stated that "Mexico stock purchased from Hansei incorrectly treated as material processing expenses, for use on order for Prince". Then in the final award it is stated that the stock was purchased from Hansei for which no evidence of subsequent usage was provided.

23. In his witness statement, Mr. Dickson says: "I am informed by Mr. Dlugash and verily believe that the payment of HK$51,168.00 to a supplier called Hansei was for material which was shipped overseas for production of samples, and that this amount should have been included as inventory of Imcor as of 30 June 1992. Only Mr. Mayers would have had access to specific information about this payment and despite repeated requests, Mr. Mayers did not provide documentary evidence of the factual purpose of this payment."

24. The judge deals with the matter on page 31 of her judgment. Having heard Mr. Dickson in the witness box she says :

"Mr. Dickson's evidence was that he was unable to obtain documentation from Imcor and was never provided with documents to prove those raw materials had been consumed. Given the timing of payment, Mr. Dickson's examination proceeded on the assumption that the materials could not have been consumed by the factory and converted into finished goods and sold to a customer prior to that year end and was therefore treated as an asset of Imcor."

25. Again, in my view, it seems that Mr. Dickson approached his task of assessing the fair value of the net asset value entirely properly.

THE INSURANCE PREMIUM

26. In relation to the insurance matter, Mr. Dickson had concluded that that payment was private in nature. Again in his witness statement he went further and said that in his opinion it was an unreasonable item of expense which Mr. Mayers would not have caused Imcor to incur had Mr. Dlugash remained as a director. Again, it seems to me that Mr. Dickson was approaching his task of assessing the fair value of the net asset value in a correct way.

27. I would therefore dismiss this appeal.