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Expert Matters: Expert determinations - final and binding?

Ben Mahler, an Associate Director from our Perth office, considers two judgments which show that so long as the expert complies with his or her contract with the parties, the Court will be reluctant to set aside the determination.

Insights Expert Matters: Expert determinations - final and binding?
Wednesday, 20 April 2016

Cox & Ors v Wettenhall & Anor [2015] VSC 38 and Australian Vintage Limited v Belvino Investments No. 2 Pty Limited [2015] NSWSC 168

Introduction

Ben Mahler, an Associate Director from our Perth office, considers two judgments which show that so long as the expert complies with his or her contract with the parties, the Court will be reluctant to set aside the determination. This is so even when the expert determination was on terms different from the original contract between the parties, or if a party disagrees with the expert’s methodology or construction of the original contract.
 
Therefore, when getting an expert determination, parties should carefully check the terms of appointment, and raise concerns with the expert if they believe that the engagement terms are not being complied with.
 

Cox & Ors v Wettenhall & Anor [2015] VSC 38


Background

Sweett Group (Australia) Pty Ltd purchased the plaintiffs’ shares in Padgham & Partners Pty Limited.
The Share Purchase Agreement called for the calculation of Padgham’s profit after tax for the three years after the purchase as recorded in ‘Earn-Out Accounts’.
 
The parties largely ignored the Share Purchase Agreement:
  • No Earn-Out Accounts were prepared, relying instead on a document referred to as the ‘T3 Reconciliation’.
  • An expert was appointed without any formal notice of a dispute having occurred.
  • The expert was given instructions which differed from the requirements of the Share Purchase Agreement.
  • The expert was instructed to base his determination on the T3 Reconciliation.
The expert made a determination in accordance with his instructions.
 

The proceedings

The plaintiffs applied to the Court to set aside the determination, and also challenged adjustments made by the expert. They contended that:
  • In the absence of the Earn Out Accounts, the expert failed to perform his contract.
  • The expert was obliged to require the buyer to prepare and deliver Earn Out Accounts.
  • The expert was obliged to express an opinion in respect of the Earn-Out accounts as required by the Share Purchase Agreement.
 
Was there an obligation to perform the expert determination pursuant to the Share Purchase Agreement?
 
Justice Judd found that ‘the plaintiffs sought to impose on the expert a duty to override his instructions and to minimise, or even neutralise, the significance of their conduct in formulating his terms of engagement and thereafter’. Their basis was a contention that, after the expert was appointed, ‘the expert “took control of the process”’ and ‘had the power to require the production of documents’.

The Court rejected the existence of the duty contended for by the plaintiffs. 
 
Rather, Justice Judd held that the role of the expert was to fulfil his contractual obligations. He identified that the relevant contract was the agreement between the parties and the expert for the determination, and not the contract between the parties for the sale of their shares (in this case, the Share Purchase Agreement). It did not matter that the terms of the contract with the expert ‘did not conform, in a material respect, with the engagement contemplated under [the Share Purchase Agreement]’. The terms of the letter of appointment were what had been agreed.
 
In this matter, the parties had ‘agreed between themselves, and with the expert on his engagement, that the T3 Reconciliation was, for the purpose of [the Share Purchase Agreement], to be treated as the Earn Out Accounts.’ As a result, the determination could not be set aside because of the lack of Earn-Out Accounts.
 
Although not necessary in arriving at this decision, Justice Judd also stated he would have found that:
  • Via their agreement to appoint the expert, the plaintiffs waived their rights under the Share Purchase Agreement to have the Earn-Out Accounts prepared.
  • Alternatively, based on their conduct, they were estopped from contending that the expert failed to perform his contract in the absence of Earn Out Accounts. That conduct included their:
    • ​Agreement regarding the scope of the expert appointment.
    • Representations that the T3 reconciliation was sufficient for the expert’s purposes.These representations were given after multiple requests from the expert for the Earn-Out Accounts.
    • Failure to insist on the preparation of the Earn-Out Accounts when the expert sought them.

Judgment

Justice Judd found that the ‘expert performed his contract with the parties, although dissatisfied with the information provided to him’ and that having ‘told the parties that he required the Earn Out Accounts ‘to appropriately comply with the Agreement clause 3.12(c)’, and explaining their utility in providing additional information, the expert was told to complete his work in the absence of such accounts. That was a term of his engagement.’
 
Justice Judd was unequivocal: ‘The [plaintiffs] have failed to establish that the determination did not conform with the terms of the contract. They have failed to establish any breach of contract by the expert. They have also failed to establish any error made by him in his determination. Accordingly, their claims for relief against the [expert and the buyer] are dismissed.’
 

Australian Vintage Limited v Belvino Investments No. 2 Pty Limited [2015] NSWSC 168


Background

Australian Vintage Limited leased a vineyard from Belvino Investments No 2 Pty Limited. AVL experienced severe frost during October 2013 which significantly reduced the 2014 harvest. As a result, AVL sought to terminate the lease.

Clause 4.26 of the lease allowed AVL to terminate the lease or require remedial works to be undertaken, should a natural disaster result in a significant reduction in production or production capacity. 
 
An expert was appointed to determine whether AVL had met the criteria for termination of the lease. This required both the determination of certain figures, and the application of those figures in a formula set out in the lease clauses. Clause 4.26(g) stated that the expert’s determination ‘shall be final and binding on the parties’ and that ‘the expert is deemed to act as an expert and not an arbitrator’.
 
The consequence of the expert’s determination was that AVL could not terminate the lease.

AVL considered that the expert had misconstrued part of clause 4.26 and that the expert’s methodology ‘makes no sense at all and produced the absurd result’. This raised the question of whether the expert’s determination could be set aside by the Court on the basis that the expert had misconstrued the clause.

The Proceedings

AVL contended that the incorrect interpretation by the expert meant that the Court was empowered to intervene and declare that the determination was not binding on the parties because the expert did not perform the task which the lease specified. AVL claimed that a question of construction of a contract is a question of law which should be determined by the Court. 
 
AVL sought to have the Court:
  • Set aside the expert’s determination.
  • Declare that the construction proposed by AVL was the correct construction.
  • Have the expert determine the matters afresh.

The Court determination

The key matters put to the Court for determination included:
 
1. Was the expert required to form his own view as to the meaning of clause 4.26 of the lease and the methodology to be adopted?
2. Had the expert carried out his determination in accordance with clause 4.26 of the lease?
3. Was the Court required to form its own view of the correct interpretation of clause 4.26?
4. If the Court: 
a. Was required to form its own view of the correct interpretation of clause 4.26, did the expert use the correct interpretation of clause 4.26?
b. Was not required to form its own view of the correct interpretation of clause 4.26, should the determination be set aside?
 
In relation to these, Justice Rein determined that:
 
1. The expert was required to form an opinion as to the meaning of clause 4.26.
2. The expert carried out his determination in accordance with the lease.
3. The Court was not required to form its own view of the correct interpretation of clause 4.26 and was not required to assess whether the expert had interpreted the clause correctly.
4. The expert determination should not be set aside.
 
In coming to these decisions Justice Rein had regard to several cases, including: 
  • AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd (formerly Txu Networks (Gas) Pty Ltd) [2006] VSCA 173. Nettle JA agreed that:
    ‘where parties to a contract have agreed that an expert determination shall be final and binding, it is ordinarily not open to a Court to review the determination on the grounds of mistake unless the mistake is such as to show that the determination has not been carried out in accordance with the contract or, to put it another way, the expert has not performed the task entrusted to the expert by the contract.’
  • Savcor Pty Ltd v New South Wales [2001] NSWSC. Barrett J said that:
    ‘In the absence of factors such as fraud and collusion, an expert determination declared by contract to be final and binding is open to challenge only to the extent that is not in conformity with the enabling contract, including such implied terms as there may be as to the conduct and procedures of the expert.’

The appeal

The AVL matter was overturned on appeal1. However, the appeal judgment did not contradict the Court’s general reluctance to overturn an expert determination prepared in accordance with the expert’s contract. Rather, Chief Justice Bathurst confirmed that:
  • ‘If the expert in fact carried out that task [which he or she was contracted to undertake], the fact that he made errors or took irrelevant matters into account would not render the determination challengeable.'
  • ‘To the extent that the decision was made in accordance with the terms of the contract, it will be final and binding. To the extent that it is not, it will be subject to review.’
Chief Justice Bathurst did not support the primary judge’s conclusion that there was broad ‘authority for the proposition that any question of construction of the clause was as much the task of the expert as the determination of facts and calculation of figures’. 
 
Rather, he concluded that the authority cited for that proposition (Jones v Sherwood Computer Services plc (1992) 1 WLR 277) required that ‘in principle, the first step must be to see what the parties have agreed to remit to the expert’.
 
Chief Justice Bathurst found that the parties had intended the expert to make determinations in relation to the calculation of certain figures, and then apply those into a formula specified in the lease. Whilst the application of the formula required an interpretation of the clause, the Chief Justice found that it was unlikely that the parties intended to bind themselves to a misinterpretation of that formula, given that interpretation was outside of the expert’s expertise. 
 
The Chief Justice found that the expert had misinterpreted the clause, and that the parties did not engage him to make a determination of the clause’s construction. He remitted the matter back to the expert for determination in accordance with the Court’s construction.


Significance

The AVL matter reinforced the principle that there are limited circumstances (such as fraud, collusion, breach of contract) in which the Court can intervene and set aside an expert determination where two parties have agreed that the:
  • Expert is deemed to act as an expert and not as an arbitrator.
  • Expert’s determination shall be final and binding.
The Wettenhall matter highlighted that, so long as the expert has complied with the terms of his or her appointment, the Court will be very reluctant to set aside the determination if a party later regrets those terms of appointment.
 
So: to avoid getting stuck with an expert’s determination that you think is wrong:
  • Eliminate ambiguity when drafting clauses which seek an expert’s determination.
  • Raise objections to the contentious matters during the process as they occur. Don’t wait until after the determination is delivered.
Endotes
1 Australian Vintage Limited v Belvino Investments No 2 Pty Ltd [2015] NSWCA 275