Litigation and Dispute Resolution

Security for Costs Series: Peculiarities, technicalities and misconceptions

1 February, 2017

Expert determination is becoming an increasingly common Alternative Dispute Resolution (ADR) process provided for in the terms of contracts between parties. In general terms it involves an independent third party, with recognised expertise in the subject matter, resolving an issue or issues in dispute between the parties by making a determination.  It has been referred to as “a relatively quick and effective way of resolving disputes which are simple in content or are essentially technical in nature” (Resolution Institute). The process affords those parties involved confidentiality and privacy.

The provision under an existing contract for a matter to be referred to expert determination is generally expressed to be “final and binding” on the parties to the dispute. But what exactly does “final and binding” mean in this context?

The role of an expert

In Holt v Cox (1994) 15 ACSR 313, Santow J referred (at 332) to “the distinction is that an arbitrator exercises a quasi-judicial function to whom is submitted for decision a formulated dispute to be decided between the competing contentions of the parties, while an expert determines matters from the expert’s own experience and expert knowledge, making his or her own investigations”.

The courts have held that a failure to specify a procedure to be adopted by the expert will not render void for uncertainty an agreement to enter into an expert determination process. The procedure to be followed is a matter for either agreement between the parties, or determination by the expert. See Heart Research Institute v Psiron [2002] NSWSC 646 at [28]-[29].

The Law Society of New South Wales has developed Rules for Expert Determination to be used in the absence of specifically designated rules, as has the Resolution Institute. Thus it is not uncommon for a contract to state that any dispute is to be submitted to expert determination to be “conducted in accordance with the [specify Rules] which set out the procedures to be adopted, the process of selection of the expert and the costs involved and which terms are deemed incorporated” (or similar).

Setting aside an expert determination

The classic statement of the legal principles to be applied, which continues to be often cited by courts today, was made by McHugh JA in Legal & General Life Australia v A Hudson (1985) 1 NSWLR 314 at 335-6. After noting that the terms of the contract usually provide, as a lease in that case did, that the decision of the expert is ‘final and binding on the parties’, McHugh JA stated:

“While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract … In each case the critical question must always be: Was the valuation made in accordance with the terms of the contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer.”

Determinations attended by fraud, collusion, dishonesty or impartiality will not have been made in accordance with the terms of the contract. Otherwise, in the case of mistake, as stated by McHugh JA above, an expert determination may only be set aside if it goes beyond a mistake in the process adopted by (or reasoning of) the expert, and departs from the contractual description of what the expert was required to determine.

Holt v Cox (1994) 15 ACSR 313

Mr and Mrs Holt were the controlling shareholders of a long established advertising business. Mr Cox, a key employee, was issued with five “A” class shares as an incentive to stay with and develop the business. The rights, duties and restrictions attaching to the shares included the right of Mr Cox on a winding up to receive twenty percent of any distribution of any capital and, upon termination of his employment, the right to receive “a fair price” determined by the auditor of the company” for his shares. Mr Cox was ultimately dismissed and he refused to transfer his shares at the value determined by the auditor ($171). As a consequence, Mr and Mrs Holt commenced proceedings in the Supreme Court of New South Wales.

It was not in dispute that the agreed plan was for the business to be sold in the future when turnover reached $8m-$10m. Mr Cox’s principal complaint was that the valuation exercise paid no regard to this prospect. Santow J agreed, concluding that given the intention to sell in the future and, further, that turnover had already reached the target range for possible sale of $8m to $10m, it was not in conformity with the contract, requiring a fair price, to disregard the future chance of sale and Mr Cox’s consequential access to 20% of the surplus assets (as the auditor had done in reaching the nominal figure of about $200).

Candoora No. 19 v Freixenet Australasia [2008] VSC 367

Candoora and Freixenet were the only shareholders in Wingara, a substantial wine producer. They owned 25% and 75% of the issued shares respectively. Candoora exercised an option to require Freixenet to purchase its 25% shareholding. The parties were unable to reach agreement in respect of the price. In these circumstances, the deed provided for the appointment of a valuer to determine the “fair value” of Candoora’s shares and for such determination to be final and binding on the parties.

Candoora applied to the Supreme Court of Victoria to have the valuation report and certificate, which concluded that the valuation of Candoora’s shares was $962,500, set aside. That application was successful. Hargrave J found that the valuer had essentially based his determination on the value of Wingara as a going concern, or the “market” value (an objective standard). The report contained no reference to the need for the valuer to ensure that the value which was determined was “fair”, being the required contractual standard and one which allowed the valuer to take into account a wider range of circumstances than those relevant to “market” valuations (i.e. a largely subjective test).

More recently, in Australian Vintage v Belvino Investments No 2 [2015] NSWCA 275, the NSW Court of Appeal held that if an expert acts upon the wrong meaning of a contractual clause or formula which forms part of the task which he or she is required to undertake, this being an objective matter outside the expertise of such a person, then the determination will not be in accordance with the terms of the contract and may be subject to review.

Take home points

  1.  Expert determination has the potential to provide an informal, speedy and effective way of resolving disputes, however in practice this will largely depend on the particular wording which the parties have adopted in the relevant clause in their contract. If the expert determination clause is not carefully worded, it may leave one or both of the parties dissatisfied with the process and/or outcome and lead to further dispute.
  2.  Ensure that the contract is explicit as to the procedures to be adopted by the parties and the expert in relation to disputes falling within the expert determination clause.
  3.  The contractual standard which the parties choose for the expert to determine may have serious ramifications and is therefore worthy of careful consideration. For example, in the valuation context there is a well-established distinction between a “market value”, “fair value” and “fair market value” test. See, further, MMAL Rentals Pty Ltd v Bruning [2004] NSWCA 451 commencing at [52].
  4.  It will likely be extremely difficult to have a court set aside an expert determination which the parties have agreed in advance will be “final and binding”.

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Canadian Court elevates thumbs-up emoji to signature status

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After the phone call, Mr Mickleborough applied his ink signature to the contract, took a photo of it on his mobile phone and texted it to Mr Archter with the text message, "please confirm flax contract". Mr Archter responded by texting back a "thumbs-up" emoji, but ultimately did not deliver the 87 metric tonnes of flax as agreed.   Issues The parties did not dispute the facts, but rather, "disagreed as to whether there was a formal meeting of the minds" and intention to enter into a legally binding agreement. The primary issue that the Court was tasked with deciding was whether Mr Achter's use of the thumbs-up emoji carried the same weight as a signature to signify acceptance of the terms of the alleged contract. Mr Mickleborough put forward the argument that the emoji sent by Mr Achter conveyed acceptance of the terms of the agreement, however Mr Achter disagreed arguing that his use of the emoji was his way of confirming receipt of the text message. By way of affidavit, Mr Achter stated "I deny that he accepted the thumbs-up emoji as a digital signature of the incomplete contract"; and "I did not have time to review the Flax agreement and merely wanted to indicate that I did receive his text message." Consensus Ad Idem In deciding this issue, the Court needed to determine whether there had been a "formal meeting of the minds". At paragraph [18], Justice Keene considered the reasonable bystander test: " The court is to look at “how each party’s conduct would appear to a reasonable person in the position of the other party” (Aga at para 35). The test for agreement to a contract for legal purposes is whether the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract (Aga at para 36). The question is not what the parties subjectively had in mind, but rather whether their conduct was such that a reasonable person would conclude that they had intended to be bound (Aga at para 37)."   Justice Keene considered several factors including: The nature of the business relationship, notably that Mr Achter had a long-standing business relationship with SWT going back to at least 2015 when Mr Mickleborough started with SWT; and   The consistency in the manner by which the parties conducted their business by way of verbal conversation either in person or over the phone to come to an agreement on price and volume of grain, which would be followed by Mr Mickleborough drafting a contract and sending it to Mr Achter. Mr Mickleborough stated, "I have done approximately fifteen to twenty contracts with Achter"; and   The fact that the parties had both clearly understood responses by Mr Achter such as "looks good", "ok" or "yup" to mean confirmation of the contract and "not a mere acknowledgment of the receipt of the contract" by Mr Achter.   Judgment At paragraph [36], Keene J said: "I am satisfied on the balance of probabilities that Chris okayed or approved the contract just like he had done before except this time he used a thumbs-up emoji. In my opinion, when considering all of the circumstances that meant approval of the flax contract and not simply that he had received the contract and was going to think about it. In my view a reasonable bystander knowing all of the background would come to the objective understanding that the parties had reached consensus ad item – a meeting of the minds – just like they had done on numerous other occasions." 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Published by Foez Dewan
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Venues NSW ats Kerri Kane: Venues NSW successful in overturning a District Court decision

The McCabes Government team are pleased to have assisted Venues NSW in successfully overturning a District Court decision holding it liable in negligence for injuries sustained by a patron who slipped and fell down a set of steps at a sports stadium; Venues NSW v Kane [2023] NSWCA 192 Principles The NSW Court of Appeal has reaffirmed the principles regarding the interpretation of the matters to be considered under sections5B of the Civil Liability Act 2002 (NSW). There is no obligation in negligence for an occupier to ensure that handrails are applied to all sets of steps in its premises. An occupier will not automatically be liable in negligence if its premises are not compliant with the Building Code of Australia (BCA). Background The plaintiff commenced proceedings in the District Court of NSW against Venues NSW (VNSW) alleging she suffered injuries when she fell down a set of steps at McDonald Jones Stadium in Newcastle on 6 July 2019. The plaintiff attended the Stadium with her husband and friend to watch an NRL rugby league match. It was raining heavily on the day. The plaintiff alleged she slipped and fell while descending a stepped aisle which comprised of concrete steps between rows of seating. The plaintiff sued VNSW in negligence alleging the stepped aisle constituted a "stairwell" under the BCA and therefore ought to have had a handrail. The plaintiff also alleged that the chamfered edge of the steps exceeded the allowed tolerance of 5mm. 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Litigation and Dispute Resolution

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