28 September, 2015
Australian Vintage Limited v Belvino Investments No 2 Pty Ltd [2015] NSWCA 275 (11 September 2015)
WHAT YOU NEED TO KNOW
- You can't oust the jurisdiction of courts to enforce a contract. But you can agree that certain issues will be determined privately by an expert (such as a valuer), whose decision the courts will enforce. In theory, this reduces the cost, delay and relationship damage of formal court or arbitration procedures.
- In a recent case, an expert determination was overturned by the New South Wales Court of Appeal because the court disagreed with the expert's interpretation of the contract.
- An agreement that the expert determination will be "final and binding" may not prevent legal challenges to the expert's interpretation of the contract.
WHAT YOU NEED TO DO
- When agreeing an expert determination clause, the expert's task must be made very clear, to avoid room for challenges to the expert's decision.
- Where appropriate, specify whether the interpretation of the contract should be resolved by the expert or by the court, and, if by the expert, consider whether the expert should have the power to obtain independent legal advice.
When can you challenge an expert determination which is expressed to be final and binding?
An expert's determination will generally be enforceable through the courts as a contractual right accruing for the benefit of the successful party provided the expert has carried out the task which the contract required.
If the expert performed that task, the determination is final and binding even if the expert made errors or took irrelevant matters into account.
There are, however, limited circumstances in which an expert's determination will not be enforceable. For example, where the determination was procured by fraud or collusion. More commonly, an expert determination is open to challenge where the expert, in arriving at the determination, exceeded the contractual mandate so that the determination did not correspond with the question put to the expert. In other words, the determination will be of no legal effect where the expert departed in a material respect from his or her instructions.
But can an expert determination be challenged for misinterpreting the contract?
While it is a matter of contractual construction in each case, courts are more likely to presume that an expert will be given the task of making the final decision on a question involving an opinion or a discretion rather than on a matter which is classified as an objective fact.
While experts often need to decide how a contract should be interpreted as part of answering the question required by the contract, this may be treated as an objective matter which, if misinterpreted, could render the determination capable of review.
This problem was recently addressed by the NSW Court of Appeal in Australian Vintage Limited v Belvino Investments No 2 Pty Ltd [2015] NSWCA 275.
The expert determination clause
The 2014 vintage of Victoria's Del Rios vineyard was affected by a severe frost.
The lease said that if grape production capacity fell by 50% due to a natural disaster, there would be remedial work and termination rights.
If the parties couldn't agree, an expert was to decide "whether Production or Production Capacity has been reduced by more than 50% of Average Production Capacity". The expert determination clause said:
"The Expert must make and deliver his written determination to the parties within 45 days of his appointment which shall be final and binding on the parties. The Expert is deemed to act as an expert and not an arbitrator. His costs shall be shared equally by the parties."
Three interpretations of the contract
The expert compared the vineyard's pre-frost production capacity with its average production capacity over the previous two years. He concluded that the production capacity had not fallen by 50%.
When the decision was challenged in court by the lessee, the judge at first instance took a different view of the clause, and instead compared the post-frost production capacity with average production capacity over the previous two years. However, on this approach production capacity had still not fallen by 50%.
On appeal, Chief Justice Bathurst said both the expert and the judge were wrong. First you had to work out the difference between the pre-frost production capacity and the post-frost production capacity. Then you had to determine whether that reduction was more than 50% of the average of the previous two years' production capacity. Beazley P and McColl JA agreed.
The expert's interpretation was not final and binding
The agreement that the expert would make a "final and binding" decision on whether production capacity had been reduced by more than 50% of average production capacity was enforceable.
However the contract was unclear on how to measure the reduction in production capacity. According to the court, interpreting the contract correctly was an objective legal issue which the parties did not intend the expert to finally determine.
The expert was asked to decide what the reduction in grape production capacity had been – that is, the expert was required to apply a formula. However, it was outside the scope of the expert's task to finally determine the true construction of the formula which was held to be an objective matter outside of the expertise of the expert and which the parties did not agree to be bound by if the expert misapplied it.
Therefore the expert's decision that grape production capacity had not fallen by 50% was able to be reviewed and set aside by the court due to a legal error.
Challenging an Expert's Mistake
- An expert determination will be final and binding if the expert carried out the task required by the contract.
- While a matter of contractual construction in each case, courts are likely to presume expert determination clauses are asking experts to resolve matters involving a discretion or opinion rather than an objective fact.
- Interpretation of the contract is an objective matter on which an expert's decision may not be final if that function was not entrusted to the expert.
For further information, please contact:
Jos Mulcahy, Partner, Ashurst
jos.mulcahy@ashurst.com
