Australia: Expert determinations: final and binding?

Key Points:

Even if a contract states that an expert's determination will be final and binding, that determination will be open to review if it has not been made in accordance with the contract.

Expert determination is a popular and affordable method for resolving disputes arising from property and construction contracts. The effect of an expert determination is usually prescribed in the contract, and may provide that any expert determination will be "final and binding" on the parties.

In the recent case of Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd [2015] NSWCA 275, the NSW Court of Appeal confirmed the principle that a decision of an expert will not be "final and binding" if it was not made in accordance with the contract.

Background of the Australian Vintage case

Australian Vintage (as Lessee) and Belvino (as Lessor) were party to a lease for the development and operation of a vineyard.

The lease provided that, if a natural disaster occurred which reduced the amount of grapes produced or capable of being produced, the Lessee could give the Lessor notice, in which case:

  • the parties were obliged to meet to determine whether the amount of grapes produced, or capable of being produced, at the vineyard for the vintage was reduced by more than 50% of the average production capacity;
  • if the parties were not able to agree, either party could refer the matter for determination by an expert, and the expert's determination would be final and binding on the parties; and
  • if the parties agreed or it was determined that the amount of grapes produced or capable of being produced had been reduced by more than 50% of the average yield, the Lessee could either carry out rectification works at the Lessor's cost or terminate the lease.

A severe frost reduced the Lessee's ability to produce grapes, and the Lessee gave the Lessor a notice under the lease. As the parties were unable to agree on whether the Lessee's production capacity had been reduced by more than 50% of the average production capacity, the matter was referred to an expert for determination.

The expert's determination

The expert determined that a natural disaster had occurred and production capacity had been reduced. However, the expert also determined that the lease required the post-frost production and pre-frost production capacity to be compared with average production capacity. As the difference between each amount compared by the expert was less than 50%, the Lessee was not entitled to a remedy under the clause.

The Lessee asserted that, rather than comparing pre-frost production capacity with average production capacity, the expert should have compared pre-frost production capacity with the post-frost production. The Lessee commenced proceedings and sought to have the expert's determination set aside.

What happens if an expert applies the wrong test?

The primary judge found that the expert had made his determination in accordance with the terms of the contract and that accordingly, the expert's determination was not reviewable.

On appeal, the Court of Appeal held that whether an expert's determination is reviewable depends on whether or not the expert carried out the task which he or she was contractually required to undertake.

If the expert carried out the task, the fact that the expert made errors or took irrelevant matters into account when carrying out that task would not render the determination unchallengeable.

However, if the expert has not carried out the task required by the contract, his or her determination will be subject to review, regardless of whether or not the contract states that the expert's determination will be final and binding.

What was the scope of an expert's mandate?

The Court found that:

  • the relevant clause of the lease required the expert to calculate pre- and post-frost production and production capacity and average production capacity, and calculate any reduction; and
  • while the expert needed to make a decision about how the formula in the relevant clause operated in order to carry out these calculations, there was nothing in the lease to suggest that the parties had intended to be bound by that decision if the expert misapplied the formula. This was particularly the case given that the calculation of production, production capacity and average production capacity were within the expert's qualifications but the construction of the formula was not.

The Court of Appeal found that the comparison of pre-frost production capacity with average production capacity undertaken by the expert was not the comparison required by the lease. Rather, the lease required a comparison of pre-frost production capacity with post-frost production. As the expert's determination was not in accordance with the lease, and the lease did not reveal an intention that the parties would be bound by the expert's interpretation of the formula, the expert's decision was open to review.

Clear drafting is the solution

The parties to a contract will not be bound by an expert's decision even where the contract provides that the decision is "final and binding", if the decision is not a determination under the contract.

By clearly prescribing matters to be considered and determined by an expert in the contract, the parties can reduce the risk of a decision-maker proceeding on incorrect assumptions and the decision being declared void.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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