Canada: Streamlining Contractual Disputes With An Expert

Carefully drafted alternative dispute resolution ("ADR") clauses can be tailored to parties' needs in solving disputes in a timely manner. Binding arbitration has commonly been implemented to limit the time and cost spent in court by providing finality to the dispute at issue. Similarly, limits on discovery can streamline issues and in a recent Alberta Court of Queen's Bench case, the Court confirmed that a properly drafted contractual clause can provide selected experts with significant decision making authority, including the ability to consider and resolve legal issues when fulfilling their mandate.

In Applied Industrial Technologies, LP v Sirois, 2018 ABQB 818 ("Applied") Applied Industrial Technologies, LP (the "Purchaser") was scheduled to purchase the shares of several companies known as the Reliance Group (the "Vendors") pursuant to a share purchase agreement ("SPA"). A term of the SPA provided that disputes over certain adjustments to the purchase price of the Vendors were to be determined by a nationally recognized accounting firm "as expert and not arbitrator", the expert's determination was to "be final and binding on all parties" and "not be subject to appeal, absent manifest error". 

In this case the Purchaser delivered a Closing Balance Sheet to the Vendors, who objected, thus engaging the expert determination process. The Vendors' objection included the argument that the relevant figures for Reliance USA (one of the Vendors) at April 30, 2014 in the Closing Balance Sheet and the Combined Target April 2014 Net Profits Statement must be converted from US dollars to Canadian dollars at the prevailing exchange rate at closing, rather than at par. The parties selected a mutually agreeable expert pursuant to the SPA and the expert determined that the currency conversion must be made at the prevailing currency exchange rate at the closing date. 

The Purchaser applied to set aside the expert's decision arguing that the expert's professional qualifications (i.e., financial and not legal) meant that the expert could not decide questions of mixed fact and law including interpretation of the contract. As the expert was not an expert in law the parties would not have intended that it answer legal matters and was confined to only ascertain accounting practices, assess compliance with generally accepted accounting principles, and compile financial information based on same.

The Vendors and McLennan Ross LLP's partner, Corbin Devlin, disagreed and were successful. In the reasons resulting in the dismissal of the Application, three issues the Court considered were whether an expert appointed under an expert determination clause in a share purchase agreement can decide questions of mixed fact and law, how the expert's decision should be reviewed and whether the expert in this case committed a manifest error.

Mixed Fact and Law

The Court recognized that the SPA provided the Vendors' representative an ability to object to "any item or aspect" of the Closing Balance Sheet or the Combined Target April 2014 Net Profits. The Court noted that the plain meaning of the phrase "any item or aspect" went far beyond calculations, compilations and accounting principles as argued by the Purchaser.

Additionally, the Court recognized that these were sophisticated parties engaging in a transaction worth over $200,000,000, and that any reasonable party in the same position with legal advice would know that expert determination clauses often refer to compilations, calculations, appraisals or valuations rather than "any item or aspect", and that an aspect is even wider than an item. As such, the Court found that the parties must have known and should be presumed to have known there were issues of mixed law and fact which could arise in ascertaining the information or methods used in the Closing Balance Sheet that was provided.

Ultimately, considering the plain words of the contract and the contextual matters, the parties provided flexibility to design a suitable process to accommodate any specific matter in dispute, giving the expert broad discretion to determine the rules and procedures to be followed in the proceedings.

Standard of Review

Anytime a court is reviewing the decision of another body, the review is expected to be performed in accordance with a recognized standard. Sometimes that review known as the "correctness standard" enables a court to replace the other body's decision if the law was applied incorrectly. On other occasions, a court will apply a "deferential standard" and defer to the findings and conclusions exercised by the other body. Here the Court acknowledged that an expert determination is binding unless the expert departed from the contractual instructions in a material respect or the contract otherwise provides. However, that may not always be the case. The Court noted that parties can install a safety valve in the contract clauses to challenge the contractually binding nature of the experts determination, if one is concerned that the expert's determination were to contain a "manifest error".

Since the SPA contained a "manifest error" clause, the Court concluded it could conduct a review that should be performed on a deferential standard for a variety of reasons. First, the review involved contractual interpretation which is a question of mixed fact and law. If the same issue arose from the decision of a trial judge, that decision could only be interfered with in the case of a palpable and overriding error or the decision was unreasonable. Likewise, in Canadian appellate courts, the term manifest error has been equated with conclusions that are clearly wrong or palpable errors. Palpable errors are those which are so obvious that they can easily been seen or known; readily or plainly seen. Secondly, if the same issue arose out of an arbitration, the appeal would be limited to questions of law and the standard of review, except in limited circumstances, is one of deference if the arbiter's decision was reasonable. Thirdly, even in administrative law cases, a reviewing court must consider multiple criteria, as set out in Dunsmuir v New Brunswick, [2008] 1 SCR 190, to avoid imposing a correctness standard and undercutting the integrity of the process to be used. 

In this case, the court found by its interpretation of the SPA that the parties' words did not simply except an "error". The parties chose to except only "manifest error". The word "manifest" must have been intended to express a higher standard than simply looking to see whether some error is apparent from the papers. The parties' choice to include words of limitation implies deference to the expert's determination, especially as they did not insert a clause to bifurcate the review standard. Additionally, the Court concluded that taking the plain language of the contract in its context, the parties' choice of the words "manifest error" indicates the parties wanted the opinion of a financial expert, not the Court, and a speedy process with some degree of finality.

No Manifest Error

This blog does not leave room for explaining multiple reasons why the Court did not find that the expert committed a manifest error in arriving at its decision but the analysis used reflected the Court's concern that deferential standards are critical for protecting the integrity of the decision making process, respecting the expertise of the decision maker, and recognizing that in many questions, reasonable minds can differ over the outcome. The Court found that an error is manifest or obvious where it is unreasonable: the conclusion is outside the range in which experts could reasonably differ. If the conclusion is within the range and sufficiently intelligible in the context of any contractually required reasons, as it was here, an error is not "obvious" or manifest.

With a strong reputation in commercial litigation, McLennan Ross LLP is well positioned to provide you with the best advice and representation. If you have any questions or concerns with respect to the ADR mechanisms in you contracts, your rights to engage such processes or any other matter, please contact do not hesitate to contact a member of our Commercial Litigation Team.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions