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.

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