Vale Belvedere Pty Ltd v BD Coal Pty Ltd  QSC 173 concerned a joint venture agreement between the parties, under which Vale Belvedere Pty Ltd (Vale Belvedere) had exercised an option to purchase the interests of BD Coal Pty Ltd (BD Coal). The contract provided that Vale Belvedere was to pay the "fair market value" for BD Coal's interests, which was determined by a valuer appointed by BD Coal, RBC Capital Markets (RBC).
Vale Belvedere subsequently commenced proceedings alleging that RBC's valuation was erroneous and overstated the price of BD Coal's venture interest, and therefore was not in accordance with the terms of the joint venture agreement. In particular, Vale Belvedere alleged that RBC had not acted as an impartial and rational valuer would, and that the valuation was "incorrect as a matter of objective fact" primarily because RBC had relied on outdated information.
The Court accepted firstly that "fair market value" generally means an amount which would be paid and accepted by willing but not anxious parties, each acting with knowledge of all relevant facts. The Court rejected BD Coal's submissions that alleged errors in valuation must be evident on the face of the valuation.
However, in dismissing Vale Belvedere's claim, the Court considered that the parties' contractual intention had been to limit the circumstances in which valuations could be challenged, through providing that "except in the case of manifest error... [the valuation] shall be final and binding on the parties". On the facts, the Court held that the alleged errors in the valuation were not of the requisite "manifest" nature.
In doing so, the Court applied McHugh JA's judgement in Legal & General Life of Australia v A Hudson Pty Ltd (1985) 1 NSWLR 314, which emphasised that whether a valuation is binding upon the parties is "not a question whether there is an error in the discretionary judgment of the valuer... it is whether the valuation complies with the terms of the contract" and that it is generally not relevant "that the valuation may have... constituted a gross over or under value".
Parties to a contract providing for a mechanism for determining the "fair market value" of interests should be aware that any error made on the part of the appointed valuer, of itself, will generally not be sufficient to invalidate the valuation. The critical question is whether the valuation was made in accordance with the terms of the contract. Parties should consider specifying key parameters for the conduct of a valuation, so there is less scope for the valuer to err.