Expert determination is becoming an increasingly common Alternative Dispute Resolution (ADR) process provided for in the terms of contracts between parties. In general terms it involves an independent third party, with recognised expertise in the subject matter, resolving an issue or issues in dispute between the parties by making a determination. It has been referred to as “a relatively quick and effective way of resolving disputes which are simple in content or are essentially technical in nature” (Resolution Institute). The process affords those parties involved confidentiality and privacy.

The provision under an existing contract for a matter to be referred to expert determination is generally expressed to be “final and binding” on the parties to the dispute. But what exactly does “final and binding” mean in this context?

The role of an expert

In Holt v Cox (1994) 15 ACSR 313, Santow J referred (at 332) to “the distinction is that an arbitrator exercises a quasi-judicial function to whom is submitted for decision a formulated dispute to be decided between the competing contentions of the parties, while an expert determines matters from the expert’s own experience and expert knowledge, making his or her own investigations”.

The courts have held that a failure to specify a procedure to be adopted by the expert will not render void for uncertainty an agreement to enter into an expert determination process. The procedure to be followed is a matter for either agreement between the parties, or determination by the expert. See Heart Research Institute v Psiron [2002] NSWSC 646 at [28]-[29].

The Law Society of New South Wales has developed Rules for Expert Determination to be used in the absence of specifically designated rules, as has the Resolution Institute. Thus it is not uncommon for a contract to state that any dispute is to be submitted to expert determination to be "conducted in accordance with the [specify Rules] which set out the procedures to be adopted, the process of selection of the expert and the costs involved and which terms are deemed incorporated" (or similar).

Setting aside an expert determination

The classic statement of the legal principles to be applied, which continues to be often cited by courts today, was made by McHugh JA in Legal & General Life Australia v A Hudson (1985) 1 NSWLR 314 at 335-6. After noting that the terms of the contract usually provide, as a lease in that case did, that the decision of the expert is ‘final and binding on the parties’, McHugh JA stated:

“While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract … In each case the critical question must always be: Was the valuation made in accordance with the terms of the contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer.”

Determinations attended by fraud, collusion, dishonesty or impartiality will not have been made in accordance with the terms of the contract. Otherwise, in the case of mistake, as stated by McHugh JA above, an expert determination may only be set aside if it goes beyond a mistake in the process adopted by (or reasoning of) the expert, and departs from the contractual description of what the expert was required to determine.

Holt v Cox (1994) 15 ACSR 313

Mr and Mrs Holt were the controlling shareholders of a long established advertising business. Mr Cox, a key employee, was issued with five “A” class shares as an incentive to stay with and develop the business. The rights, duties and restrictions attaching to the shares included the right of Mr Cox on a winding up to receive twenty percent of any distribution of any capital and, upon termination of his employment, the right to receive “a fair price” determined by the auditor of the company” for his shares. Mr Cox was ultimately dismissed and he refused to transfer his shares at the value determined by the auditor ($171). As a consequence, Mr and Mrs Holt commenced proceedings in the Supreme Court of New South Wales.

It was not in dispute that the agreed plan was for the business to be sold in the future when turnover reached $8m-$10m. Mr Cox’s principal complaint was that the valuation exercise paid no regard to this prospect. Santow J agreed, concluding that given the intention to sell in the future and, further, that turnover had already reached the target range for possible sale of $8m to $10m, it was not in conformity with the contract, requiring a fair price, to disregard the future chance of sale and Mr Cox’s consequential access to 20% of the surplus assets (as the auditor had done in reaching the nominal figure of about $200).

Candoora No. 19 v Freixenet Australasia [2008] VSC 367

Candoora and Freixenet were the only shareholders in Wingara, a substantial wine producer. They owned 25% and 75% of the issued shares respectively. Candoora exercised an option to require Freixenet to purchase its 25% shareholding. The parties were unable to reach agreement in respect of the price. In these circumstances, the deed provided for the appointment of a valuer to determine the “fair value” of Candoora’s shares and for such determination to be final and binding on the parties.

Candoora applied to the Supreme Court of Victoria to have the valuation report and certificate, which concluded that the valuation of Candoora’s shares was $962,500, set aside. That application was successful. Hargrave J found that the valuer had essentially based his determination on the value of Wingara as a going concern, or the “market” value (an objective standard). The report contained no reference to the need for the valuer to ensure that the value which was determined was “fair”, being the required contractual standard and one which allowed the valuer to take into account a wider range of circumstances than those relevant to “market” valuations (i.e. a largely subjective test).

More recently, in Australian Vintage v Belvino Investments No 2 [2015] NSWCA 275, the NSW Court of Appeal held that if an expert acts upon the wrong meaning of a contractual clause or formula which forms part of the task which he or she is required to undertake, this being an objective matter outside the expertise of such a person, then the determination will not be in accordance with the terms of the contract and may be subject to review.

Take home points

  1. Expert determination has the potential to provide an informal, speedy and effective way of resolving disputes, however in practice this will largely depend on the particular wording which the parties have adopted in the relevant clause in their contract. If the expert determination clause is not carefully worded, it may leave one or both of the parties dissatisfied with the process and/or outcome and lead to further dispute.
  2. Ensure that the contract is explicit as to the procedures to be adopted by the parties and the expert in relation to disputes falling within the expert determination clause.
  3. The contractual standard which the parties choose for the expert to determine may have serious ramifications and is therefore worthy of careful consideration. For example, in the valuation context there is a well-established distinction between a "market value", "fair value" and “fair market value” test. See, further, MMAL Rentals Pty Ltd v Bruning [2004] NSWCA 451 commencing at [52].
  4. It will likely be extremely difficult to have a court set aside an expert determination which the parties have agreed in advance will be “final and binding”.