A recent Supreme Court of Appeal decision demonstrates the importance of the wording in contractual clauses, and in particular joint valuation clauses. The decision in Adnow Pty Ltd (as trustee for the Adnow Pension Fund) v Greenwells Wollert Pty Ltd  VSCA 282 makes it clear that courts will determine the parties’ intention objectively looking at the terms and language of the contract, and will not redraft clauses to suit a later interpretation.
The Supreme Court of Appeal unanimously upheld Justice Judd’s decision of 14 April 2016 considering the drafting of expert determination clauses in contracts concerning land, specifically, whether an expert had carried out an independent valuation in accordance with the requirements of an option deed.
To view our previous article on the earlier decision, click here.
The case concerned an option to purchase land, under an option deed entered into on 14 October 2008 between Adnow Pty Ltd (Adnow) and Greenwells Wollert Pty Ltd (Greenwells) (Option Deed).
Adnow was the registered proprietor of prime residential development land comprising 42.63 hectares situated at 220 Craigieburn Road, Wollert (Property).
The purchase price under the proposed contract of sale, the form of which was annexed to the Option Deed, was to be determined under a cascading regime of negotiation. In the event an agreement could not be reached by the parties, an independent valuer was to be jointly appointed (Valuer).
The parties were not able to agree on the purchase price, nor was there any agreement between the parties’ respective appointed valuers as to a valuation for the Property. Accordingly, the parties jointly appointed an independent valuer to carry out the valuation in accordance with clause 5.7 of the Option Deed.
Clause 5.7 of the Option Deed required that the Valuer’s valuation:
- be in writing
- have regard to the Valuation Guidelines (Guidelines)
- assume that the Precinct Structure Plan (Wollert PSP) affecting the Property had been approved by the Minister for Planning
- specify the matters to which the Valuer had regard in making the determination
- be provided within one month of his appointment.
Further, clause 5.8 provided that the parties agreed the price would be the greater of the amount specified in the valuation and the amount calculated by multiplying the developable area by $200,000 per acre.
Relevantly, clause 5 did not prescribe a methodology by which the valuation had to be conducted.
At first instance the seller, Adnow, alleged the valuation should be set aside for failing to comply with clause 5 of the Option Deed. Andow submitted that the Valuer:
- was required by clause 5.7(c) to ‘assume, consider and apply the content’ of the Wollert PSP and, on that basis, he had failed to assume the Wollert PSP had been approved by the Minister, in accordance with clause 5.7(c)
- failed to carry out a valuation in making his determination, as required by clauses 5.5 and 5.7, by failing to specify the matters to which he had regard to, failing to identify comparable transactions on which he relied and by not providing analysis or workings to show the basis of calculations
- failed to have regard to the Guidelines in accordance with clause 5.7(b), and to specify the matters to which he had regard in making his determination as required under clause 5.7(d).
On 14 April 2016, Justice Judd of the Victorian Supreme Court delivered judgment, finding wholly in favour of Greenwells.
On 11 May 2016, Adnow sought leave to appeal Justice Judd’s decision on four grounds, namely that the trial judge erred in:
- failing to hold that clause 5.7 of the Option Deed required the Valuer to assume, consider and apply the content of the Wollert PSP
- holding that the applicant could not now rely upon the proper construction of clause 5.7(c) of the Option Deed
- failing to hold that the Valuer did not have regard to the Guidelines as prescribed by clause 5.7(b) and (d) of the Option Deed
- in failing to hold that the Valuer did not carry out a ‘valuation’ as that term is used in clauses 5.5 and 5.7 of the Option Deed.
The fundamental submission made by Adnow in support of ground 1 was that clause 5.7(c) of the Option Deed required the Valuer not just ‘assume’ the Wollert PSP had been approved by the Minister, but also required the Valuer to ‘consider and apply the content of the Wollert PSP’ in carrying out the valuation.
Further, Adnow submitted the Valuer failed to conform with, and apply, minimum housing density yields that were prescribed as mandatory requirements under the Wollert PSP.
Adnow submitted this went beyond a matter of mere mistake, but, rather, had the effect that the Valuer did not conduct the valuation in accordance with the requirement specified in clause 5.7(c) of the Option Deed.
In response, Greenwells submitted that clause 5.7(c) did no more than require the Valuer to assume the Wollert PSP had been approved. It was the assumption required by clause 5.7(c), that the Wollert PSP had been approved, that ‘gave reality to the valuation’, as it entitled the Valuer to proceed on the basis that the Property could be subdivided and developed [at 54].
The Court of Appeal found that while there was ‘no doubt that, on its proper construction, cl 5.7(c) required the valuer to do more than merely assume that a particular PSP applying to the property had been approved by the Minister’ [at 62], it was ‘clear, from a plain reading of the valuation, that the valuer did substantially more than merely acknowledge or make the assumption that the PSP applying to the property had been approved by the Minister. In a number of parts of the valuation, the valuer referred to and took into account aspects of the Wollert PSP’ [at 63], and ‘did not simply pay ‘lip service’ to the assumption specified in cl 5.7(c), but that, on the contrary, the valuer had reference to the Wollert PSP, and applied specific aspects of it to his valuation of the subject property’. [At 64].
Further, the Court of Appeal made it clear it was ‘important not to lose sight of the precise language chosen by the parties, by which to express the particular obligation that the valuer was required to comply with’ [at 69] and that ‘in the end, the submission made on behalf of the applicant required that the verb ‘assume’, in cl 5.7(c), be construed to require the valuer to take into account and give effect to a very specific requirement contained in the Wollert PSP. Such a construction of cl 5.7 does not conform to the language which the parties chose to express the obligation of the valuer’ [At 73].
In support of ground 2, Adnow submitted His Honour erred in rejecting the Valuer was required to take into account particular yield estimates when Adnow, in its submissions to the Valuer, had not contended the Valuer was required to take those yields into account. Given its conclusions on ground 1, the Court of Appeal did not find it necessary to address this ground.
Ground 3 was directed to the rejection by the judge of the submission of the applicant that the Valuer had failed to comply with the requirements of clauses 5.7(b) and (d) of the Option Deed.
In support of ground 3, Adnow submitted the Valuer had failed to comply with Item 4.5 of Part 8.1, and with Part 11.5, of the Guidelines.
Item 4.5 of the Guidelines states:
‘Unless not required in a proforma report, the methodology should be appropriately outlined for each approach along with important calculations and rationale. A reconciliation of the approaches adopted should be included. A value range may be expressed before being reconciled to a single point figure’. [At 83].
Part 11.5 of the Guidelines was entitled ‘Feasibility Studies’. Its provisions specified the manner in which valuers are to conduct and prepare feasibility studies.
The Court of Appeal held that, on their view, ‘a proper consideration of the valuation reveals that the valuer outlined sufficiently the methodology that he applied, and the data that he relied on in applying that methodology, in compliance with Item 4.5 of Part 8.1 of the Valuation Guidelines.’ [At 90].
The Court also noted there is no single fixed method by which a valuation must be conducted.
In support of ground 4, Adnow relied on the submissions made in support of grounds 1 and 3. As a consequence of the Court of Appeal’s findings on grounds 1 and 3, ground 4 was also rejected.
The Court of Appeal unanimously upheld Justice Judd’s decision on 23 November 2016. Adnow was granted leave to appeal, and the appeal was dismissed with costs.
This case demonstrates the importance in the wording of contractual clauses, and in particular joint valuation clauses and makes it clear that courts will determine the parties’ intention objectively looking at the terms and language of the contract, and will not redraft clauses to suit a later interpretation.
It is clear courts are reluctant to interfere with valuations. If experts have complied with the contract terms, parties will generally be bound by the determination, even if it is wrong. The principle for this arises from the leading case of Legal & General Life of Australia Limited v A Hudson Pty Ltd (1985) 1 NSWLR 314. This principle was confirmed by the Court of Appeal [at 40], where the Court stated that:
‘In short, a court will only set aside such a valuation if it has not been made in accordance with the terms of the contract. Ordinarily, in the absence of fraud or collusion, a mere error in the production of the valuation will not constitute a departure by the valuer from the terms of the contract. In the case of fraud or collusion, it may be concluded that the valuation has not been made in accordance with the terms of the contract. However, otherwise, mistake or error by the valuer is not sufficient to invalidate the valuation, unless the error is of such a kind as to demonstrate that the valuation has not been made in accordance with the terms of the contract’.
In cases where an error or mistake in a determination arises through the negligence of the valuer in circumstances not sufficient to have the valuation set aside, an aggrieved party may still be entitled to seek to recover its loss from the negligent valuer.
Finally, this case is an important reminder of the importance of clearly drafting pricing mechanisms in all acquisition documents, including put and call options and contracts of sale.
If a pricing methodology that requires a market valuation is the agreed mechanism for determining price, it can leave open the possibility of a party disputing the valuation if it is unhappy with the result.
Accordingly, such a mechanism needs to be carefully considered and crafted. Maddocks is well placed to assist as it has considerable experience in drafting and negotiating acquisition documents and pricing mechanisms.
To access a full copy of Adnow Pty Ltd (as trustee for the Adnow Pension Fund) v Greenwells Wollert Pty Ltd  VSC 153, click here.
To access a full copy of Adnow Pty Ltd (as trustee for the Adnow Pension Fund) v Greenwells Wollert Pty Ltd  VSCA 282, click here.