In a recent decision of the Supreme Court of Victoria, the Court held that an “independent expert” appointed pursuant to a contractual mechanism was not in fact independent. This decision is a reminder to parties to exercise caution when referring disputes to expert determination and to ensure that the matters for determination are appropriate and the procedure adequately defined.

Facts of the dispute

500 Burwood Highway Pty Ltd v Australian Unity Ltd [2012] VSC 596 concerned a dispute between the vendor, 500 Burwood Highway, and purchaser, Australia Unity, regarding the purchase price of a partly completed aged care development in Melbourne. The purchase price in the contract of sale was $35 million, however as the development was incomplete at the time of sale, the parties agreed to an adjustment to the purchase price to accommodate the works which remained to be completed.

The contract of sale provided that the task of assessing the cost to complete the works and the consequent adjustment of the purchase price was assigned to an independent quantity surveyor to be appointed by the purchaser.

The independent quantity surveyor assessed the cost to complete the works at $2.8 million and the purchaser sought to reduce the purchase price accordingly. The vendor believed the quantity surveyor’s assessment to be excessive and that the cost to complete was only $500,000.

The vendor issued proceedings, claiming the quantity surveyor’s assessment should be set aside as not binding on the parties, and the Court was required to determine:

  1. whether the quantity surveyor was “independent” as required by the contract;
  2. whether the quantity surveyor was actually biased; and
  3. whether the quantity surveyor’s report complied with the terms of the contract.

Role of an independent expert

This case is a useful reminder of the role of an independent expert and his or her duties and obligations to the parties. The role of an expert is quite different to that of an arbitrator and it has a different range of duties, as highlighted in the Court’s decision. For example:

  1. An expert is not obliged to afford the parties procedural fairness or receive submissions from the parties, unless the contract provides otherwise.
  2. An expert is usually required to assess loss or damage by use of some special knowledge or skill without being required to hear from the parties.
  3. Unless the contract provides otherwise, the parties have no entitlement to insist that the expert adopt any particular procedure or that the expert seek their approval to the proposed determination.
  4. Whilst the expert is under a duty to act fairly and impartially in carrying out his or her contractual function, it is actual partiality, rather than the appearance of partiality, that is the relevant standard to demonstrate bias on the part of an expert.

When parties appoint an expert, they place reliance on the expert’s skill and judgment. Providing the expert’s decision is arrived at honestly and in good faith, the parties will not be able to re-open the decision and will be bound by the result. In his reasons for decision, Justice Vickery noted:

Mistake or error in the process of the determination of the appointed expert will not invalidate a decision. However, if the expert asks the wrong question or misconceives the function of the appointment, the task required to be performed by the contract will not have been fulfilled. In this event, the determination will be exposed to being set aside.”

As to alleged bias, which the vendor alleged in this case, his Honour noted: “actual bias or partiality must be demonstrated in order to impugn the determination”.

Court’s findings

Justice Vickery relevantly held that the expert was not “independent” because both a company related to the vendor and the purchaser itself had engaged the expert to provide quantity surveying services prior to his appointment as expert under the contract. Further, the expert treated the purchaser as his client for the duration of his appointment, rather than acting independently as required by the contract. The requirement of the expert’s independence involved both independence of mind and independence in appearance, which the expert in this case did not satisfy.

The expert demonstrated actual bias because he was influenced by communications from the purchaser and invited and accepted modifications to his assessment from the purchaser. Further, the expert did not consult with the vendor at any stage in relation to various draft reports which he provided to the purchaser for review and comment.

Further, the expert’s assessment did not comply with the terms of the contract as it was founded on inadequate material.

In setting aside the expert’s assessment, the Court remitted the assessment to an independent quantity surveyor to be agreed by the parties or failing that a Special Referee pursuant to Order 50 of the Supreme Court Rules.

What does this mean for me?

This case highlights the importance of carefully drafting clauses referring matters to expert determination and shows what can go wrong if the procedure to be followed by the expert is not adequately defined. This dispute may have been avoided if the procedure had been clearly set out in the contract and the expert properly instructed by the purchaser as to his obligations to act independently. Due to the expense of litigation, parties are increasingly adopting expert determination as a means of resolving disputes under construction contracts. This case serves as a timely reminder to ensure the matter to be referred to the expert is appropriate for expert determination and is not better suited to arbitration or litigation. Expert determination has its limitations and is most effective when the dispute falls within the expert’s field of expertise. Whilst expert determination was probably appropriate in this case, the expert needed guidance from the parties to ensure that his independence was not compromised and that he complied with the contract.