In 500 Burwood Highway Pty Ltd v Australian Unity Limited & anor [2012] VSC 596, the Victorian Supreme Court (Justice Vickery) was considering the appointment of a quantity surveyor to facilitate an adjustment to the purchase price in a Contract of Sale for an aged care facility. the Contract of Sale provided for the purchaser to appoint an “independent” quantity surveyor to assess the cost of the works required to complete the development (that cost then to be deducted from the $35 million purchase price at settlement). The independent surveyor ultimately estimated the cost to complete at $2.86 million approx, but the Vendor had its own report, by a different quantity surveyor, estimated the cost to complete at $0.52 million approx. His Honour concluded on the particular facts that the expert report did not comply with the requirements of the Contract of Sale and was not binding on the parties.

 

His Honour reviewed a number of key legal principles in relation to expert determination:

Legal Principles as to the Role of a Contractually Appointed Expert

164.            An expert appointed under a contract is in a different position to an arbitrator and has a distinctly different range of duties. In Beevers v Port Philip Sea Pilots Pty Ltd[1] (“Beevers”), Dodds -Streeton J described the differences in the following terms:

A valuer acting as an expert unlike an arbitrator is generally not obliged to receive submissions from the parties. An arbitration is characteristically quasi-judicial and the parties intend that they should have the right to be heard if they so desire.  It is clear that, whereas a primary function of an arbitrator is to hear and resolve opposing contentions, in contrast, an expert is appointed to appraise value of loss or damage ‘by use of some special knowledge or skill … without being required to hear the parties.  It has been held that, due to the distinction between the arbitral and expert functions, a report by an expert will not be vitiated by the appearance alone of partiality.[2]

165.            In Beevers Dodds-Streeton J referred to Macro v Thompson (No. 3)[3] (“Macro”) with approval. Macro involved a valuation of shares in family companies was, under a pre-emption clause in the articles, committed to the companies’ auditor acting as an expert, rather than an arbitrator.  Robert Walker J stated that

[a]n expert entrusted with the duty of issuing certificates under contractual arrangements between two other parties is under a duty to act fairly and impartially, and the other parties implicitly contract on that basis.

Robert Walker J accepted that

[o]n the authorities as a whole I accept the submission made by Mr Rhys that when the court is considering a decision reached by an expert valuer who is not an arbitrator performing a quasi-judicial function, it is actual partiality, rather than the appearance of partiality, that is the crucial test.

His Honour adopted that view because –

[t]o hold otherwise would mean that auditors who have had a longstanding professional relationship with an association with one party to the contract might be unduly inhibited in continuing to discharge their professional duty to their client, by too high an insistence on avoiding even an impression of partiality.

In Macro, as noted by Dodds -Streeton J in Beevers, [4]Robert Walker J found that the auditor (while not guilty of fraud or collusion or any conscious and positive cooperation in forwarding the interests of one party) was extremely imprudent in seeking advice and information from the purchaser’s solicitor, with whom he discussed figures.  The auditor allowed the solicitor ‘to obtain a position of psychological ascendancy over him’ which the solicitor seemed to exploit.[5]

166.            Nevertheless, Robert Walker J, despite finding that “[the auditor] should have taken a much more independent line from the outset”, on the balance of probabilities was:

not persuaded that [the auditor] yielded sufficiently to [the solicitor’s] influence as to invalidate his valuation on the ground of partiality.[6]

167.            In the recent case of McGrath v McGrath (“McGrath”) [7] Pembroke J cited with approval the observations of the English Court of Appeal in Barclays Bank v Nylon Capital [8] which are to similar effect:

As I have said, there is no procedural code for expert determination, in contradistinction to arbitration. The activities of an expert are subject to little control by the court, save as to jurisdiction or departure from the mandate given. Unless the parties specify the procedure, the expert determines how he will proceed; it is rare for what might be perceived as procedural unfairness in an arbitration to give rise to a ground for challenge to the procedure adopted by an expert: see Kendall, Freedman & Farrell, Expert Determination, 4th ed (2008), ch 16.[9]

168.            For these reasons, unless required by the contract in question, the parties have no entitlement to insist that the expert adopt any particular procedure; or that the appointed expert seek their approval to the proposed determination; or that they are given any hearing or facility to provide input into the process. An expert is not obliged to afford to the parties procedural fairness in the manner required of a court or arbitration in a curial context. [10]  A certifying expert is not under an obligation to provide procedural fairness or natural justice in the absence of an express contractual provision, and there is none in the present case: Hounslow London Borough Council v Twickenham Garden Developments Ltd. [11] How the task is undertaken is in the hands of the expert, subject to anything to the contrary in the contract pursuant to which the appointment was made.

169.            This result is in part the product of the contract and what is to be gleaned from it as to the intention of the parties. When the parties appoint an expert, they usually do so because they agree to place reliance on the expert’s skill and judgment. They implicitly agree to accept and be bound by the determination. In the usual case, provided the decision is arrived at honestly and in good faith, the parties will not be able to re-open it and will be bound by the result.

170.            It is also in part the product of a particular body of expert experience, learning, skill and judgment which the parties wish to apply to the problem to be dealt with. This is to be applied in a manner which is untrammelled by procedural considerations, so that the specialist skills and insights of the expert can be freely applied to the issue.

171.            Finally, considerations of commercial utility are likely to be relevant factors. Efficiency, the production of a speedy and authoritative outcome and the elimination of the expense of a more elaborate procedure, undoubtedly play a part in parties selecting the contractual process of expert determination.

172.            Mistake or error in the process of the determination of the appointed expert will not invalidate a decision.[12] 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.[13] In this event, the determination will be exposed to being set aside.

173.            Parties to a contract who, by the terms of that contract, agree to submit a question to an independent expert, are bound by the determination of that expert acting honestly and in good faith.[14]

174.            Actual bias or partiality must be demonstrated in order to impugn the determination. Further, the party alleging actual bias by a decision-maker carries a heavy onus. So much was made clear in Minister for Immigration v Jia by Gleeson CJ and Gummow J.[15]

175.            As observed by Pembroke J in a recent decision on point, McGrath,the appearance of partiality is not sufficient even if made out.  McGrath concerned the appointment of an expert under a shareholders’ agreement to determine the value of a corporate group following a dispute between shareholders.[16]  The plaintiff shareholder sought to avoid the appointment of a particular expert to carry out the valuation on the basis of communications between that expert and one appointing shareholder prior to the expert’s formal engagement. The plaintiff’s application to avoid the expert’s appointment failed for want of evidence of partiality.[17]  Pembroke J held that, based as it was on an apprehension that, if appointed, the expert would fail to act impartially, the plaintiff’s case was akin to one of apprehended bias, which would not entitle the Court to prevent the expert from taking appointment.[18]  Pembroke J was thus not required to make findings as to whether or not the expert had breached his duty to act impartially (meaning without actual bias). His Honour made the following observations in McGrath:

The obligation on an expert to act impartially is of course a foundational requirement. It finds its source in an implied term that subsists in agreements of this kind: Ceneavenue Pty Ltd v Martin (2008) 106 SASR 1 at [69]; Legal & General v A Hudson Pty Ltd at 335; Holt v Cox (1997) 23 ACSR 590 at 595. Within that constraint however, the expert may act as he likes and may give such opportunities to the parties to make submissions, and on what terms, as he alone considers necessary or appropriate. He may even choose not to do so – so long as he acts honestly and impartially.[19]

176.            In Beevers Dodds-Streeton J held that “a report by an expert will not be vitiated by the appearance alone of partiality”.[20]  Having referred to the orthodox position,[21] her Honour then introduced the concept of “a credible appearance or soundly based apprehension of partiality”.[22]  However, her Honour did not finally rule on the question on the facts of the case before her, finding it unnecessary to do so.

177.            To the extent that Dodds-Streeton J in Beevers opened the door to the prospect of the appearance of bias as being sufficient to call into question and bring down the determination of a contractually appointed expert, I do not follow the decision. Absent something in the contract which works against this outcome in a particular case, actual partiality and not the appearance of partiality is the critical test: Macro v Thompson (No 3).[23]  Such observations are consistent with the views expressed by the Court of Appeal concerning experts called upon to give independent opinion evidence, such experts not being disqualified from that role due to previous association with the parties; see FGT Custodians Pty Ltd (formerly Feingold Partners Pty Ltd) v Fagenblat.[24]

178.            There is a substantial body of further authority on the point. In Ceneavenue Pty Ltd v Martin, Debelle J took the conventional approach in adopting the view that actual bias is required.[25]  In Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd (No 2), Hargrave J referred to and approved the ruling in Macro that actual partiality, rather than the appearance of partiality, was necessary.[26]  In Kenros Nominees Pty Ltd v Tipperary Group Pty Ltd, Hollingworth J gave further approval to this approach, observing:  “All of the cases to which the parties referred deal with the setting aside of a valuation after it has been performed, on the basis of actual bias”.[27]  Other authorities are to similar effect in support of the orthodox approach.[28]

179.            This view of the law accords with sound policy.  Pembroke J in McGrath explained the policy considerations in the following terms:

When it comes to the principle of apprehended bias in relation to independent experts, I prefer the orthodox approach. To my mind, that approach accords with sound principle and persuasive authority. Too high an insistence on independent experts being required to avoid even an impression of partiality would not be in the interests of justice. It might, as it has in this case, encourage unwarranted challenges and unnecessary litigation by those too readily prone to suspicion and paranoia. The better course would be to allow the independent expert to complete his determination. [29]

180.            In the light of the weight of these authorities, 500 Burwood conceded that an apprehension of bias on the part of Mr Hogg is not a sufficient basis for setting aside the DCWC assessment.

181.            500 Burwood also concedes that Mr Hogg owed no obligation to accord procedural fairness or natural justice to 500 Burwood or AU. 

182.            Accordingly, in order to have the DCWC assessment set aside, 500 Burwood must show, on the balance of probabilities, either actual bias or lack of impartiality on the part of Mr Hogg rather than mere apprehension of it.[30]

…….

Assessment in Accordance with the Contract

Legal Principles

267.            The circumstances in which a court will intervene to overturn an expert determination, where the assessment is undertaken pursuant to a contractual mechanism, are very limited.

 

268.            In Beevers Dodds -Streeton J outlined the applicable principles in the following terms:

Historically, there has been a considerable degree of diversity in judicial identification of the deficiencies or flaws sufficient to vitiate an expert valuation.  The fundamental principle endorsed in modern Australian authority is that an expert valuation will be binding if it is within the terms of the contract.  Conversely, if an expert valuation can be said to depart from the terms of the contract, it will invite curial review and intervention.  The fundamental principle is very general, and its application will, in each case, depend on the terms of the particular contract.  The decided cases provide guidance on the construction of a contract under which an expert is appointed to determine a value or price.  An expert’s determination on discretionary matters is not
ipso facto immune from review, but where, by the contract, such matters are entrusted to the expert without the prescription of criteria or restrictions, whether express or implied, it has frequently been inferred that the parties intended to be bound by the expert’s bona fide judgment, even if it is in some way erroneous.  On the other hand, it has been inferred that the parties would not intend to be bound by gross errors of objective fact or mechanical calculation.  Further, the expert’s determination may fail to satisfy a term of the contract because, when construed in context, the term is held to bear a special meaning which was not addressed. [31]

269.            Recently, in TX Australia Pty Ltd v Broadcast Australia Pty Ltd (“TX Australia”) Brereton J described the potential scope of the enquiry, in a case such as the present, in the following terms:

In Legal & General Life of Aust Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314, McHugh JA recognised, and it has repeatedly been accepted, that the fundamental question is whether the exercise performed in fact satisfies the terms of the contract so as to make the determination binding. Absent fraud or collusion, a valuation is binding if it was made in accordance with the contract, and if so it is beside the point that it proceeded on the basis of error, or was a gross over or under value, or took into account irrelevant considerations [Legal & General Life of Aust Ltd v A Hudson Pty Ltd, 335-336 (McHugh JA); Holt v Cox (1997) 23 ACSR 590, 596 (Mason P)]. This does not mean that a valuation will stand regardless of error; it depends on the terms of the contract [Holt v Cox, 597 (Mason P)]. Accordingly, the question is whether the Expert’s determination binds the parties in accordance with their contract, and that depends on whether the Expert has performed the task allocated him by the contract, in a way that the contract makes binding on the parties. [32]

270.            In  Legal & General Life of Aust Ltd v A Hudson Pty Ltd (“Legal & General”) McHugh JA held[33]:

While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of the valuation, nevertheless the mistake may be of a kind which shows that the valuation is not in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case, the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuer 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 account or has failed to take into account matter which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract.[34]

[Emphasis added]

271.            Accordingly, the DCWC assessment contained in the DCWC Report may not be set aside by reason of error, such as a factual or arithmetic error, even if, in some cases, that error resulted in a “gross over or under value” where it was otherwise made under the terms of and within the scope of the governing contractual terms.[35]

272.            However, and conversely, an expert determination may be set aside where it has not been undertaken in accordance with the prescription contained in the contract under which the appointment of the expert was made.

273.            The distinction between those circumstances which may justify setting aside an expert determination and those which will not, was considered in Khayat Investments Pty Ltd v Winston Holdings Pty Ltd (No.2).[36] Martin CJ, with whom Newnes and Murphy JJ agreed, explained the test, in the context of a contractual appointment of an expert valuer under a lease, as follows:

If the determination accords with the terms of the lease, it binds the parties even though it might be the product of mistake or error. As McHugh JA observed in Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314:

‘By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision (335).’

However, if the determination of the rental payable does not accord with the lease agreement because, for example, it is not honest or is vitiated by collusion, or falls outside the scope of the provision in the lease because, for example, the valuer has assessed the wrong premises, the parties will not be bound, and one or other could seek a remedy setting aside the purported determination of the valuer, on the basis that it was not a valid determination under the lease. However, an error in the discretionary judgment of the valuer, or a mistake in the reasoning process, will not result in the invalidity of the determination unless it is of the limited kind to which I have referred, and which takes the purported determination beyond the scope of the powers conferred upon the valuer by the lease agreement (see also Campbell v Edwards [1976] 1 WLR 403, 407; Jones v Sherwood Computer Services plc [1992] 1 WLR 277, 287; TXU Electricity Ltd v Commonwealth Custodial Services Ltd [2003] VSC 88).[37]

274.            In TX Australia, Brereton J formulated an appropriate test and identified the task required of the Court where an expert determination delivered under a contract is challenged, in these terms:

[23] It is not in doubt that there will be an error of law, and that the determination will not be binding, if the Expert misconceived his function, asked himself the wrong question or applied the wrong test [Ex parte Hebburn Limited; Re Kearsley Shire Council (1947) 47 SR (NSW) 416, 420 (Jordan CJ); Avon Downs Pty Limited v Federal Commissioner of Taxation [1949] HCA 26; (1949) 78 CLR 353, 360 (Dixon J); Coal and Allied Operations Pty Limited v Australian Industrial Relations Commission [2000] HCA 47; (2000) 203 CLR 194, 208-209, [31] (Gleeson CJ, Gaudron and Hayne JJ)], as in that event, he would not have addressed himself to, nor performed, the task required of him by the contract.

[24]   Consideration of this ground requires analysis of two issues: first, what was the Expert’s task; and secondly, what did the Expert actually do. [38]

[Emphasis added]

  1. 275.            Accordingly, and by way of a summary of the legal position, the DCWC assessment may be set aside if the Court determines that it did not comply with the exercise required by the Contract to be undertaken

 


[1]               Beevers v Port Philip Sea Pilots Pty Ltd [2007] VSC 556.

[2]               Beevers v Port Philip Sea Pilots Pty Ltd [2007] VSC 556 [263] –[ 266].

[3]               Macro v Thompson (No. 3) [1997] 2 BCLC 36.

[4]               Beevers v Port Philip Sea Pilots Pty Ltd [2007] VSC 556 [268 – 270].

[5]               Macro v Thompson (No. 3) [1997] 2 BCLC 36 [64].

[6]               Macro v Thompson (No. 3) [1997] 2 BCLC 36 [66].

[7]               McGrath v McGrath [2012] NSWSC 578.

[8]               Barclays Bank v Nylon Capital [2011] EWCA Vic 826; [2012] Bus LR 542.

[9]               McGrath v McGrath [2012] NSWSC 578 [7].

[10]             Lahoud v Lahoud [2010] NSWSC 1297 [59]; Barclays Bank v Nylon Capital [2011] EWCA Cic 826; [2012] Bus LR 542 [37].

[11]             Hounslow London Borough Council v Twickenham Garden Developments Ltd [1971] Ch 233, 258-60; Capricorn Inks Pty Ltd v Lawter International (Australasia) Pty Ltd [1989] 1 Qd. R. 8; cf Fletcher Construction Australia Pty Ltd v MPN Group Pty Ltd (unreported) Supreme Court, NSW, 14 July 1997 p.20.

[12]             Legal & General Life of Australia v A Hudson Pty Ltd (1985) 1 NSWLR 314, 334-336 (McHugh JA).

[13]             TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4 [23] (Brereton J); AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173 [51].

[14]             See Campbell v Edwards [1976] 1 WLR 403, 407 per Lord Denning MR; followed in Baber v Kenwood Manufacturing Co Ltd and Whinney Murray & Co [1978] 1 Lloyds Rep 175 (Court of Appeal); Jones & Others v Sherwood Computer Services PLC [1992] 1 WLR 277; applied in Australia in Legal & General by McHugh JA. The critical distinction is between a mistake in process of the valuation or assessment where in the absence of dishonesty or partiality, the courts will not interfere, in contrast to a valuation or assessment which actually departs from the contract, where the courts will intervene.

[15]             Minister for Immigration and Multicultural Affairs v Jia  [2001] HCA 17.

[16]             McGrath v McGrath [2012] NSWSC 578.

[17]             McGrath v McGrath [2012] NSWSC 578 [16].

[18]             McGrath v McGrath [2012] NSWSC 578 [17].

[19]             McGrath v McGrath [2012] NSWSC 578 [12].

[20]             Beevers v Port Philip Sea Pilots Pty Ltd [2007] VSC 556 [266] and [300].

[21]             Beevers v Port Philip Sea Pilots Pty Ltd [2007] VSC 556 [263] – [272].

[22]             Beevers v Port Philip Sea Pilots Pty Ltd [2007] VSC 556 [300].

[23]             Macro v Thompson (No. 3) [1997] 2 BCLC 36.

[24]             FGT Custodians Pty Ltd (formerly Feingold Partners Pty Ltd) v Fagenblat [2003] VSCA 33.

[25]             Ceneavenue Pty Ltd v Martin (2008) 106 SASR 1 [69] and [71].

[26]             Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd (No 2) [2008] VSC 478 [25].

[27]             Kenros Nominees Pty Ltd v Tipperary Group Pty Ltd [2009] VSC 524 [95].

[28]             See: Legal & General Life of Australia Ltd  v A Hudson Pty Ltd  (1985) 1 NSWLR 314, 335; Holt v Cox (1997) 23 ACSR 590, 595; Andrews v Queensland Racing Ltd (No. 2) [2009] QSC 364 [24] – [25]; Bernhard Schulte GmbH & Co KG v Nile Holdings Ltd [2004] 2 Lloyd’s Rep 352 372.

[29]             McGrath v McGrath [2012] NSWSC 578 [21].

[30]             McGrath v McGrath [2012] NSWSC 578 [16].

[31]             Beevers v Port Philip Sea Pilots Pty Ltd [2007] VSC 556 [295].

[32]             TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4 [18].

[33]             Legal & General Life of Australia Ltd v A Hudson Pty Ltd [1985] 1 NSWLR 314; applied in Beevers v Port Philip Sea Pilots Pty Ltd [2007] VSC 556, Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd (No. 2) [2008] VSC 478, Kenros Nominees Pty Ltd v Tipperary Group Pty Ltd [2009] VSC 524 and McGrath v McGrath [2012] NSWSC 578.

[34]             Legal & General Life of Australia Ltd v A Hudson Pty Ltd [1985] 1 NSWLR 314, 335-6.

[35]             Legal & General Life of Australia Ltd v A Hudson Pty Ltd [1985] 1 NSWLR 314, 336.

[36]             Khayat Investments Pty Ltd v Winston Holdings Pty Ltd (No.2) [2011] WASCA 196.

[37]             Khayat Investments Pty Ltd v Winston Holdings Pty Ltd (No.2) [2011] WASCA 196 [10] – [11].

[38]             TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4 [23] – [24].