Oct 162015
 

Usually, an expert’s determination expressed to be binding and non-appealable is just that – final. However, the New South Wales Court of Appeal declared an expert’s determination not binding because the expert did not follow the contract. The Court remitted the determination to the expert with directions about the proper construction of the contract.

Background

The parties were lessor and lessee of Del Rios Vineyard, Victoria. The lease protected the lessee against natural disasters that reduced production below 50% by giving compensation and termination rights.

A severe frost hit the vineyard in October 2013, and the lessee invoked the clause. Before referring the matter to the expert, the lessor sought a declaration about the proper construction of the expert determination clause. Those proceedings were stayed pending the outcome of the expert’s determination.

In June 2014 the matter was referred to the expert, and a final determination was made in October 2014. The expert ruled against the lessee. The lessee sought orders in the Equity division of the Supreme Court, where the single judge also ruled against the lessee, though on a different construction of the clause than the expert. The present case is the appeal from that decision.

This writer humbly takes the view that had a declaration been given at the outset the court system would have provided real and timely assistance to the parties and avoided two unnecessary proceedings.

The expert’s determination clause

“4.26 Disaster

(b) If, in the Lessee’s opinion, the amount of grapes produced (Production) or capable of being produced (Production Capacity) for all vines on the Premises in respect of any one vintage is reduced by more than 50% of Average Production Capacity for that vintage year due to a Natural Disaster, the Lessee may immediately notify the Lessor in writing (Lessee’s Notice) that it wishes this clause to apply and…etc

(f) … the expert to determine:

(i) whether Production or Production Capacity has been reduced by more that 50% of Average Production Capacity;

(ii) whether the reduction in Production or Production Capacity was due to a Natural Disaster;

(iii) what remedial works would restore Production Capacity…”

(m) For the purposes of this clause, Average Production Capacity means the

average yield produced from the vines growing on the Premises for the 2 vintages preceding the Natural Disaster which destroyed or affected the vines growing on the Premises.”

Construction dispute

The lessor and lessee disputed the construction of the formula with which the expert would determine whether production had been reduced. The preferred construction of each of the parties is set out below. While the constructions are similar, when applied to the production figures their differences were sufficient to change the outcome of the assessment.

Lessee’s construction

The expert is to calculate the reduction in production or production capacity due to the natural disaster, and compare that amount with 50% of the average production capacity.

Lessor’s construction

The expert is to determine if production capacity after the natural disaster was less than 50% of the average production capacity.

Expert’s construction

The expert compared production in the year of the natural disaster with average production capacity.

The Court’s construction

The Court accepted the lessee’s construction. The expert’s construction was rejected because:

·         it did not calculate the reduction before the comparison was made between production capacities in the preceding years; and,

·         the construction of the formula by the expert was outside his decision-making-authority.

Decision-making-authority

The expert was authorised to do three things:

  1. Calculate the reduction in production or of production capacity;
  2. Determine whether that reduction was due to a natural disaster; and,
  3. Specify the remedial work necessary to restore production capacity

Any determination as to those three things came within the expert’s authority and so would be final and binding under the contract, as Hoffmann LJ explained:

 “By ‘decision-making-authority’ I mean the power to make the wrong decision…”

Mercury Communications Ltd v Director-General of Telecommunications [1994] CLC 1125, at [1120] Hoffmann LJ; cited at [78].

Each of those three things was determined to be a subjective matter. The construction of the clause however was an objective matter to be guided by the principles of contract law with which the expert did not engage. Instead of constructing the formula, the expert was required to calculate the integers to insert into the formula. As a result, the decision of the expert was not made within his decision-making-authority and so was open to review by the court.

Decision of the Court

The Court of Appeal succeeded only in making the order the lessor had sought a year previously: a declaration of the proper construction of the clause. The declaration having been made their honours remitted the matter to the expert, ordered costs for the applicant, and indemnified the respondent to the extent they were able under the Suitors’ Fund Act 1951 (NSW).

Lessons

Parties: Be clear on what you are asking your expert to do, from contract formation through to instruction in the event of a dispute. Inserting an expert into a contract without absolute clarity as to their role can multiply proceedings in the event of a dispute.

Experts: Be very clear on your authority. It is derived from, and strictly limited to, the provisions of the contract.

Courts: If parties apply for a declaration as to the construction of the contract, unwillingness on the part of a court to involve itself in private affairs may merely delay the resolution of the issue. Had a declaration been made at the initial request of the lessor, the expert could have been correctly instructed at the outset.

Peter McNamara

Principal 

You can read the case of Australian Vintage Limited v Belvino Investments No 2 Pty Ltd [2015] NSWCA 275 herehttps://www.caselaw.nsw.gov.au/decision/55ee60a6e4b0517a972807de

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