MTECC NEWS 21.05 ||| Navigating expert determination clauses – Queensland Court of Appeal overturns determination for lack of contractual compliance
In Middlemount South Pty Ltd v Anglo American Metallurgical Coal Assets Pty Ltd & Anor  QCA 132, the Queensland Court of Appeal allowed an appeal and found that part of an expert determination was not valid because the expert erred in its application of the contract clause governing the preparation of final completion accounts in the sale and purchase agreement (SPA) for controlling shares in the Foxleigh Coal mine.
The SPA provided for a mechanism for calculating the completion accounts, which would then be adjusted against the initial completion price (positively or negatively), by agreement, failing which the parties agreed an expert determination would be final and binding absent manifest error. It was the drafting of this mechanism and its application that gave rise to the disputes in the case.
Upon disagreement over two main issues relating to Loader Maintenance Spare Parts Accruals and Rail and Port Accruals, an independent accountant was engaged to determine the issues. The SPA provided for mandatory guidelines for the method by which the accounts were to be calculated, by Schedule 11 to the Agreement, which nominated, in cascading order of precedence, the application of the “principles, policies and procedures” each item of account was “used” in preparation of the monthly trial balances (generally between contract and completion), failing that then the Accounts (yearly or special reporting accounts), and failing that then the Accounting Standards (an accepted set of standards published by the relevant accounting body).
The dispute over the Spare Parts accrual came about because Anglo had, in its monthly trial balances from December 2015 through to July 2016, “expensed” these parts, which it admitted, whereas in the month of completion in August 2016, it changed that to capitalise the part in inventory, which it said was consistent with a policy it had on goods handling, and it had to correct an error. The expert agreed with Anglo. The primary judge (Jackson J) held that the expert had not been in error in doing so. The Court of Appeal (Holmes CJ, Lyons SJA agreeing, Morrison JA dissenting) overturned that, and upholding that part of the appeal, held that there had to be businesslike interpretation given to the word “used”, and the expert had not applied that.
As for the rail and port accruals, the dispute focussed on what Middlemount had claimed was a change in when the “true up” of the accounts occurred, asserting that it should have been at the end of the calendar (Anglo’s financial) year in or about December, thus after completion. It relied on Anglo having undertaken such a true up in November 2015, the year before the completion as the procedure Anglo had “used”. The primary judge disagreed, as did the Court of Appeal.
- Whilst the case was not a construction case, the principles behind contractual interpretation and the scope of challenges of expert determinations apply equally.
- Be careful of the drafting of the Scott v Avery clauses for expert determination, to ensure there is clarity over how the expert is to undertake the task he or she is engaged to perform, and if possible, provide details of proscriptive approaches. Take care in identifying how the engagement documents (notice of dispute, response, engagement letter) all define the “dispute” and what the expert can and cannot do – don’t simply rely upon the contract terms which too often do not properly spell out these boundaries.
- Identify how a “dispute” is to be defined, particularly where there may be many disputes over some small amounts (in which case the determination might be final and binding notwithstanding manifest error), and larger amounts (in which case the determination may be subject to manifest error).
- Consider whether an expert has failed to undertake the task he or she was engaged to perform. This is an often-fruitful area of review of expert determinations, and it was the main point in this case.