For the third time in the past 18 months, the New South Wales Court of Appeal was asked to construe the terms of a commercial contract.[i] This time, it was the terms an expert determination agreement.

In Lepcanfin Pty Ltd v Lepfin Pty Ltd [2020] NSWCA 155, the court held that in addition to applying the orthodox, common sense approach to construction, expert determination clauses and agreements must, in the usual course, be given a broad and liberal construction.

The case concerned, in part, the scope of an expert’s mandate under such an agreement. A dispute arose about whether the summary of the dispute contained in a schedule to that agreement confined the expert’s mandate to a narrow or broad set of legal and factual issues.

The decision is of particular importance to lawyers who draft these types of agreements and those representing parties in disputes falling within the ambit of them.

Expert Determination

Expert determination is a dispute resolution process found in many types of commercial contracts and is widely used in the building and contraction industry. It is a process where an independent expert decides an issue or issues between the parties. Historically, it was a process reserved for questions of a technical nature—the valuation of an asset or a complex engineering issue—by someone with specialised knowledge. But it is also common to see an expert’s mandate include questions of law, as well, i.e. the construction of a commercial contract.[ii]

The process works well when the parties agree beforehand that they will be bound by the expert’s determination. And assuming the determination is enforceable, this form of dispute resolution provides an informal, timely and cost effective way of resolving certain types of commercial disputes.

One downside to expert determination is that it is a purely contractual process. Unlike arbitration, the expert determination process is not regulated by statute. Therefore, parties seeking to enforce an expert’s determination must commence a proceeding seeking a declaration or order for specific performance of the agreement between the parties and the expert. Thus, the terms of the agreement become paramount.

Construction of dispute resolution clauses generally

The starting point is that a dispute resolution clause is to be construed, like any other contract term in a way that will seek to discover what the parties actually wanted and intended to agree.[iii] In the search for meaning and intention, the orthodox, common-sense approach to construction is to be followed.[iv] As observed by the plurality in Electricity Generation Corporation v Woodside Energy, a clause of any commercial contract must be construed objectively by reference to, ‘the language used by the parties, the circumstances known to them and the commercial purpose or objects to be secured by the contract’[v].

The impugned clause must, of course, be considered within the context of which it was agreed. As was recently observed by Edelman J in Rinehart:

Every clause in a contract, no less arbitration clauses, must be construed in context. No meaningful words, whether in a contract, a statute, a will, a trust, or a conversation, are ever acontextual.[vi]

The same applies to expert determination clauses.[vii]

Whilst not determinative in the instant case, as noted below, the Court of Appeal emphasised the parties’ adoption of pleadings—despite the relevant agreement not making any explicit reference to those documents or to that process—to ascertain the ambit of the experts mandate. This raises an important issue about the difference between the context of a contract on the one hand, and the surrounding circumstances of a contract on the other, for the purpose of construction.

Context has been described as, ‘the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract’, and surrounding circumstances as, ‘events, circumstances and things external to the contract’.[viii] The former is relevant to all instances of construction; the latter only in particular circumstances.

The rule about recourse to the surrounding circumstances of a contract is known as Mason J’s ‘true rule’ in Codelfa Construction Pty Ltd v State Rail Authority of NSW: the surrounding circumstances of a contract—which includes pre-contractual conduct—is admissible to:

[A]ssist the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But is not admissible to contradict the language of the contract when it has a plain meaning’.[ix]

In recent years, two divergent views have emerged in Australia about whether the ‘true rule’ still applies or not. The continuing debate is whether ambiguity is still the gateway to examining extrinsic evidence of surrounding circumstances of a contract. In a Victorian context, Riordan J recently stated in Siemans Gamesa Renewable Energy Pty Limited v Bulgana Wind Farm Pty Ltd that the ‘true rule’ remains good law.[x] Despite statements to the contrary in other jurisdictions,[xi] his Honour held that High Court decisions subsequent to Codelfa, in particular, Mount Bruce Mining:

[E]stablishes that Codelfa still represents the law in Australia. In my opinion, the true rule as expressed by Mason J in Codelfa, requires ambiguity as a gateway to examining extrinsic evidence of surrounding circumstances, because:

(a) the true rule does not permit evidence of surrounding circumstances to identify ambiguity; and

(b) the true rule has not been varied by subsequent decisions of the High Court.[xii]

But the position that has emerged in, for example, New South Wales in recent years is somewhat blurred. In Cherry v Steele-Park, Leeming JA opined that the High Court rejected the notion that the ‘true rule’ remained good law. Refencing Simic v New South Wales Land and Housing Corporation,[xiii] his Honour said:

It will be seen that once again no reference was made to any necessity for there to be ambiguity before regard may be had to objective matters external to the contract. Neither judgment in terms stated that recourse could be had to context and purpose without first concluding that the contract was ambiguous.[xiv]

What remains of the ‘true rule’ is a matter for clarification by the High Court, but until then, one should assume that, (i) the ‘true rule’ remains good law in Victoria; and (ii) the line between context and surrounding circumstances, for the purpose of ascertaining the intention of the parties’ at the time of contract, is somewhat uncertain in New South Wales.

Lepcanfin Pty Ltd v Lepfin Pty Ltd

Various parties entered into a Development Deed for the development of a property. The main protagonists were Lepcanfin Pty Ltd, the financier, and Antegra Pty Ltd, the vendor.

Clause 12.4 of Development Deed provided for the payment of a ‘facilitation fee’ to Lepcanfin. That clause also provided for an increase in that fee if a particular situation eventuated. The event occurred and Lepcanfin claimed an increase to that fee.

The parties subsequently entered into two amending deeds, one of which contained a clause that said, ‘Lepcanfin waives the Existing Defaults on and from the Effective Date’. A dispute arose as to whether by that clause, Lepcanfin had waived its entitlement under clause 12.4 of the Development Deed to an increase in the ‘facilitation fee’.

The parties appointed an independent expert under an Expert Determination Agreement (EDA) to make a final and binding decision in relation to the dispute, which was described in a Schedule to the EDA in these terms:

The dispute is, in essence, as to whether or not Lepcanfin waived the obligation of Antegra to pay the balance of $2,756,667.44 and Lepcanfin’s entitlement to the increase in the Facilitation Fee, pursuant to the terms of the Second Amendment and Restatement Deed.

The EDA also provided the expert with a broad power to adopt, ‘any appropriate procedure for the Expert Determination, which will assist the Expert in the efficient conduct and resolution of the Expert Determination’. The parties ultimately agreed to exchange pleadings, copies of which were provided to the expert as a part of a bundle of documents for use in the determination.

Before executing the EDA, Antegra served Points of Claim contending, among other things, that clause 12.4 of the Development Deed was, ‘void and unenforceable as a penalty’. Lepcanfin denied that allegation in its Points of Defence. Despite the penalty issue being joined on the pleadings, neither party sought to amend the description of the dispute in the Schedule to the EDA before it was concluded.

During the expert determination, Lepcanfin submitted that the penalty issue did not fall within the description of the dispute as defined in the Schedule; compared to its mere denial in its Points of Defence that the clause amounted to a penalty. The expert disagreed, and determined that clause 12.4 of the Development Deed, ‘is a penalty and therefore either void or wholly unenforceable’.

Lepcanfin applied to the Supreme Court of New South Wales seeking, among other relief, a declaration that the expert exceeded its mandate by determining the penalty issue. The primary judge held that the expert had not exceeded its mandate and dismissed the application on a summary basis.

Lepcanfin appealed.

Decision on appeal

The New South Wales Court of Appeal unanimously dismissed the appeal, finding that the penalty issue clearly fell within the ambit of the expert’s mandate.

On the issue of construction, Bell P, with whom the other judges agreed, held that an expert determination clause, like any clause of a commercial contract, is to be construed in the orthodox way[xv]. The court then expanded on that principle by determining that such clauses are, in the usual course, to be afforded a broad and liberal construction:

In the context of dispute resolution clause, whether they be arbitration or exclusive jurisdiction clauses, much authority can be found in support of affording such clauses a broad and liberal construction.[xvi]

In finding so, Bell P referred to a statement by Gleeson CJ in Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd, where his Honour said:

When the parties to a commercial contract agree, at the time of making the contract, and before any disputes have yet arisen, to refer to arbitration any dispute or difference arising out of the agreement, their agreement should not be construed narrowly. They are unlikely to have intended that different disputes should be resolved before different tribunals, or that the appropriate tribunal should be determined by fine shades of differences in the legal character of individual issues, or by the ingenuity of lawyers in developing points of argument.[xvii]

Applying these principles to the description of the dispute in the Schedule to the EDA, the court held that it was right for the expert to determine the penalty issue.

First, the word ‘and’ in the Schedule was capable of being read disjunctively, such that any restriction on Lepcanfin’s entitlement under clause 12.4 of the Development Deed was not only limited to the issue of waiver.

Second, commercial common-sense dictated that the parties intended to give the word ‘entitlement’ in the Schedule a broad interpretation: as a matter of plain English, a party’s ‘entitlement’ to rely on a particular contract term includes arguments about its enforceability:

A party’s “entitlement” to reply on a particular contractual provision comprehends, or at least includes, whether or not there is any reason which may preclude that party from asserting or enjoying a contractual benefit otherwise conferred by it.[xviii]

Bell P went on to say in the same breath that whether the clause was properly characterised as a penalty was ‘a classic example’ of this.

Third, the description of the dispute in the Schedule to the EDA was said to be a ‘brief description of the subject matter of dispute’, which was qualified by the phrase ‘in essence’. And related to this was the reference in the EDA to the expert’s broad power to, ‘adopt any appropriate procedure’. The parties urged the expert to adopt the procedure of pleadings, which in Bell P’s view, did no more than provide a ‘fuller’ statement of the dispute than of the brief description contained in the Schedule.[xix]

And, fourth, by adopting the process of pleadings, the parties had joined issue on the penalty issue: Lepcanfin had unequivocally represented that it accepted that the penalty issue formed part of the dispute and did not otherwise, (i) plead that the penalty issue fell outside the ambit of the expert’s mandate or (ii) say anything to that effect to either Antegra or the expert prior to execution of the EDA.[xx]

Key Takeaways

The decision reinforces the importance of clarity in expression in expert determination clauses and agreements. If a party to a dispute intends to limit an experts mandate, then clear words are needed. Otherwise, there is a risk of a broadened, unintended reference for determination by the expert.

And it highlights the importance of understanding the context of an expert determination agreement when seeking to interpret its words; in particular, (i) the risk of giving an expert carte blanche to determine the procedure for the determination; and (ii) ensuring that the intended message conveyed by the agreement is consistent with what is said as part of the agreed process—pleadings, memorials or submissions—or any extrinsic document referred to in the agreement.

[i] Australian Health & Nutrition Association Ltd v Hive Marketing Group Pty Ltd [2019] NSWCA 419 and Inghams Enterprises Pty Limited v Hannigan [2010] NSWCA 82.

[ii] See Westport Insurance Corporation v Giordan Runoff Ltd [2011] HCA 37 at [82] (per French CJ, Gummow, Crennan and Bell JJ), where the court held that, ‘… in the mundane sense … the interpretation of a written agreement between private parties is a question of law’.

[iii] Lepfanfin Pty Ltd v Lepfin Pty Ltd [2010] NSWCA 155 at [79] (Lepcanfin), citing A Briggs, Agreements on Jurisdiction and Choice of Law (2007, Oxford University Press) at 4.58 and Insigma Technology Co Ltd v Alstom Technology Ltd [2009] 3 SLR 936 at [30]-[33].

[iv] Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13 at [18].

[v] [2014] HCA 7 at [35]; and Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165.

[vi] Rinehart at [18].

[vii] See, for example, Illawarra Community Housing Trust v MP Park Lane Pty Ltd [2020] NSWSC 751 at [42], [45] and [49].

[viii] Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37 at [46] and [48] (obiter) (Mount Bruce Mining).

[ix] Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352.

[x] Siemans Gamesa Renewable Energy Pty Limited v Bulgana Wind Farm Pty Ltd [2020] VSC 126 (Siemans).

[xi] See, for example, Cherry v Steele-Park [2017] NSWCA 295 at [76]-[83] and Commissioner of Taxation v Trustee for the Michael Hayes Family Trust [2019] FCAFC 226 at [32]. See, also, Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633.

[xii] Siemens at [98].

[xiii] [2016] HCA 47.

[xiv] [2017] NSWCA 295 at [80]-[82].

[xv] Lepcanfin at [80].

[xvi] Ibid, at [85].

[xvii] (1996) 39 NSWLR 160 at 165.

[xviii] Lepcanfin at [99].

[xix] Ibid, at [92], [101] and [102].

[xx] Lepcanfin at [108].