Introduction
The case of Bagata Pty Ltd v Sunstorm Pty Ltd [2024] QCA 17 involved an expert determination clause in a lease. The clause provided, as is common, that '[i]n the absence of manifest error, the determination of the expert is conclusive and binding on the parties.' The Queensland Court of Appeal delved into the meaning of 'manifest error' and whether the unsuccessful party could challenge the determination.
Case facts
Dispute
Sunstorm Pty Ltd was the tenant under a commercial lease. The tenant leased the premises for its business, which was manufacturing and supplying artworks and involved storing raw materials and using industrial machines and printers.
In perhaps a somewhat unusual scenario, the landlord left various machinery and items, significant in both number and size, on the floor of the premises. The tenant claimed that the items constituted a substantial impediment to the tenant's use of the premises and made an application to the Supreme Court of Queensland for a declaration for those items to be removed by the landlord.
However, there was a clause in the lease that required the parties to first resolve lease disputes by expert determination. As a result, the Supreme Court ordered that the dispute be referred for expert determination.
Expert determination
The parties instructed the expert to determine several questions, including, most importantly, whether or not the landlord was required to give vacant possession. This was a key issue in the expert determination, as the lease did not contain an express right to vacant possession. The landlord sought to rely on the fact that the lease did not contain such an express right and argued there was no legal obligation to remove obstructing machinery and items.
Despite the absence of an express provision in the lease requiring vacant possession, the expert ultimately determined that the landlord was required to provide vacant possession based on the proper legal interpretation of the lease. In making his determination, the expert relied upon the established legal principle that a commercial contract should be construed according to how a reasonable businessperson would have understood the terms of the contract. The expert formed the view that any interpretation, other than one requiring vacant possession to be provided to the tenant (particularly given the tenant's use of the premises for their business), would be commercially nonsensical and absurd.
Clause 39.3(c) of the lease provided that '[i]n the absence of manifest error, the determination of the expert is conclusive and binding on the parties'.
Challenge to expert determination
The landlord subsequently started court proceedings seeking that the expert determination be set aside on the basis that the expert, among other things, had made an error of law by incorrectly interpreting the lease. The landlord argued that the correct legal construction of the lease was that the tenant accepted the premises in an 'as is/where is' condition and also argued that the error made by the expert was an error of law, which must be a 'manifest error' for the purpose of clause 39.3(c) of the lease.
The primary judge disagreed with the landlords' argument that an error of law must by definition be a 'manifest error', and also found that the expert made no manifest errors in his determination. The landlord then appealed that decision.
Court of Appeal decision
The Court of Appeal, in a unanimous judgment, first considered the meaning of 'manifest error' to determine whether the primary judge had fallen into error regarding the expert's determination, and then examined whether the expert's determination was in fact infected by manifest error.
The Court of Appeal agreed with the primary judge's findings that a manifest error:
- can be an error of law or an error of fact; and
- must be apparent on the face of the determination or the reasons for the determination.
Martin SJA, with Morrison JA and Williams J agreeing, also further elaborated on the second point, by making reference to case authorities that defined manifest error to mean an error that is 'obvious rather than arguable' or 'easily demonstrable without extensive investigation'.
This position was contrasted with that of an error of law, which the Court of Appeal emphasised is something that either exists or does not exist, but nevertheless can take different forms. These forms include an error that is not readily evident on the face of determination and might only be apparent on a re-litigation of an issue in a court (i.e. not manifest).
The Court of Appeal applied this reasoning and noted that if an expert is engaged pursuant to a contract to make a determination on matters of contractual interpretation, then the proper contractual interpretation is a question of law meaning that there can only be one right answer.
However, the Court of Appeal emphasised the fact that an error of law can be a manifest error does not automatically mean that all errors of law are manifest errors, as the key requirement is to demonstrate that the error is manifest by being obvious on the face of the determination. It follows from this that there may be errors of law made by experts that are not readily apparent from their determinations and that are consequently not challengeable (in cases where a similar clause to clause 39.3(c) exists in the relevant commercial contract).
For these reasons, the Court of Appeal held that the primary judge was not in error in holding that an error of law must be manifest for it to come within clause 39.3(c) of the lease, and upheld the primary judge's findings that no manifest error was demonstrated in the expert's determination.
Comments
Expert determination clauses within commercial contracts can be a useful way to avoid some of the disadvantages of court proceedings.
How such clauses operate will depend on the particular terms of the clause and contract but generally the commercial objective of such clauses is to streamline the resolution of a dispute and get to a final and binding decision quickly. This means that in most cases there will be limited grounds for the unsuccessful party to challenge the decision of an expert.
Expert determination clauses leave open the opportunity for challenge in the case of 'manifest error'. To establish manifest error, a party would need to show an obvious and clear error on the face of the determination. An error of law may be a manifest error, but one should not assume that every error of law falls in that category.
Another potential line of challenge (that was not part of this case), is where the expert strays from the task they were contractually required to undertake. For example, an expert determination may potentially be set aside if the expert performs a different task to that set out under the contract or carries out their task in a way not within the contractual contemplation of the parties, objectively ascertained. Again, however, this path is not easy and will depend on the terms of the particular contract and the decision made by the expert.
When agreeing to contractual dispute resolution mechanisms, it is always very important to consider whether they are appropriate for your circumstances. For example, an expert determination clause may be useful to quickly resolve a dispute involving a relatively small amount of money or immaterial issue. However, where larger amounts of money or issues of enormous significance to the survival of a business are at stake, it is worthwhile considering whether court proceedings may be a more appropriate mechanism to rely upon.
While there is usually greater time and cost associated with court proceedings, they have the advantage of well‑established rules designed to ensure fairness and detailed consideration of the issues – with appeal rights where things go wrong.
Cooper Grace Ward is a leading Australian law firm based in Brisbane.
This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.