Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd & Anor

Supreme Court of Victoria|2008-11-13|Before: HARGRAVE J

EXPERT DETERMINATION - Contractual valuation binding on parties - Valuation certificate set aside as not in accordance with the contract and thus not binding on the parties - Whether valuation ought to be remitted to the original valuer or another valuer - Principles to be applied - Contractual valuation procedure to recommence - New valuer to be appointed.

1 The plaintiff Candoora No. 19 Pty Ltd ("Candoora") and the first defendant Freixenet Australasia Pty Ltd ("Freixenet") are the only shareholders in the second defendant Wingara Wine Group Pty Ltd ("Wingara"). Candoora and Freixenet accept that their relationship as shareholders in Wingara is governed by a draft shareholders deed prepared in 2007. The shareholders deed annexes a draft put option deed, which is also accepted as binding Candoora and Freixenet ("the put option deed").

2 On 2 November 2007 Candoora gave notice that it intended to exercise the option granted to it under the put option deed, thus requiring Freixenet to purchase its 25 per cent shareholding in Wingara.

3 After agreement could not be reached on the put option price, Candoora and Freixenet agreed to appoint an expert valuer, Ernst & Young Transaction Advisory Services Limited ("Ernst & Young"), to determine the "fair value" of Candoora's shares in Wingara. The put option deed provides that the expert's determination is binding on the parties.

4 On 19 September 2008 this Court determined that the resulting valuation certificate prepared by Ernst & Young was invalid, because the valuation upon which it was based was not made in accordance with the put option deed. The valuation certificate was set aside.[1] Upon inviting the parties to agree on the precise form of the declaration and orders to give effect to the Court's judgment, an issue arose as to whether the valuation should be remitted to Ernst & Young for re-determination or whether a different valuer should be appointed under the contractual mechanism contained in the put option deed.

5 It was submitted on behalf of Candoora that the re-determination of the fair value of its shares in Wingara should be conducted by an independent expert valuer, other than Ernst & Young, to be agreed on by the parties or, in the absence of such agreement, that a valuer other than Ernst & Young should be appointed by the President for the time being of the Institute of Chartered Accountants (Victorian Branch). Appointment by the President is the contractual mechanism provided for in the put option deed where agreement is not reached. Alternatively, it was submitted that a valuer other than Ernst & Young should be appointed by the Court under order 50 of the Supreme Court (General Civil Procedure) Rules 2005, which provides for reference to a special referee.

6 It was submitted on behalf of Candoora that it has, as would a fair-minded and informed observer, a reasonable apprehension that Ernst & Young would not bring an impartial mind to bear on the contractual task if the further valuation is remitted to it for re-determination. It was submitted that such an apprehension arises from the fact that Ernst & Young may defend its professionalism by arriving at a valuation which coincides with or is near to the impugned valuation, that Ernst & Young is subject to the risk that it may be liable to the parties as a result of the impugned valuation and that, subsequent to making its valuation determination, Ernst & Young has demonstrated a propensity to support that valuation as one which accords with the contractual obligation to determine fair value under the terms of the put option deed. In this latter regard, Candoora places emphasis upon a letter dated 12 May 2008 written by Ernst & Young to the solicitors for Freixenet, in which Ernst & Young stated:

You have advised, in a letter dated 9 May 2008, that [you] act for Freixenet SA and Freixenet Australasia Pty Ltd. You have then sought our confirmation in writing that the opinion we have "expressed in the Valuation Report on the fair value of Wingara shares is consistent with the opinion required under the terms of Schedule 1 of the Put Option Deed". We hereby confirm that the opinion we have expressed in the Valuation Report on the fair value of Wingara shares is consistent with the opinion required under the terms of Schedule 1 of the abovementioned Put Option Deed.

7 It was submitted on behalf of Freixenet that "the usual consequence" would be for Ernst & Young to prepare a further valuation in accordance with the put option deed. Reliance was placed on the following passage in the fourth edition of the text Expert Determination:

The usual consequence of a material departure from instructions is that the expert must come to a new decision in accordance with the instructions, as clarified by the court, and it is not usually appropriate for the court to fill the gap by ordering an enquiry.[2]

8 Freixenet contends that Candoora has failed to establish why this Court should depart from the usual course

9 Where an otherwise binding contractual determination by an expert is set aside by a court, it is open for the parties to agree that the same expert should re-determine the matter which was the subject of the contractual reference. The recent case of Eureka Funds Management Limited & Anor v Freehills Services Pty Ltd provides an example of this.[3] In that case, like here, the Court set aside the contractual determination by the expert because that determination was not made in accordance with the contract. Given the attitude of the parties, the Court of Appeal ordered that the contractual task be remitted to the same expert who had prepared the impugned determination.

10 In this case, there is no such agreement. The Court must determine whether or not a new valuer should be appointed to conduct the contractual reference. The parties were unable to direct the Court's attention to any case which states the principles to be applied in determining such an issue.

11 On behalf of Candoora, substantial reliance was placed upon the decision of Dodds-Streeton J (as she then was) in Beevers & Anor v Port Phillip Sea Pilots Pty Ltd & Anor.[4] In that case, the relevant contract provided for a determination of the fair selling value of shares in a company by the company's auditor. The resulting valuation was set aside because the auditor did not perform it with a sufficient degree of independent skill, judgment and impartiality.[5] As the contract did not provide for any alternative mechanism to appoint a different valuer in the event that the company's auditor was unable or disqualified from doing so, her Honour ordered under order 50 that the contractual valuation be performed by a special referee appointed by the Court.[6]

12 Beevers is not authority for the proposition that, whenever a court sets aside a contractual determination by an expert, the court can or should refer the re-determination to a special referee. The Court was there placed with a contractual mechanism which had broken down because the specified expert was not impartial. In that circumstance, it was for the Court to step in and provide machinery to carry into effect the intention of the parties that there be a binding valuation. The use of the procedure under order 50 was a practical approach determined by the Court in that circumstance and was in accordance with authorities concerning circumstances where, for one reason or another, the contractual machinery is defective or has broken down.

13 For example, in Cameron v Cuddy the Privy Council considered a case where the contractual reference to arbitration had become abortive.[7] The judgment of their Lordships was delivered by Lord Shaw of Dunfermline. It appears that there was no relevant statutory context, and that the matter was governed by contractual principles, as here. Lord Shaw stated the applicable principle in the following terms:

When an arbitration for any reason becomes abortive, it is the duty of a Court of law, in working out a contract of which such an arbitration is part of the practical machinery, to supply the defect which has occurred. It is the privilege of a Court in such circumstances and it is its duty to come to the assistance of parties by the removal of the impasse and the extrication of their rights. The rule is in truth founded upon the soundest principle, it is practical in its character, and it furnishes by an appeal to a Court of justice the means of working out and of preventing the defeat of bargains between parties.[8]

14 The jurisdiction of a court to supply machinery to enable a valuation to take place where the contractual machinery has been frustrated is subject to the limit that the prescribed contractual machinery is not an essential and indispensable part of the contractual bargain.[9] In this regard, it has been stated that the nomination of a single expert valuer, such as a company's auditor, affords a possible example of contractual machinery which is essential and indispensable.[10] However, even in such a case, it has been held that alternative contractual machinery may be ordered by the court where the nominated valuer lacks the necessary expertise to perform the task.[11] It is unnecessary to further consider such cases.

15 This is not a case where the contractual machinery agreed upon by the parties has failed. Rather, the expert chosen by them has failed to properly undertake the task. The valuation certificate has not been set aside on grounds of partiality, incompetence or other grounds of incapacity on the part of the valuer. If the Court orders that a valuer other than Ernst & Young conduct the re-determination of fair value, the contractual machinery can recommence. In these circumstances, I do not consider that the Court can simply impose an alternative machinery upon the parties for the purpose of determining the fair value of Candoora's shares in Wingara.

16 The first issue to be considered in approaching a case such as the present is the proper interpretation of the relevant contract. It is possible that the relevant contract will contain an express provision as to what is to take place if an expert determination is set aside by the Court. Further, it is possible, but highly unlikely, that the Court will be able to fashion an implied term to deal with the issue. An implied term is highly unlikely because no clear term could be fashioned to cope with the various circumstances in which the Court may set aside an expert determination.

17 For example, if a determination is set aside on the ground of fraud or actual partiality in the process, the parties would doubtless be taken to intend that, upon the determination being set aside, a different expert should be appointed under the contractual machinery. At the other extreme, where a determination is set aside because of an error which results from the expert being provided with facts which are objectively wrong, and there is no reason to suppose that the expert will not be able to arrive at a just determination if the matter is remitted after that error has been pointed out, the parties would usually be taken to have intended that the same expert re-determine the question referred under the contract. An example of such a situation is that which confronted the Court of Appeal in AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd,[12] although in that case no issue arose as to whether remission was the appropriate course.

18 However, there are other cases in between these extremes, where an implied term could not govern the situation. Generally speaking, if the parties to a contract were asked, at the time of signing it, whether or not the same expert should re-determine the contractual question after the Court has set aside the determination, they would probably answer: "It all depends upon the reason why the determination was set aside."

19 Putting to one side the possibility of a contractual term dealing with the issue, it is for the Court to give direction to the parties where there is a dispute, as here, as to whether or not the contractual question should be re-determined by the same expert whose determination has been impugned. It goes without saying that in giving direction to the parties, the Court should consider all of the relevant circumstances of the case before it. No two cases will be alike. However, I think that there are some general statements which can be made which will be of assistance in future cases where this issue arises.

20 In my view, whilst recognising the differences between a contractual determination by an expert who is not acting as an arbitrator and awards made by arbitrators, and taking into account the contractual intention of the parties that the law governing arbitral awards is not to apply to the expert determination arising under their contract, considerable assistance is to be gained from the approach taken by courts to the question of whether an impugned arbitral award should be set aside or remitted to the arbitrator for re-determination in accordance with the court's reasons. In this regard, courts have a wide discretion under the arbitration legislation in Australia and in the United Kingdom.

21 In Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd,[13] Stephen J stated that the power to remit an impugned arbitral award under statute is a wide and unfettered discretionary power, the exercise of which depends upon "the exact facts in each case."[14] Stephen J concluded that remission was appropriate in that case because:

Justice to the parties appears to me to call clearly for remission rather than setting aside, there being nothing whatever to suggest that the arbitrators will not satisfactorily deal with the matter in accordance with the judgment of this Court if remitted to them.[15]

22 In Lovell Partnerships (Northern) Limited v AW Construction Plc,[16] Mance J considered whether the Court should set aside an interim award and to remove the arbitrator or to remit the matter to the arbitrator for re-determination. Mance J stated that the choice between the two alternatives should be resolved by application of the following test:

The legal test is whether a reasonable person would no longer have confidence in the present arbitrator's ability to come to a fair and balanced conclusion on the issues if remitted.[17]

23 This statement by Mance J provides a useful factor to be taken into account in considering the facts of a particular case. It should not be applied in this context, or indeed in an arbitration context, as a "legal test" which fetters the Court's discretion. However, its consideration will ensure that it is only where the objection raised to the same expert who prepared the impugned determination is reasonably based that the Court will, in the usual case, direct that the re-determination take place before a different expert.

24 Counsel for Candoora relied upon a series of cases concerning judicial review of administrative action, and submitted that a similar approach should be adopted in determining whether it is appropriate to direct that re-determination of an impugned expert determination should be conducted by the same or an alternative expert. Reliance was placed upon the well-known statement by Ormiston J (as he then was) in Body Corporate Strata Plan No. 4166 & Ors v Stirling Properties Ltd (No. 2) that:

where the reasons are partly defective, in the sense that not all issues have been dealt with, then an order compelling delivery of further or better reasons would have an air of unreality about it. Such an order would merely give a tribunal an opportunity to patch up what has been shown to be defective in circumstances where it is more than likely that the tribunal overlooked the issue altogether.[18]

25 I do not accept that the administrative law cases provide an appropriate analogy. Although some guidance may be gained from them as to the justice of a particular case, the focus upon issues of procedural fairness may lead to error if statements in that context as to whether remission should occur to the same tribunal were to be adopted for the purpose of determining the issue raised for consideration in cases such as the present. The case of Macro v Thompson (No. 3) provides an example of the difference in approach between the administrative law cases and the contractual determination context.[19] In that case, it was held that actual partiality, rather than the mere appearance of partiality, was necessary in order to justify setting aside a contractual determination.[20]

26 The mere fact that objection is taken by a party who is dissatisfied with the expert determination should not be enough. If it was, the party who is dissatisfied could object for no good reason other than the desire to achieve a different result, or to cause increased cost and inconvenience to the other party, in circumstances where such an approach would not be in accordance with the purpose of the binding expert determination provisions of the contract. For example, where the only objection to the expert's determination is one based upon a mistake as to an objective fact, such as in AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd,[21] it would usually be unreasonable to object to remission to the same expert.

27 In my view, reasonable persons in the position of parties who have agreed to resolve their disputes by a binding expert determination are, depending upon the surrounding circumstances of each contract, unlikely to intend that one party will have the unqualified right to object to a re-determination of the contractual question by the expert whose determination is set aside. Such a result does not accord with commercial commonsense and should only be attributed to contracting parties where they have, on the proper construction of their contract in light of the surrounding circumstances, so agreed.[22]

28 I do not accept Freixenet's submission that the statement in the text relied upon establishes that there is a "usual consequence", or general rule, which should be applied in the absence of good reason being shown to the contrary. Each case must be decided upon its own facts. Of course, I accept that there will be cases where a direction by the court that a new expert should be appointed will cause delay, increased cost and inconvenience. However, these are matters which are to be taken into account in the exercise of discretion on the facts of each particular case.

29 I do not accept the submission made on behalf of Freixenet that, in all the circumstances of this case, the parties should remain bound by their agreement to appoint Ernst & Young as the valuer for the purposes of the put option notice served by Candoora. In the circumstances of this case, it would be inappropriate for Ernst & Young to conduct any subsequent valuation.

30 In my view, Candoora's objection to Ernst & Young re-determining the value of its shares in Wingara is justified. Viewed objectively, there are reasonable grounds for Candoora to assert that it is not confident that Ernst & Young will bring a fair and balanced mind to any further valuation. First, this Court has found that Ernst & Young gave no consideration to the governing criterion of fairness in preparing its valuation. The failure to give any consideration to the governing contractual criterion is a matter about which Candoora is entitled to feel real concern. The error was of a most substantial kind. Second, Ernst & Young have, since concluding their contractual task, demonstrated a propensity to support the impugned valuation. The letter of 12 May 2008 should not have been written by Ernst & Young. At that time, their contractual task had been completed. The fact that the letter was written provides a basis for Candoora ceasing to have the necessary confidence that Ernst & Young will approach a re-determination of the required valuation in a fair and balanced manner.

31 I will accordingly order that the parties agree to the appointment of a valuer other than Ernst & Young and that, in default of such agreement, Wingara request that the President for the time being of the Institute of Chartered Accountants (Victorian Branch) appoint a valuer other than Ernst & Young.

[1] Candoora No. 19 Pty Ltd v Freixenet Australasia Pty Ltd & Anor [2008] VSC 367.

[2] John Kendall, Clive Freedman and James Farrell, Expert Determination (4th ed, 2008), 246.

[9] Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444.

[11] Macro & Ors v Thompson & Ors (No. 3) [1997] 2 BCLC 36, 61.

[18] [1984] VicRp 73; [1984] VR 903 at 912. Reference was also made to Northern NSW FM Pty Ltd v Australian Broadcasting Tribunal (1990) 26 FCR 39 at 42-3 and Vegco Pty Ltd & Anor v Gibbons [2008] VSC 363 at [33].

[20] Ibid 64-5. Whether or not this aspect of the case should be followed was left open by Dodds-Streeton J in Beevers [2007] VSC 556 at [266]- [272] and [299]-[300].

[22] Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451, [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, [40].

Court (General Civil Procedure) Rules 2005

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