Vale Belvedere Pty Ltd v BD Coal Pty Ltd [2011] QSC 173

Judgment (99 paragraphs)

[1]

[1] The parties to these proceedings are joint venture partners in a coal mining project in Central Queensland. The plaintiff holds a 51% share and each of the defendants holds a 24.5% share. The joint venture is governed by a written contract which I will call the JVA.

[2]

[2] Pursuant to the JVA, the plaintiff was entitled to an option to acquire the interests of the defendants. It exercised that option on 2 June 2010. By cl 14.3 of the JVA, the plaintiff must pay the defendants for their interests a price as determined under cl 14.8. That clause provides that the price is to be the "Fair Market Value of a 49% Venture Interest determined under clause 15 as at the date of the [exercise of the plaintiff's option]". It is that process of determination which is the subject of their dispute.

[3]

[3] The JVA contains an extensive definition of "Fair Market Value". But in essence, it is the amount which would be paid and accepted by willing but not anxious parties, each acting with knowledge of all relevant facts. Clause 15 of the JVA sets out the process by which that Fair Market Value is to be determined. Each party is to instruct a valuer of its choice to value the interest. If the respective valuations are within 10% of each other, then the Fair Market Value and thereby the price will be the average of those valuations. If they differ by more than 10% and the parties are not able to agree a price, they must together appoint a further valuer, called the "Determining Valuer". They must instruct the Determining Valuer to make its own determination. The amount fixed by the Determining Valuer then becomes the price. However, the figure reached by the Determining Valuer must not be less than the lowest of the valuations which had been obtained by the parties individually.

[4]

[4] After the plaintiff exercised its option, the parties agreed that each of the defendants need not instruct a different valuer, but that instead only the first defendant would do so. Consequently two valuations were produced: one by Citigroup Global Markets Australia Limited on the instructions of the plaintiff and the other by RBC Capital Markets on the instructions of the first defendant. The former was a lower value than the latter and they were more than 10% apart. Accordingly, the defendants say, the parties must appoint the so-called Determining Valuer.

[5]

[5] But the plaintiff says otherwise. It claims that the valuation obtained by the first defendant, the RBC valuation, was not made according to the JVA and, in particular, was inconsistent with the definition of Fair Market Value. Therefore, the plaintiff argues, the occasion for appointing the Determining Valuer has not yet arisen and the defendants are obliged to cause a valuation to be made which does comply with the requirements of the JVA. By these proceedings it seeks declarations that the RBC valuation report is not a determination of the Fair Market Value in accordance with or for the purposes of the JVA and that the first defendant has not provided a valuation as required.

[6]

[6] The first defendant has applied to strike out parts of the statement of claim. But at least without those parts, the pleading would not disclose a cause of action, so that in practical terms, the question is whether it should be struck out entirely. The first defendant says that the pleaded case is an impermissible attack upon the merits of the RBC valuation. And to the extent that the plaintiff challenges the impartiality of RBC, the first defendant argues that the pleaded facts do not support that challenge.

[7]

[7] The plaintiff resists that application and cross-applies for orders for extensive disclosure of documents in the event that its pleading stands. The strike-out application must therefore be considered first.

[8]

[8] Before going to the pleading of the plaintiff's case, it is necessary to set out in full the relevant terms of the JVA. They are as follows:

[9]

'Fair Market Value' means, in relation to a Venture Interest, the amount that a willing but not anxious buyer would pay, and a willing but not anxious seller would accept, for the Venture Interest when they are both acting freely, carefully and with complete knowledge of the Venture Interest and all other relevant facts, determined as at the relevant date in accordance with the applicable standards prescribed by the Australasian Institute of Mining and Metallurgy for the valuation of interests in coal projects and following the procedure set out in clause 15. In making his valuation, the Valuer shall:

[10]

(a) assume that a reasonable time is available in which to obtain a sale of the Venture Interest in the open market;

[11]

(b) without limiting the valuation methodologies to be utilised by the Valuer, have regard to:

[12]

(i) the estimated discounted future cash flows associated with the Venture Interest calculated, unless agreed otherwise by the Participants, using a discount rate that references the average of the weighted average cost of capital of the independent listed coal companies in Australia (calculated by reference to publicly available information), adjusted appropriately for the level of risk associated with the Project as at the date of valuation; and

[13]

(ii) other recent similar acquisitions concluded under comparable terms and conditions and on an arm's length basis for coal deposits, resources and reserves, and considering the quality and quantity of the deposits, resources and reserves, development scenarios and inherent risks, mining type, location, proximity to and availability of infrastructure and ownership structure;

[14]

[15]

(d) have regard to the assumptions set out in the Feasibility Study (if any) approved under clause 6.1 with respect to the Project Area, to the extent they remain appropriate based on the best information available as at the date of valuation.

[16]

'Valuer' means a reputable international investment bank that:

[17]

(a) has its foreign currency long term rating assessed by at least one of the ratings agencies below at a minimum of:

[18]

(b) is ranked in the top ten investment banks in the league table issued by Thomson Financial or, in its absence, a reputable international database manager, considering concluded mergers and acquisitions transactions worldwide in the mining sector in the two years prior to the Valuer's appointment,

[19]

or such other appropriately experienced and reputable person approved by the other Participants prior to that person's appointment.

[20]

15.1 The Fair Market Value of a Venture Interest for the purposes of clauses 7.9, 7.11, 8, 12, 14 and 18.8(b) shall be determined in accordance with the procedure set out in the remainder of this clause 15.

[21]

15.2 The Relevant Participants shall each appoint a Valuer within 10 Business Days after the requirement to determine a Fair Market Value having arisen.

[22]

15.3 Each Valuer must be instructed to make a final determination of Fair Market Value within 20 Business Days of its appointment. The Relevant Participant appointing such Valuer must provide a copy of their Valuer's determination to all other Participants within 5 Business Days of receiving the Valuer's final determination.

[23]

15.4 If the determinations of Fair Market Value by each Valuer are within 10% of each other, the Fair Market Value for the purposes of this clause shall be set as the average of those determinations.

[24]

15.5 If the determinations of Fair Market Value by the Valuers differ by more than 10%, and the Relevant Participants are not able to agree a Fair Market Value within 10 Business Days of being provided the last of the Valuers' reports under clause 15.3, the Relevant Participants must agree upon a further Valuer ('Determining Valuer'). The Relevant Participants must jointly appoint and instruct the Determining Valuer to:

[25]

(a) undertake an assessment of the values determined by each Valuer based upon its own skills and experience in coal development projects similar to the nature of the Joint Venture; and

[26]

(b) make its own determination of Fair Market Value after assessing the appropriate assumptions to be utilised in determining Fair Market Value, provided that the Determining Valuer's determination of Fair Market Value must not be less than the lowest Fair Market Value determined by any Valuer.

[27]

15.6 The Determining Valuer must make a final determination of Fair Market Value within 20 Business Days of its appointment. The Relevant Participants must provide a copy of the Determining Valuer's determination to any other Participants within 5 Business Days of receiving the Determining Valuer's final determination.

[28]

15.7 A final determination of Fair Market Value by the Determining Valuer shall be deemed to be the Fair Market Value for the purposes of this clause 15.

[29]

15.8 The Relevant Participants must co-operate fully with the Valuers and any Determining Valuer and acknowledge that:

[30]

(a) the Valuers and any Determining Valuer act as an experts and not as arbitrators; and

[31]

(i) the Fair Market Value determined in accordance with clause 15.4; or

[32]

shall be final and binding on the Relevant Participants."

[33]

[9] The plaintiff makes many complaints about the RBC Report. But in essence it says that the RBC value was too high because of two things. The first is that the amount of the so-called coal resource, that is to say the coal able to be extracted from the mines held by or for the joint venture, was overstated. The second concerns the extraction of coal seam gas. The RBC value was upon the premise that there would be no net cost to the joint venture of extracting the gas, which is a necessary step prior to permitting coal mining to safely proceed. The plaintiff says that an impartial and rational valuer would have found that there was a very large net cost involved in extracting the gas.

[34]

[10] As to the amount of coal, RBC was briefed by the first defendant with, amongst other things, two reports described respectively as the 2008 SRK JORC Resources Report and the 2010 Salva JORC Resources Report. The estimate of the coal resource in the former was more than half as much again as the estimate in the latter report. The plaintiff pleads that the latter report was based on more extensive and current exploration, information and analysis and was "on the basis of any rational, expert view, a more reliable and up to date report". Accordingly, the plaintiff alleges, it superseded the 2008 Report. It further alleges that the first defendant's parent company, Aquila Resources Ltd, had said just that to the investing public in March 2010.

[35]

[11] Nevertheless, the plaintiff pleads, the RBC valuation adopted the estimate of coal resource which was within the 2008 Report. The pleading sets out what are said to have been RBC's reasons for doing so. One was that the 2008 Report used data from some 73 drill holes from an exploration program in 2005-06, whereas the 2010 Report used data from but 53 drill holes, from an exploration program in 2008-09 and did not consider the data from the 2005-06 program. Further, RBC reasoned, the 2008 Report included coal seams of a thickness greater than 1.5 metres, whereas the 2010 Report limited the coal resource to coal seams which were at least 2 metres in thickness.

[36]

[12] The plaintiff pleads that by using the estimated coal resource in the 2008 Report, RBC did not determine the Fair Market Value of a 49% Venture Interest in accordance with the JVA. That is alleged to be so firstly because what RBC had said about the data used in the 2010 Report was "incorrect and wrong as a matter of objective fact" on the face of the 2010 Report and another document, with which RBC had also been briefed, which is described as the 2010 Prefeasibility Report.

[37]

[13] The RBC valuation is also claimed to be "incorrect as a matter of objective fact", on the face of another document which was briefed to RBC, which was the so-called "24 February email" (from Salva Resources to the company which was the manager under the JVA). The effect of this email is said to have been that the adoption of a threshold of a 1.5 metre minimum coal seam thickness, rather than a 2 metre threshold, would add only an immaterial amount to the estimated coal resource. Therefore, the plaintiff pleads, RBC was wrong to have concluded that the 2008 estimate was correct because it was based upon the 1.5 metre threshold.

[38]

[14] Further, the plaintiff pleads[1] that RBC thereby proceeded upon an estimate of the coal resource which "was the most favourable to and slanted in favour of [the first defendant]..." and which "would not have been made by a willing but not anxious buyer and a willing but not anxious seller". It alleges that it thereby acted irrationally and inconsistently with the required assumption that the buyer and seller would know all the relevant facts, because to know all the relevant facts would be to know that the 2008 Report had been superseded.[2] It is claimed that the RBC Report did not "identify a sound, correct, rational or valid reason" for preferring the 2008 Report.[3] Upon those premises, the plaintiff alleges that the RBC Report was "...manifestly careless and had no rational basis" and did not determine the amount that the hypothetical buyer and seller would pay and accept.[4]

[39]

[15] Then there is a further variation upon this theme by the allegation that in using the 2008 Report, RBC acted upon information "which was wrong and inaccurate in an objective sense..." and upon which the hypothetical buyer and seller would not have acted.[5] It pleads that RBC thereby "failed to act rationally and in accordance with objectively known facts".[6] But importantly, the plaintiff goes further by alleging that in using the 2008 Report, RBC "failed to act impartially".[7] The particulars of that allegation are as follows:

[40]

"The failure to act impartially is inferred from the gross and serious nature of the inaccuracies, the fact that such inaccuracies favoured the interest of [the first defendant] and [certain other conduct]."

[41]

The other conduct referred to in the particulars has to some extent been mentioned already, and otherwise involves the plaintiff's complaints about RBC's treatment of coal seam gas extraction, to which I will come.

[42]

[16] Lastly on this subject, it is alleged that the use of the 2008 Report resulted in a non-compliance with the so-called VALMIN Code, which was one of the "applicable standards prescribed by the Australasian Institute of Mining and Metallurgy", as referred to in the definition of Fair Market Value. It is unnecessary to discuss the ways in which the VALMIN Code is said to have been disregarded. In essence, the plaintiff's complaints in this respect are that the 2008 Report was plainly out of date and could not have been considered as reliable.

[43]

[17] Within these many variants of the plaintiff's case, four types of complaint can be identified. Each involves more than a complaint that the valuer was simply in error. One is to the effect that RBC was wrong "as a matter of objective fact". The point here seems to be that this is more than a question of a valuer's opinion; rather the valuer was wrong on important factual matters. Secondly, there is the complaint that it was irrational to rely upon the 2008 Report. Thirdly, there is the complaint that the reliance upon the 2008 Report was "manifestly careless". Fourthly, there is the allegation of partiality or, if it was intended to be something different, the allegation that RBC used an estimate of the coal resource which was "slanted in favour of" the first defendant. Of the first three of those complaints, only the third is in terms resembling a "manifest error" which, according to cl 15.8 of the JVA, is the exceptional circumstance where the relevant valuation or valuations will not be "final and binding". Even then, the pleading does not clearly relate the allegation to cl 15.8.

[44]

[18] I come then to the complaints about coal seam gas. The plaintiff pleads that the 2010 Prefeasibility Report contained a detailed analysis of the need to extract coal seam gas prior to mining for coal, in the interests of the safe operation and productivity of the mine. The document is said to contain conclusions as to the estimated revenue to be generated from the gas and the costs of extracting it over the life of the mine, the effect of which is that the costs would exceed the revenues by about $1.7 billion.

[45]

[19] The RBC Report made an assumption that gas would be "economically extracted and monetised by a third party", at no net gain or loss to the joint venture. This assumption is said to have been adopted because of "an unidentified analysis" or "unidentified discussions with unidentified management of Aquila".[8] As purported particulars of that allegation, there is only this:

[46]

"[The plaintiff] requires disclosure to provide particulars of the analysis engaged in by RBC, if any, and of the content of the discussions with management of Aquila and the identifies of the people involved in those discussions."

[47]

[20] It is alleged that this assumption adopted by RBC was not justified by anything other than the "unidentified analysis" and "unidentified discussions", it was "wrong and inaccurate in an objective sense" having regard to the 2008 Prefeasibility Report, it was something which the hypothetical buyer and seller would not have acted upon and it involved a "failure to act rationally and in accordance with objectively known facts".[9] It is then alleged that the "unidentified management of Aquila" had no expertise or competence upon this subject and were not "experts" or "specialists" upon whom RBC could have relied consistently with a provision of the VALMIN Code.[10] There is also a complaint that the RBC Report did not identify the nature and contribution of these informants from Aquila, again contrary to the VALMIN Code.

[48]

[21] Then there is an allegation that this assumption was "most favourable to and slanted in favour of [the first defendant]".[11] In making the assumption, it is alleged, RBC did not determine the amount which the hypothetical buyer and seller would pay and accept with complete knowledge of all relevant facts. And again there is an allegation that RBC failed to act impartially, the particulars being:

[49]

"The failure to act impartially is inferred from the gross and serious nature of the divergence from the contents of the 2010 Preseasibility Report, the absence of any sound or valid reason for such departure, the fact that such divergence favour the interest of [the first defendant] and the other conduct [relating to estimating the coal resource]."

[50]

[22] So again, although it has many variants, this part of the case can be seen to involve complaints of certain kinds. They are the same kinds of complaints which are made in relation to the estimate of coal resources, except that here there is no allegation of "manifest carelessness".

[51]

[23] There are two other parts of the pleaded case, each involving an alleged failure to comply with the VALMIN Code. Clause 32 of that Code is said to require the valuer, "if more than one valuation method is used and, in consequence, different valuations result, ... [to] comment on how the valuations compare and the reason(s) for selecting the value adopted". It is alleged that the RBC Report used more than one valuation method but did not comply with that clause. Secondly, there is said to have been a non-compliance with cl 9 and cl 46 of the VALMIN Code, which provide that a valuer must disclose and explain within a report any departures from the Code and must declare in the report that it has otherwise been prepared in accordance with it.

[52]

[24] The first defendant submits that none of the alleged errors in the RBC Report could have the consequence that it is not a valuation for the purposes of cl 15 of the JVA. It argues that it is well-established that such an expert determination cannot be challenged simply upon the basis of a valuer's mistake or that the valuation is unreasonable. The argument relies in particular upon the judgment of McHugh JA, as he then was, in Legal & General Life of Australia v A Hudson Pty Ltd.[12] In that case there was a challenge to a valuation prepared by a valuer acting as an expert to fix a revised rent under a lease. The parties had agreed that the valuer's decision was to be "final and binding". This was a "speaking valuation", that is one which set out the reasons for its conclusions. In a passage which has been frequently applied, McHugh JA said:

[53]

"In my opinion the question whether a valuation is binding upon the parties depends in the first instance upon the terms of the contract, express or implied. This was pointed out by Sir David Cairns in the Court of Appeal in Baber v Kenwood Manufacturing Co Ltd (at 181). A valuation obtained by fraud or collusion can usually be disregarded even in an action at law. For in a case of fraud or collusion the correct conclusion to be drawn will almost certainly be that there has been no valuation in accordance with the terms of the contract. As Sir David Cairns pointed out, it is easy to imply a term that a valuation must be made honestly and impartially. It will be difficult, and usually impossible, however, to imply a term that a valuation can be set aside on the ground of the valuer's mistake or because the valuation is unreasonable. The terms of the contract usually provide, as the lease in the present case does, that the decision of the valuer is 'final and binding on the parties'. By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision. It is now settled that an action for damages for negligence will lie against a valuer to whom the parties have referred the question of valuation if one of them suffers loss as the result of his negligent valuation: Sutcliffe v Thackrah [1974] AC 727; Arenson v Arenson [1977] AC 405. But as between the parties to the main agreement the valuation can stand even though it was made negligently. While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract."

[54]

That judgment has been consistently applied in Queensland: see e.g. Wickham Properties Pty Ltd v Astor Motel Pty Ltd;[14] Norco Co-operative Ltd v Pauls Trading Pty Ltd & Anor;[15] Yarraman Pine Pty Ltd v Forestry Plantations Queensland;[16] Corpco No. 23 Pty Ltd v J S Hemingway Investments Pty Ltd;[17] Andrews v Qld Racing Limited (No 2).[18]

[55]

[25] Secondly, it is argued for the first defendant that the suggested errors of RBC cannot be relied upon because they do not "appear on the face of the RBC Report". This argument is based upon Mayne Nickless Limited v Solomon,[19] which also concerned a provision of a lease by which the rent was to be fixed according to a valuation and where the valuation which was challenged was a speaking valuation. The case had been tried in the District Court by a full investigation of the merits of the valuation. Upon the appeal, the principal judgment was given by Sheahan J, with whom Lucas SPJ and Kelly J agreed. After extensive reference to authority, Sheahan J said that he was prepared to assume that a speaking valuation "is open to be impeached and set aside for mistake", but that such a mistake must "appear on the face of the valuation", that is to say that it "must appear from a reading of the valuation and not from cross examination of the valuer and answers elicited therein ...".[20]

[56]

[26] The first defendant submits that this was followed by the Court of Appeal in Wickham Properties Pty Ltd v Astor Motel Pty Ltd, where Moynihan J said that Mayne Nickless is:

[57]

"... authority for the proposition that, assuming that [a speaking valuation may be impeached for error], the errors must appear on the face of the valuation rather than depend on extrinsic evidence to establish them."[21]

[58]

[27] However, in Kanivah Holdings Pty Ltd v Holdsworth Properties Pty Ltd,[22] Palmer J thought that in Mayne Nickless Sheahan J was not meaning to say that "evidence extrinsic to the determination itself is never admissible on the issue whether the determination has vitiated by error", but rather that "the Court should not entertain a contest as to the validity of a speaking valuation on a particular ground unless the complainant can point to something on the face of the determination which gives a foundation to the claim of vitiating error on that ground".[23]

[59]

[28] The first defendant submits that none of the alleged errors appear on the face of the RBC Report. The plaintiff submits that, if it matters, the errors do appear from the report because the report should be taken to include the documents referred to within it, and in particular the 2008 and 2010 (Resource) Reports, the 2010 Prefeasibility Report and the 24 February email.

[60]

[29] As to the complaints of non-compliance with the VALMIN Code, the first defendant argues that it is not an "applicable standard" within the definition of Fair Market Value. It is unnecessary to discuss the detailed submission which was developed in that respect. The outcome of this strike-out application should not depend upon this question, for it would necessarily involve a factual enquiry to determine whether, as the first defendant argues, the code is applicable only in the context of expert reports which are to be publicly released for a purpose regulated by the laws governing corporations, the ASX or other stock exchanges.

[61]

[30] As to the allegations of partiality, the first defendant argues that the pleaded case cannot succeed, without the addition of an allegation which attributes dishonesty to RBC. The plaintiff's counsel disavow a case of dishonesty, but submit that there was a partiality in the sense that RBC allowed itself to the overborne by the first defendant so that without realising it, RBC lost its independence and acted according to the first defendant's direction. The plaintiff argues that this was sufficient to invalidate the RBC Report, relying upon Hickman & Co v Roberts & Ors.[24] In that case a builder sued the building owners claiming payment under a contract which provided that payment should be made on the certificate of the architect. The architect, under a misapprehension of his role, allowed himself to be influenced by the building owners and wrongly delayed issuing his certificates. In those circumstances, the building owners were held to be precluded from defending the action on the basis that the certificate was a condition precedent to the bringing of the action or that the final certificate, which was issued after its commencement, was conclusive as to the amount of the claim. Lord Loreburn L.C. said that it was not a case of fraud on the part of the architect, but that his error was "that he mistook his position; that he meant to act as a mediator; that he had not the firmness to recognise that his true position was that of an arbitrator and repel unworthy communications made to him by the defendants".[25]

[62]

[31] In the passage which I have cited from McHugh JA's judgment in Legal & General Life, his honour referred to the implication of a term that a valuation must be made "honestly and impartially".[26] Counsel for the plaintiff submit that this shows that they are distinct requirements and that a valuation might be impeached for partiality whilst not being made dishonestly. In general, that must be accepted. An expert might be biased in favour of one side of a controversy without being necessarily corrupt. The difficulty here, however, is in understanding the pleading of RBC's partiality in that way. For example, there is no allegation of facts by which RBC came to this task with less than an open mind, such as by having considered the same questions upon a previous occasion. Nor is there any allegation that RBC was overborne by the defendants such that it misapprehended its role. As I read the pleading, the case is that no valuer could have made such serious errors and such baseless assumptions in the face of incontrovertible evidence, unless it was trying to help the defendants' cause. But that is the case which the plaintiff's counsel disavowed in argument. Accordingly, the pleaded case is not intended to be the plaintiff's case and the allegations of impartiality should be struck out.

[63]

[32] I return then to the question of whether, absent partiality, the matters alleged by the plaintiff could have the result that the RBC Report is not a valuation for the purposes of cl 15 of the JVA.

[64]

[33] There is a substantial debate here as to the effect of Mayne Nickless. The argument for the plaintiff disputes its authority for the proposition that a vitiating error must appear on the face of the valuation, but adds that such a proposition is inconsistent with the judgment of McHugh JA in Legal & General Life which, as I have said, has been consistently applied. As to that, no subsequent decision of the Full Court or the Court of Appeal of Queensland has expressly overruled Mayne Nickless. What was there said about the need for an error to appear on the face of the valuation was plainly obiter dictum, because Sheahan J concluded that none of the suggested errors of the valuer were proved, by evidence or otherwise. Moreover, his Honour was inclined to the view that a valuation, speaking or non-speaking, should not be impeachable for any error or mistake.[27] And in Wickham Properties Pty Ltd v Astor Motel Pty Ltd, Moynihan J noted that Mayne Nickless had left open the question of impeaching a valuation for error, holding that the valuation in that appeal had effect because it had not been demonstrated that the valuer acted "other than conformably with the contractual arrangements between the parties".[28] Accordingly, I am not bound to hold that an expert determination of this kind is impeachable, if at all, only if the error appears on the face of the expert's written decision.

[65]

[34] The plaintiff's argument cited several cases where a valuation in this context was impeached for an error of the valuer. One is Holt & Anor v Cox,[29] where an auditor of a company was required to determine a "fair price" for which some of its shares were to be sold. The auditor valued the shares on the basis of a capitalisation of future maintainable dividends. The shareholder refused to transfer the shares at that value, contending that the auditor had ignored the possibility of a members' winding up of the company, which would result in a distribution to shareholders in excess of the amount which had been assessed as the "fair price". A majority of the New South Wales Court of Appeal (Mason P and Priestley JA, Cole JA dissenting) held that the auditor's determination was not binding because, by disregarding the possibility of a winding up, he had not determined the "fair price". The case turned upon the construction of the provision by which the determination by the auditor was to be made and, in principle, the judgment is entirely consistent with that of McHugh JA in Legal & General Life, which was extensively discussed. Mason P said:

[66]

"A close reading of McHugh JA's judgment in Legal & General indicates that his Honour was not propounding the view that a valuation will stand regardless of error. Rather he was making the point that mistake is not itself a ground of vitiation: see also Wamo Pty Ltd v Jewel Food Stores Pty Ltd (1983) ANZ Conv R 50. A valuation may contain factual error or embody consideration of matters which should not have been taken into account, but it does not follow that the result is outside that which the contract contemplated would be within the realm of determination by the valuer. As McHugh JA makes plain, 'in each case the critical question must always be: Was the valuation made in accordance with the terms of [the] contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value' (emphasis added). The statement in the next sentence ('Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account') must be read in the same context. His Honour is not saying that these matters are never relevant. Rather he is saying that they are not relevant if the valuation was in accordance with the terms of the contract.

[67]

I have already mentioned Sir Frederick Jordan's apophthegm about 'mistakes and mistakes'. It was uttered in a mandamus case. It seems to me that administrative law provides a useful analogy in the present context. There, the decision maker has an area within which he or she may make mistakes, even mistakes of relevance or law, without failure to exercise the jurisdiction conferred, or exposing the decision to quashing. It is only those mistakes which involve a failure to address something which the statute requires to be taken into account that will expose the decision to judicial review on jurisdictional grounds: Sean Investments Pty Ltd v MacKellar [1981] FCA 191; (1981) 38 ALR 363 at 385 (Deane J); Minister for Aboriginal Affairs v Peko-Wallsend Ltd [1986] HCA 40; (1986) 162 CLR 24 at 39; [1986] HCA 40; 66 ALR 299. The criteria of discrimination between 'mistakes and mistakes' are not determinable in advance: cf R v Australian Broadcasting Tribunal; Ex parte 2HD Pty Ltd [1979] HCA 62; (1979) 144 CLR 45 at 49; 27 ALR 321."[30]

[68]

[35] In AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd & Anor[31] an expert determination was set aside because it was based on erroneous data. The principal judgment was given by Nettle JA, who said:

[69]

"... [T]he question of whether it is open to review an expert determination on the ground of error is in the first place to be decided according to the whether the determination answers the contractual description of what the expert was required to determine."[32]

[70]

His Honour agreed with Mason P's analogy of cases of judicial review of administrative error and continued:

[71]

"Turning then to the judge's reasoning about the overriding nature of the determination of the Reconciliation Amount, I have already observed that it does not necessarily follow from the fact that a determination is of an overall discretionary or judgmental nature that those of its elements which are matters of objective fact or mere mechanical calculation are to be treated as being of a discretionary or judgmental nature. In each case the question is one of what the parties intended. Logic suggests, and the course of authority tends to confirm, that parties more often than not intend that the discernment of objective facts and mechanical calculations on which a determination is to be based should be subject to review. Hence the conclusion reached in Holt v Cox that the failure of a valuer to have regard to one of the facts upon which his opinion should have been based meant that his valuation was not in accordance with the contract."[33]

[72]

[36] Putting to one side the first defendant's argument based upon Mayne Nickless, the respective arguments accepted that the extent to which error might vitiate an expert determination turns upon the proper interpretation of the contract by which the determination is required. In that exercise of interpretation, care must be taken in considering judgments where the outcome depended upon the terms of different contracts. In each case, the contract must be interpreted to see whether the expert determination is one by which the parties have agreed to be bound. That requires an assessment of what the parties agreed that the expert should do. Importantly, it also involves an assessment of what the parties agreed should be the consequence, if any, of the expert not doing everything which they had agreed he would do. They may have agreed, for example, to appoint a valuer upon the usual basis that the valuer would act with reasonable skill and care. But it does not follow that the agreed consequence of a negligent valuation is that they are not bound by it. That consequence or otherwise depends upon the terms of the contract upon their proper interpretation.

[73]

[37] Accordingly, I would respectfully disagree with the general proposition which the first defendant's argument seeks to draw from Mayne Nickless. It is for the parties to a contract to agree as to when they will or will not be bound by the purported determination of an expert. They are not constrained in that respect by some overarching principle as the first defendant's argument would suggest. Nor should this suggested rule affect the proper interpretation of their contract.

[74]

[38] On the plaintiff's case, a valuation which, perhaps only after an extensive factual enquiry, can be shown to depart in some respect from the requirements expressed within the definition of Fair Market Value is not one which has any effect under cl 15. For example, if the valuer was ignorant of and therefore did not consider some fact which would be relevant to the hypothetical buyer and seller referred to in that definition, then the valuation would not be one of Fair Market Value. The results of this interpretation could be highly problematical. The entirety of the "relevant facts" might not be ascertainable by the valuer, at least within the relatively short period of 20 business days allowed for the exercise. And whether such a fact was considered by the valuer might never become apparent, or at least until well after the agreed sequence of events by which the price is to be determined and paid. A further problem is that many of the requirements imposed on a valuer involve matters of professional judgment. The plaintiff's argument appears to accept, as it must, that valuers could reasonably differ upon such matters. But it argues that a valuation will be ineffective where there is some step in the valuer's reasoning which has no reasonable basis. That provides a very considerable scope for investigating the valuer's reasoning, an investigation which might be lengthy as well as expensive. Considerations such as these show the tension between the plaintiff's interpretation of these terms of the JVA and their apparent object of providing a means for fixing a price, where it cannot be agreed, by a process which will provide, not only fairness, but also will resolve a disagreement rather than compounding it. The express requirements placed upon the valuer, within this definition of Fair Market Value, cannot be ignored. The question is what the parties have agreed should be the consequence of a non-compliance with them. The answer is revealed by what the parties have expressly agreed, within cl 15.8 of the JVA, should be the basis for challenging a valuation by which the price would be fixed.

[75]

(i) the Fair Market Value determined [by averaging the respective valuations where they are within 10% of each other]; or

[76]

shall be final and binding on the Relevant Participants."

[77]

The apparent intention is to limit the basis for challenging any valuation under cl 15 to the case of an error which is "manifest". But the plaintiff submits otherwise. Upon its argument, there are errors which although not manifest, might result in the valuation being ineffective, because they involved a failure to comply with the requirements within the definition of Fair Market Value. In those cases, it is said, there would be no determination of the Fair Market Value at all for the purposes of cl 15, and cl 15.8 would not be engaged. The plaintiff then submits that cl 15.8, by providing for the exception of manifest error, was intended to provide an additional means by which a purported valuation would be ineffective.

[78]

[40] I am unable to accept that argument, which attributes a complexity to the operation of this scheme of dispute resolution which the parties cannot be thought to have intended. The evident intent of cl 15.8 is to limit the circumstances in which the valuation could be challenged, rather than to widen them. The parties have agreed to balance the competing considerations of accuracy against certainty and finality by depriving the valuation of effect but only where there is a manifest error. That is not only because such an error would be apparent, without the need for any substantial factual inquiry, but also because it could be promptly corrected. An error in complying with the requirements imposed within the definition of Fair Market Value would make the valuation ineffective for the purposes of cl 15 as long as it was a manifest error. In using this expression, the parties appear to have imported the notion of a manifest error from s 38(5) of the uniform Commercial Arbitration Act 1990 (Qld) which is a basis for reviewing the decision of an arbitrator (although in this case the manifest error need not be one of law and the process is one of expert adjudication rather than arbitration).

[79]

[41] Of course cl 15.8(b) governs two situations, neither of which exist here. The first is where the respective valuations obtained by the parties are within 10% of each other. The second is where the Fair Market Value has been determined by the Determining Valuer. Nevertheless, cl 15.8 is critical to the construction of cl 15 as a whole. It cannot have been intended that where the amount of a valuation does matter in the quantification of the price, there should be a more limited scope for its review (i.e. manifest error) than where, as here, the amount of the valuation price will not affect in any way the quantification of the price. In the present case, because the valuation obtained by the plaintiff is lower than the RBC valuation, it is the plaintiff's valuation which will provide the constraint upon the Determining Valuer, which is that its own determination of Fair Market Value must not be less than the lower of the two values thus far produced.[34] I would accept that a manifest error in the plaintiff's valuation (if any) could provide a basis for challenging the determination of the Determining Valuer, if it affected what otherwise would have been that determination. But the RBC valuation can have no effect of that or any other kind. The Determining Valuer would not be bound or constrained by RBC's analysis, because the contract requires the Determining Valuer to undertake an assessment of the values determined thus far, using its own skills and experience to make its own determination.

[80]

[42] Absent a valuation affected by a manifest error, what suffices as a determination of Fair Market Value for the purposes of cl 15.4 or cl 15.7? It is a determination of "the amount that a willing but not anxious buyer would pay, and a willing but not anxious seller would accept, for the Venture Interest when they are both acting freely, carefully and with complete knowledge of the Venture Interest and all other relevant facts". It can be seen that the parties have agreed in terms which derive from the formulation in Spencer v The Commonwealth.[35] The valuer must treat the hypothetical buyer and seller as fully informed of the relevant facts. But if the valuer itself is mistaken as to any of those facts, the outcome remains a determination, or in other words a professional opinion, of the amount that would be paid and accepted under the required hypothesis. By necessary implication, that determination must have been made honestly and impartially. The parties have agreed that the valuer should make its determination according to the requirements within the definition of Fair Market Value, beginning with the requirement that the value be determined in accordance with the applicable standards. But they have agreed that an error in complying with those requirements or some other error absent the case of manifest error, will not make the determination ineffective for any of the steps within cl 15.

[81]

[43] As I have discussed, this pleading proceeds upon quite a different interpretation of the JVA. It does not limit its complaints to what are said to be manifest errors in the RBC Report. And to the extent that it does plead something of that kind (i.e. manifest carelessness), it does not reveal how that would matter to the determination of the Determining Valuer.

[82]

[44] For these reasons, the statement of claim will be struck out. That puts paid to the plaintiff's disclosure application, which will be dismissed.

[83]

[1] Amended Statement of Claim filed 30 March 2011 paragraph 34(e).

[84]

[12] (1985) 1 NSWLR 314.

[85]

[14] [1994] 1 Qd R 211 at 214.

[86]

[15] [2006] QSC 166 at [27].

[87]

[16] [2009] QCA 102 at [9] and [48].