Has the expert gone beyond the mandate? The importance of accurately defining the 'dispute' in expert determination agreements

Lepcanfin Pty Ltd v Lepfin Pty Ltd [2020] NSWCA 155

Contracting parties often agree to refer disputes arising under their commercial, or construction, contracts to a mandatory expert determination process as a threshold dispute resolution step prior to any arbitration or litigation. To give effect to such an expert determination process, parties will include in their contract an Expert Determination Agreement (EDA). An integral part of the EDA will be the parties' definition of a 'dispute' which is capable of being referred to the expert for determination.

What happens when the parties disagree as to whether a dispute actually arising under the contract comes within the EDA definition of 'dispute'? And, consequently, when one of those parties believes the expert has exceeded the contractual mandate and considered issues outside the 'dispute'? Will a court uphold the resulting expert determination as enforceable?

A recent decision of the New South Wales Court of Appeal in Lepcanfin Pty Ltd v Lepfin Pty Ltd [2020] NSWCA 155 has provided insight into the extent to which courts will interpret parties' EDAs as providing a broad ambit for experts to resolve disputes under contract, and pursuant to an EDA.

Background facts

The dispute concerned a Development Deed (the Deed) for the development of land in Leppington NSW. Under the Deed, Lepcon Pty Ltd (Lepcon) was required to advance to Lepfin Pty Ltd (Lepfin) the amount of $3.9 million by way of interest-free loan for working capital purposes. However, Lepcon only paid $1,143,332.56 of the $3.9 million. The contract stipulated that any shortfalls in Lepcon's payments were to be captured by a corresponding increase to a Facilitation Fee (the Top Up Fee) payable to Lepcanfin Pty Ltd (Lepcanfin). The Deed required the parties to use "reasonable endeavours to resolve the Dispute by negotiation", and if unsuccessful, the parties were required to proceed to dispute resolution by expert determination; "If the Dispute is not resolved, the parties must within the 14 day period use reasonable endeavours to appoint an expert (Expert) by agreement." If consensus on an expert could not be reached, the parties could request an expert be appointed by the President of a professional body, such as the President of the Law Society of NSW.

Lepcon failed to provide the entirety of the working capital required under the Deed, or to pay the shortfall in working capital through the Top Up Fee, and Lepcanfin issued corresponding Notices of Default in relation to each of Lepcon's defaults under the Deed.

By way of a Second Amendment and Restatement Deed dated 8 July 2015, Lepcanfin waived Lepcon's "Existing Defaults on and from the Effective Date.” Existing Defaults, as defined by the Second Amendment and Restatement Deed, included the two Notices of Default issued against Lepcon for its failure to pay the entirety of the working capital and the shortfall in working capital through the Top Up Fee, and a third Notice of Default in respect of a Facility Agreement entered into between Lepcon and Lepcanfin.

Lepcanfin disputed whether, under the Second Amendment and Restatement Deed, Lepcon's obligation to pay the Top Up Fee had been waived. An expert was appointed jointly by the parties under the EDA to make a final and binding decision under the EDA.

The dispute, as referred by the parties to the expert, concerned "Lepcanfin's entitlement to the increase in the Facilitation Fee" (emphasis added) - had Lepcanfin had waived the obligation to pay the Top Up Fee?

The parties responsible for payment of the Facilitation Fee (which included the Top Up Fee) claimed it was unenforceable as a penalty (Penalty Issue). Lepcanfin, the recipient of the Top Up Fee, contended that the expert's mandate under the EDA did not permit consideration of the Penalty Issue. The expert determined there had been no waiver of the requirement to pay the Top Up Fee by Lepcanfin, but the Facilitation Fee itself (which included the Top Up Fee) was a penalty and therefore unenforceable.

At first instance, Justice Rein in the NSW Supreme Court dismissed Lepcanfin's claim that the expert had exceeded her mandate in determining the Penalty Issue. Lepcanfin appealed to the NSW Court of Appeal, arguing that Justice Rein had made an error in holding that the expert had not exceeded her mandate.

What did the NSW Court of Appeal decide?

The Court of Appeal upheld Justice Rein's decision and dismissed Lepcanfin's appeal.

Justice Rein was correct in determining that the expert had not exceeded her mandate. Commercial common sense would indicate that the use of the phrase "Lepcanfin's entitlement to the increase in the Facilitation Fee" in defining the dispute under the EDA, permitted consideration of not only whether Lepcanfin had waived the requirement to pay the Top Up Fee, but also whether fundamentally, the Facilitation Fee (which included the Top Up Fee) which Lepcanfin claimed it was "entitled" to, was in a fact a penalty, and therefore unenforceable.

Lessons learnt

This decision acts as a timely reminder for parties to commercial and construction contracts to ensure they think long and hard about how best to accurately define, or delimit, the matters which they are content to have referred to an expert for determination.

It may be that parties are prepared for an independent expert to have a wide mandate in terms of the issues that expert is permitted to determine. Clearly, mandate can be defined, or curtailed, by subject-matter, quantum of claim, nature of dispute and timeframes, among other criteria. A party that fails to accurately define, upfront, the scope of the dispute to be referred to a third party expert risks another party introducing new issues during the expert determination process, or an expert purporting to determine matters outside of the ambit which one party was prepared to refer.[1]

[1] Note: The above material provides a summary only of the subject matter covered, without an assumption of a duty of care by Resolution Institute or Clayton Utz. The material is not intended to be nor should it be relied upon as a substitute for legal or other professional advice. Copyright in the material is owned by Clayton Utz.