‘Expert determination’ clauses in commercial contracts – should I include one?

Parties to commercial contracts commonly agree on dispute resolution processes to seek to avoid court proceedings in the event of a dispute.  A recent Queensland case illustrates the risks for unsuccessful parties in the context of an expert determination clause.

The case of Bagata Pty Ltd v Sunstorm Pty Ltd [2024] QCA 17 involved an expert determination clause in a lease. The clause provided:

‘[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.

The Case

The relevant facts of the case are as follows:

• 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.

• 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.

The Expert Determination

The parties instructed an expert to determine, relevantly, whether or not the landlord was required to give 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 arriving at 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 make no commercial sense. 

The landlord did not agree with the expert’s decision and commenced 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.

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’.

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 Court of Appeal

The landlord appealed the Court’s decision.

The three issues on appeal were:

• whether the primary judge had erred on the meaning of ‘manifest error’;
• whether the primary judge had erred in requiring ‘vacant possession’; and
• whether the primary judge had erred in finding that manufacturing was permissible under the lease.

Manifest error

As to whether the primary judge had erred on the meaning of ‘manifest error’, the Court of Appeal upheld the decision of the primary judge. The key authority relied on was a decision of the High Court in Westport Insurance Corporation v Gordian Runoff Ltd (2011) 244 CLR 239. A manifest error is an error that is ‘manifest on the face of the award’. It is not enough that the expert made an error. The existence of an error must not be equated with the error being manifest. There was no manifest error.

Vacant possession

As to whether the primary judge had erred in requiring ‘vacant possession’, the Court of Appeal upheld the decision of the primary judge and expert. While the lease contained no term requiring vacant possession, applying the settled principles of contractual construction, the expert was correct in finding that vacant possession was required.

The concept of vacant possession was well known to leases. As to its meaning, the authority of Cumberland Consolidated Holdings Ltd v Ireland [1946] KB 264 was relied upon. Vacant possession includes a right to ‘actual unimpeded physical enjoyment’.  None of the special conditions indicated that the landlord would have a right to store goods. A reasonable business person would have understood that the objects of the lease included vacant possession.

Permitted use

As to whether the primary judge had erred in finding that manufacturing was permissible under the lease, the Court of Appeal upheld the decision of the primary judge and expert.  The ‘Permitted Use’ under the lease was described as ‘Industrial – warehouse and ancillary office’.  The landlord understood that the business of the tenant included the manufacturing of artworks and had permitted early access to install ‘certain plant and equipment’.  The Court of Appeal agreed with the primary judge that it ‘would make no commercial sense for the parties to have agreed to a “Permitted Use” that did not allow Sunstorm to engage in the industrial activity which both parties know was its intention in entering into the Lease’.

Key takeaway

Expert determination clauses in contracts can be a useful mechanism to resolve a contract dispute swiftly and cost effectively.  The upshot of this is that in most cases there will be limited grounds for the unsuccessful party to challenge the decision of an expert.

When agreeing to contractual dispute resolution mechanisms, it is always very important to consider whether they are appropriate for your circumstances. That being so, 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 greater 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.

Court proceedings are inherently costly and time consuming, however Court's have well‑established rules designed to ensure fairness and detailed consideration of the issues – with appeal rights where things go wrong.

In this decision of Bagata, the landlord was bound by the expert’s determination that: (a) they were in beach of the lease for failing to provide vacant possession; and (b) that the tenant had not itself breached the lease in any of the ways the landlords alleged. 

The landlord was ordered to pay the tenant's damages.

If you would like to discuss the operation of expert determination clauses or whether they are appropriate for your situation, please reach to our team at Winterkorn Legal Group.