Carefully drafted alternative dispute
resolution (“ADR”) clauses can be tailored to parties’ needs in solving
disputes in a timely manner. Binding arbitration has commonly been implemented
to limit the time and cost spent in court by providing finality to the dispute
at issue. Similarly, limits on discovery can streamline issues and in a recent
Alberta Court of Queen’s Bench case, the Court confirmed that a properly
drafted contractual clause can provide selected experts with significant
decision making authority, including the ability to consider and resolve legal
issues when fulfilling their mandate.
In Applied
Industrial Technologies, LP v Sirois,
2018 ABQB 818 (“Applied”) Applied Industrial Technologies, LP (the “Purchaser”)
was scheduled to purchase the shares of several companies known as the Reliance
Group (the “Vendors”) pursuant to a share purchase agreement (“SPA”). A term of
the SPA provided that disputes over certain adjustments to the purchase price
of the Vendors were to be determined by a nationally recognized accounting firm
“as expert and not arbitrator”, the expert’s determination was to “be final and
binding on all parties” and “not be subject to appeal, absent manifest error”.
In this case the Purchaser delivered a
Closing Balance Sheet to the Vendors, who objected, thus engaging the expert
determination process. The Vendors’ objection included the argument that the
relevant figures for Reliance USA (one of the Vendors) at April 30, 2014 in the
Closing Balance Sheet and the Combined Target April 2014 Net Profits Statement
must be converted from US dollars to Canadian dollars at the prevailing
exchange rate at closing, rather than at par. The parties selected a mutually
agreeable expert pursuant to the SPA and the expert determined that the
currency conversion must be made at the prevailing currency exchange rate at
the closing date.
The Purchaser applied to set aside the
expert’s decision arguing that the expert’s professional qualifications (i.e.,
financial and not legal) meant that the expert could not decide questions of
mixed fact and law including interpretation of the contract. As the expert was
not an expert in law the parties would not have intended that it answer legal
matters and was confined to only ascertain accounting practices, assess
compliance with generally accepted accounting principles, and compile financial
information based on same.
The Vendors and McLennan Ross LLP’s
partner, Corbin Devlin, disagreed and were successful. In the reasons resulting
in the dismissal of the Application, three issues the Court considered were whether
an expert appointed under an expert determination clause in a share purchase
agreement can decide questions of mixed fact and law, how the expert’s decision
should be reviewed and whether the expert in this case committed a manifest
error.
Mixed
Fact and Law
The Court recognized that the SPA provided
the Vendors’ representative an ability to object to “any item or aspect” of the
Closing Balance Sheet or the Combined Target April 2014 Net Profits. The Court
noted that the plain meaning of the phrase “any item or aspect” went far beyond
calculations, compilations and accounting principles as argued by the Purchaser.
Additionally, the Court recognized that
these were sophisticated parties engaging in a transaction worth over
$200,000,000, and that any reasonable party in the same position with legal
advice would know that expert determination clauses often refer to
compilations, calculations, appraisals or valuations rather than “any item or
aspect”, and that an aspect is even wider than an item. As such, the Court
found that the parties must have known and should be presumed to have known
there were issues of mixed law and fact which could arise in ascertaining the information
or methods used in the Closing Balance Sheet that was provided.
Ultimately, considering the plain words
of the contract and the contextual matters, the parties provided flexibility to
design a suitable process to accommodate any specific matter in dispute, giving
the expert broad discretion to determine the rules and procedures to be
followed in the proceedings.
Standard
of Review
Anytime a court is reviewing the decision
of another body, the review is expected to be performed in accordance with a
recognized standard. Sometimes that review known as the “correctness standard”
enables a court to replace the other body’s decision if the law was applied
incorrectly. On other occasions, a court will apply a “deferential standard”
and defer to the findings and conclusions exercised by the other body. Here the
Court acknowledged that an expert determination is binding unless the expert
departed from the contractual instructions in a material respect or the
contract otherwise provides. However, that may not always be the case. The
Court noted that parties can install a safety valve in the contract clauses to
challenge the contractually binding nature of the experts determination, if one
is concerned that the expert’s determination were to contain a “manifest error”.
Since the SPA contained a “manifest error”
clause, the Court concluded it could conduct a review that should be performed
on a deferential standard for a variety of reasons. First, the review involved
contractual interpretation which is a question of mixed fact and law. If the
same issue arose from the decision of a trial judge, that decision could only
be interfered with in the case of a palpable and overriding error or the
decision was unreasonable. Likewise, in Canadian appellate courts, the term
manifest error has been equated with conclusions that are clearly wrong or
palpable errors. Palpable errors are those which are so obvious that they can
easily been seen or known; readily or plainly seen. Secondly, if the same issue
arose out of an arbitration, the appeal would be limited to questions of law
and the standard of review, except in limited circumstances, is one of
deference if the arbiter’s decision was reasonable. Thirdly, even in
administrative law cases, a reviewing court must consider multiple criteria, as
set out in Dunsmuir v New Brunswick,
[2008] 1 SCR 190, to avoid imposing a correctness standard and undercutting the
integrity of the process to be used.
In this case, the court found by its
interpretation of the SPA that the parties’ words did not simply except an
“error”. The parties chose to except only “manifest error”. The word “manifest”
must have been intended to express a higher standard than simply looking to see
whether some error is apparent from the papers. The parties’ choice to include
words of limitation implies deference to the expert’s determination, especially
as they did not insert a clause to bifurcate the review standard. Additionally,
the Court concluded that taking the plain language of the contract in its
context, the parties’ choice of the words “manifest error” indicates the
parties wanted the opinion of a financial expert, not the Court, and a speedy
process with some degree of finality.
No
Manifest Error
This blog does not leave room for
explaining multiple reasons why the Court did not find that the expert
committed a manifest error in arriving at its decision but the analysis used reflected
the Court’s concern that deferential standards are critical for protecting the
integrity of the decision making process, respecting the expertise of the
decision maker, and recognizing that in many questions, reasonable minds can differ
over the outcome. The Court found that an error is manifest or obvious where it
is unreasonable: the conclusion is outside the range in which experts could
reasonably differ. If the conclusion is within the range and sufficiently
intelligible in the context of any contractually required reasons, as it was
here, an error is not “obvious” or manifest.
With a strong reputation in commercial
litigation, McLennan Ross LLP is well positioned to provide you with the best
advice and representation. If you have any questions or concerns with respect
to the ADR mechanisms in you contracts, your rights to engage such processes or
any other matter, please contact do not hesitate to contact a member of our
Commercial Litigation Team.
