Alberta – expert determination allows expert to decide questions of mixed fact and law – #121

In Applied Industrial Technologies, LP v. Sirois, 2018 ABQB 818, Mr. Justice J.T. Eamon distinguished between expert determination and arbitration, holding that, unlike arbitration, the scope of an expert’s mandate and the court’s review depended on contractual interpretation without the benefit of a statutory framework or well-established practices available in arbitration. Despite the challenges, Eamon J. provided a detailed analysis useful in future cases regarding an expert’s ability to decide questions of mixed fact and law and the applicable standard of review.

The dispute stemmed from disagreement over determination of the purchase price in a share purchase agreement (“SPA”) by which Applied Industrial Technologies, LP (the “Purchaser”) agreed to acquire the shares of a group of several corporations, referred to as the Reliance Group (the “Targets”). The SPA set the price of the shares at $208,000,000.00 subject to a six (6) component list of adjustments (reproduced at paragraph 21 of the reasons).

The adjustments included some related to closing statements of the companies whose shares were to be purchased. In particular, the Purchaser and Vendors disputed whether to translate the net working capital and certain net profits of one of the Targets, a U.S-based corporation, into (i) Canadian dollars at par or (ii) at the actual CAD-U.S. exchange rate prevailing on the date the SPA closed.

When negotiating their SPA, the parties had anticipated how they wanted to deal with any dispute on this particular determination. The SPA at Article 2.5(4) and (5) provided that a dispute over the purchase price would be submitted to an “expert not an arbitrator”. That expert would not be an individual but an entity, “a nationally recognized accounting firm”. That clause, more fully reproduced at paragraph 35 of the reasons, reads in part:

If the Purchaser and the Vendors’ Representative cannot resolve all matters in dispute within such thirty day period, all such unresolved matters shall be submitted to a nationally recognized accounting firm acceptable to the Purchaser and the Vendors’ Representative (the “Expert”) for resolution, as expert and not arbitrator. The Expert shall use its reasonable efforts to render its written decision within 30 days of its appointment. The Expert shall be given access to all materials and information reasonably requested by it for such purpose. The rules and procedures to be followed in such proceeding shall be determined by the Expert in its discretion. The Expert’s determination of all such matters shall be final and binding on all parties and shall not be subject to appeal, absent manifest error.

The dispute brought before Eamon J. involved what the nationally recognized accounting firm (the “Expert”) did in answering the question put to it. The key reproach was that the Expert “interpreted the SPA”. In doing so, Applicants asserted that the Expert decided something which was beyond its agreed-upon expertise. Applicants applied to the court to challenge the Expert’s determination.

Early on, Eamon J. summed up each party’s position.

[5] The Applicants argue that the Expert’s contemplated professional qualifications – financial, not legal – should lead a Court to conclude that the Expert cannot decide questions of mixed fact and law including interpretation of the contract. They say the Expert is not an expert in law, so the parties would not have intended that it answer legal matters. Instead, the Expert is to ascertain accounting practices, assess compliance with generally accepted accounting principles, and compile financial information based on them. They say the Expert further erred in failing to apply historical accounting practices for converting US currency at par as the SPA required. They also submit the Expert erred in failing to give reasons.

[7] The Respondents argue that the Expert can decide those issues of law and mixed fact and law necessary to discharging its mandate, and that the standard of review is deferential. They say there are no errors and cross-applied for judgment based on the Expert’s determination.

Eamon J. responded with a detailed consideration of the issues raised, offering an analysis set out over 280+ paragraphs. That analysis lead him to dismiss the application. Eamon J. concluded that:

1. the Expert appointed under the SPA can consider questions of mixed fact and law;
2. its conclusions are reviewed on a deferential standard; and,
3. the Expert did not commit manifest error.

Eamon J.’s reasons provide one of the most fulsome, recent considerations of the differences between expert determination and arbitration. The reasons resist being condensed. Unlike many other notes in ArbitrationMatters, this note accepts only to flag the discussion points rather than try to summarize them. The actual reasons are best read in their entirety as they are more complete and nuanced.

At paragraphs 56-63, Eamon J. reviewed how the parties appointed the Expert. These paragraphs, especially paragraphs 56-57, offer helpful guidance to those considering how to select and retain an expert as apposed to an arbitrator. The reasons disclose the skill and care with which each party approached the selection of the Expert.

[56] The parties searched for a mutually agreeable Expert. The Purchaser proposed a list of four individual candidates, based on criteria acceptable to the Purchaser:

(a) the firm must have a separate transaction services practice, demonstrating they are qualified and familiar with issues that generally arise in mergers and acquisitions;

(b) the lead professional must have a minimum of 10 years experience in like size transactions, demonstrating experience with the types of issues that generally arise in similar sized transactions;

(c) strong familiarity with net working capital targets and adjustment mechanisms;

(d) experience in transaction related dispute resolution;

(e) the work will be staffed by the firm’s most qualified professionals, other than from offices located in specific geographic regions;

(f) the firm must be free of conflicts;

(g) the lead professional will have no personal or professional relationship with various named individuals.

[57] The Purchaser interviewed each candidate, providing a brief introduction without any indication of actual items in question nor details on the parties’ position to preserve the expert’s neutrality; and inquired about each candidate’s perceived ability to deliver a decision in 30 days.

In contrast to nominating an arbitrator, the parties in the joint retainer letter with the Expert agreed that more than one person would be involved and that internal discussions would take place. In their retainer letter, the parties “identified the partner [at Expert] in charge, and stated that other professionals may assist on the assignment as required. Thus, the retainer contemplated internal consultation by the partner in charge with others in the firm.

In contrast, the idea that an arbitrator would consult with others (aside from the other tribunal members) is a non-starter.

Eamon J.’s reasons at paragraphs 64-85 detail the submissions made by the parties to the Expert as well as some procedural steps offered to but not accepted by the Expert such as oral interviews.

Eamon J. began his analysis by confirming that the parties agreed that he was dealing with an expert determination and not an arbitration. His starting point was that the scope of the Expert’s mandate and the standard of review depended on contractual interpretation.

Eamon J. also cautioned that, if the parties had wanted a review of any of the Expert’s determinations which it made within its contractual decision making authority, they ought to have provided for it in their contract. Failing to do so meant that the Expert’s determination was binding on them. Eamon J. referred to Campbell v. Edwards, [1976] 1 WLR 403 (EWCA) at p. 407 in which Lord Denning MR held:

It is simply the law of contract. If two persons agree that the price of property should be fixed by a valuer on whom they agree, and he gives that valuation honestly and in good faith, they are bound by it. Even if he has made a mistake they are still bound by it. The reason is because they have agreed to be bound by it. If there were fraud or collusion, of course, it would be very different. Fraud or collusion unravels everything.

Because of the decisive role the contract would have on the outcome of his own analysis, Eamon J. first set out the rules applicable to contractual interpretation (paragraphs 90-99) and estimated his own authority as a judge sitting in Chambers to interpret the parties’ SPA (paragraphs 100-110). Having addressed both those issues, Eamon J. then grouped his analysis in key sections.

1. Context of ADR clause – paragraphs 111-121

These paragraphs contain the core of Eamon J.’s analysis and ought to provide arbitration practitioners with fresh insights into the distinction between expert determination and arbitration

Canadian case law recognizes the use of expert determination in lieu of arbitration. See Sport Maska Inc. v. Zittrer, [1988] 1 SCR 564, 1988 CanLII 68 paras 61-62; Cummings v. Solutia SDO Ltd, 2008 CanLII 42017 (ON SC) paras 18, 24-25 (appeal dismissed Cummings v. Solutia SDO Ltd., 2009 ONCA 510;); Preload Company of Canada v. Regina (City), 1953 CanLII 209 para. 20; Pfeil v. Simcoe & Erie General Insurance Co. and McQueen Agencies Ltd., 1986 CanLII 2922 para. 11.

To distinguish between the two, Eamon J. listed those elements which the courts consider:
– the actual wording of the parties’ contract;
– the context and surrounding circumstances;
– the subject matter to be resolved in the clause;
– the qualifications of the person who will make the determination; and,
– the contemplated formality or judicial nature of the process.

Eamon J. accepted that the distinction mattered.

[112] The choice between expert determination and arbitration can lead to drastically different consequences. Unless agreed otherwise by contract (express or implied), in an expert determination there are no fixed or default procedures for the determination; no jurisdiction in the decision maker to determine his or her jurisdiction; the potential for greater limitations on jurisdiction to decide questions of law or mixed law and fact; no requirement on the expert to give reasons; and no rights of appeal or judicial review of the decision. Also, Alberta law provides that parties can compel witnesses to testify in an arbitration, whereas there is no similar compulsion in an expert determination.

Eamon J. reviewed the parties’ SPA and other criteria. He noted that their process shared some of the “hallmarks” of arbitration and that parties in general cannot merely use the term “expert determination” in order to avoid the mandatory provisions (sections 5(2), 19, 39, 44(2), 45, 47 and 49) of Alberta’s Arbitration Act, RSA 2000, c A-43 the waiver of which section 3 prohibits.

At paragraph 119, Eamon J. lists the features he identified as key:

(a) The parties were sophisticated and represented by legal counsel in drafting the SPA;
(b) The parties stated that the Expert was not an arbitrator;
(c) The procedure called for a fast track to identify issues and resolve them, a feature Eamon J. said was of the most common reasons favouring expert determination over arbitration;
(d) The SPA does not mention the usual procedures under the Arbitration Act, leaving the Expert discretion to determine the appropriate procedures, the retainer contemplating informal procedures such as letters and interviews;
(e) The SPA contemplated determination by a national accounting firm, not a lawyer. The decision maker would have experience in the matters most likely to arise in relation to working capital disputes in mergers and acquisitions;
(f) The decision maker was a firm and not a natural person, providing that more than one individual could be involved;
(g) The subject matter of the determination was limited in scope to disputes over any item or aspect of the closing statements; and,
(h) The fact the decision is final and binding does not necessarily suggest arbitration suggested expert determinations which are commonly expressed to be final and binding. (Note: this is more true of domestic arbitration which provide for appeals on certain terms).

Eamon J. did flag the parties’ agreement to allow appeals limited to “manifest error”. He noted that appeals are available from domestic arbitration awards, but not from expert determinations. He questioned why the parties would refer to an appeal if they intended a process which is not subject to appeal. He dismissed the use of the term “appeal” as “simply sloppy drafting, and was obviously meant to impose a limit on the contractually binding effect of the decision.

Eamon J. further cautioned against giving any of the criteria undue weight. He did note that in some cases, it might be “implausible” or would not make “sound business sense” that the parties would appoint a non-lawyer to pursue an informal process to decide mixed questions of fact and law. It is equally necessary not “to think that only lawyers can answer legal questions or questions of mixed fact and law or that a full judicial process is necessary to answer disputed questions.” See paragraphs 117-118.

Eamon J. held that each case depends on the contract in question. “No one argued in the present case that I should disregard the parties’ choice, a choice made by sophisticated parties, expressed in a negotiated and custom drafted agreement, and which appears both reasonable and genuine.” He concluded that the parties’ intent to select expert determination and not arbitration was effective.

2. Decision making authority over questions of law or mixed fact and law – paragraphs 122-157

Eamon J. readily captured what arbitrators ought to decide, mentioning that it is “usually beyond question” that arbitrator may determine questions of mixed fact and law. He referred to the Arbitration Act, section 31 and article 28 of Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on June 21, 1985, attached as Schedule 2 to Alberta’s International Commercial Arbitration Act, RSA 2000, c I-5.  Each specifically references the jurisdiction to decide disputes in accordance with the applicable law.

[123] In contrast, an ADR clause mandating an expert must be carefully considered in answering this question. It might be contrary to business sense in some cases to assign decision making authority to determine legal questions to persons without legal qualifications or to allow such questions to be determined in a forum without procedures similar to a Court or formal arbitration process.

Eamon J. noted that party autonomy allows extensive flexibility in designing a bespoke dispute resolution process. At paragraph 127 of his reasons, listed some but not all of that variety for arbitration. The same flexibility is available to drafting expert determination clauses. He analysed the parties’ own wording in the SPA and did not find any unsettling inconsistencies which undermined or invalidated the express mention of expert determination. Choice of law, attornment clauses and bifurcation of issues (addressed at length in his reasons) did not cause him to reconsider the parties’ own designation of the decision-maker’s role as that of expert determination.

He was alert that there are “dangers to leaving an issue with legal components to someone without formal legal training” but such dangers could be set-off with limited rights of review. The latter could serve as “a safety valve if something went seriously wrong”. By providing for a review by the court for “manifest errors”, the parties in their SPA did not limit the review to “errors of law”. Doing so gave them a review that is “more generous” that that offered in the Arbitration Act.

For safe measure and in the absence of a clear line of authority in Canadian cases, Eamon J. referred to case law in the U.K. which accepted that experts could decide questions of law “in appropriate cases”. See paragraphs 149-152.

Eamon J. accepted the plain words of the SPA: “the parties meant what they said”. The Expert’s mandate included any necessary interpretation of the SPA in order to determine the rate of exchange.

3. Standard of review – paragraphs 159-176

The case law cited by Eamon J. regarded expert determination as binding unless the expert departs from the contract’s instructions in a material way: Smiechowski v. Preece, 2015 ABCA 105 (CanLII) para. 5 ; Saputo Inc v. Dare Holdings Ltd, 2012 ONSC 4981 (CanLII) paras 4 – 8; Re Ivaco, 2007 ONCA 746 (CanLII) para. 3; Shinkaruk Enterprises Ltd and Mr Klean Enterprises Ltd v. Commonwealth Insurance Company et al, 1990 CanLII 7738 (SK CA), 1990 CanLII 7738 (SKCA) para. 15.  See also two (2) U.K. cases: Veba Oil Supply & Trading GmbH v. Petrotrade Inc, [2001] EWCA Civ 1832, [2002] 1 All ER 703 para. 26; Jones v. Sherwood Computer Services plc (1989), [1992] 2 All ER 170 (CA) page 179.

The case law reviewed accepted that an expert does not exceed her authority by making a mistake in the course of the determination. At paragraphs 166-171, Eamon J. drew on the standards for deference developed for arbitration, administrative tribunals and for courts of first instance.

[170] Deferential standards are animated by concerns 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 and the tribunal has a “margin of appreciation within the range of acceptable and rational solutions”. Deferential standards require an attitude of the court which imports respect for the decision-making process of adjudicative bodies with regard to both the facts and the law (Dunsmuir v New Brunswick, [2008] 1 SCR 190, 2008 SCC 9 (CanLII) at paras 47-48).

Based on the parties’ own addition of the word “manifest” to an event of “error”, Eamon J. saw this choice as opting to “express a higher standard that simply looking to see whether some error is apparent from the papers”.

Eamon J. held that the question for the Expert was mainly financial and “the Expert’s expertise and margin of appreciation over the Court is clear”. The Expert’s transactional experience gave it a degree of appreciation in interpreting and applying the relevant standards. The SPA’s own wording demonstrated the parties’ own preference to have a financial expert give its opinion in a speedy process with some finality. Having not exercised the option of imposing a lower standard of review by adding the wording to the SPA, Eamon J. accepted that the standard of review required his deference.

[176] 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, an error is not “obvious” or manifest, because reasonable minds can differ.

4. The role of reasons – paragraphs 184-191

The Purchaser argued that the Expert erred by not giving reasons. Eamon J. disagreed. “A decision maker in an expert determination need not give reasons unless expressly or impliedly required by the contract.

The SPA only required that the Expert issue a “written decision within 30 days of its appointment”. Eamon J. rejected Applicant’s attempt to equate “reasons” with “decision”. “There is a distinction in ordinary language between a decision (what was decided) and reasons for a decision (why the decision was made).

Eamon J. did concede that, had the SPA required reasons, a failure to provide them would be a manifest error. Eamon J. was prepared to consider the facts he could infer from the Expert’s decision and the record, on the assumption that there was a distinction between an absence of reasons and inadequate reasons. “If reasons are required, they need not be detailed. They need only be sufficient to permit the Court to conduct a meaningful review for manifest error, mindful of the respectful attention owed to the Expert’s reasons and the context of the record including the parties’ submissions and information provided to the Expert.

In paragraphs 192-253, Eamon J. did consider the reasons he could infer and agreed that the Expert’s was not unreasonable.

The reasons will no doubt serve as an authoritative guide for others when drafting their own expert determination clauses as well as for courts striving to decide whether the dispute resolution adopted is more expert determination than arbitration. Many of the facts contained in the reasons, including the list of qualifications required of the expert, will also serve as guides.