Ontario – ‘Parochial’ perspective on expert determination rejected – #708

In KMH Cardiology Centres Incorporated v Lambardar Inc., 2022 ONSC 7139, Justice Myers referred a dispute for expert determination pursuant to the parties’ agreement. He concluded that the parties intended the dispute to be determined by an expert, and not arbitration, even though it required the expert to engage in the exercise of contractual interpretation and not simply a mathematical calculation.

The dispute– The dispute arose out of identically worded clauses in three commercial leases between the parties. The applicant KMH Cardiology Centres Incorporated (“KMH” or “Tenant”), a provider of nuclear cardiology services, operated out of several locations, three of which it leased from the respondent owner Lambardar Inc. (“Lambardar” or “Landlord”). As is typical with such leases, Lambardar was required to estimate KMH’s share of operating costs at the beginning of each year, to be paid in equal monthly installments and adjusted after year end  based on a written statement from Lambardar, to reconcile the actual costs incurred in the year against the initial estimate.

The parties disagreed as to Lambardar’s calculation of those operating costs in three specific respects: 1) whether the basement area in two of the buildings should be included in the calculation of the “gross leasable office space” (there were factual disagreement as to the use of that space); 2) the application of a 15% administration fee on taxes (the parties disagreed as to the interpretation of the terms “taxes” and “operating costs” defined in the leases); and 3) a charge for the provision of a site supervisor through a corporation related to the landlordt (a section of the lease excluded from operating costs the salary of any executive head office personnel of the landlord itself). For the four fiscal years from 2017 through 2020, KMH estimated that it had overpaid Lambardar by approximately $900,000.

The leases entitled KMH to require Lambardar to provide reasonable backup information for the operating costs claimed and allowed KMH to audit the operating costs if dissatisfied with the information it received. If KMH still disputed the accuracy of a statement reconciling operating costs within 15 days of the audit, then it still had to make payment, but the disagreement had to be referred by Lambardar for “prompt”, “final and binding” “decision” by “an independent professional consultant approved by the Tenant, acting reasonably, who is qualified by education and experience to make such decision and who shall be deemed to be acting as an expert and not an arbitrator.” The leases provided for adjustments to previous payments and the costs of the consultant depending on the result of the determination.

This dispute resolution mechanism was set out in two sections of the leases:

Section 4.7 (c) provided:

“If Tenant disputes the accuracy of any Statement, Tenant shall nevertheless make payment in accordance with the Statement, pending resolution of the dispute, but, subject to Section 4.8, the disagreement shall be referred by Landlord for prompt decision to an independent professional consultant approved by the Tenant, acting reasonably, who is qualified by education and experience to make such decision and who shall be deemed to be acting as an expert and not an arbitrator. The consultant’s signed determination shall be final and binding on both Landlord and Tenant. Any adjustment required to any previous payment made by Tenant or Landlord by reason of any such determination shall be made within fourteen (14) days thereof, and the party required to pay such adjustment shall bear all costs of the consultant, except that if the amount to be paid is three percent (3%) or less of the amount in dispute, Tenant shall pay all such costs.”

Section 4.8 provided for an audit right:

“Within one ninety (90) days of Landlord delivering the Statement, Tenant shall have the right, to request, in writing, reasonable back up information from the Landlord pertaining to the Operating Costs (the “Tenant’s Notice”). If Tenant , acting reasonably and in good faith, is not satisfied with the information provided then Tenant shall have the option, at its sole expense and within sixty (60) days of Landlord providing response to Tenant’s Notice, to audit the Operating Costs for the Statement year (the “Audit”) on the following terms and conditions:

(d) Tenant’s accountant/auditor shall complete its audit within thirty (30) days of its commencement and issue its report to Landlord and Tenant within thirty (30) days after completion of the audit; and

(e) if Landlord or Tenant are unable to resolve any disagreements relating to the payment by Tenant of Tenant’s Proportionate Share of Operating Costs within fifteen (15) days thereafter, then the matter shall be resolved pursuant to the Section 4.7(c)”.

Lambardar refused to appoint an independent financial consultant pursuant to s. 4.7 to resolve the dispute, on the basis that it called for contractual interpretation that is a matter for the court to decide, and not a simple mathematical dispute concerning the accuracy of Lambardar’s reconciliation statements. KHM filed an application to refer the dispute for expert determination.

The role of expert determination – First, Justice Myers reviewed the role of an expert as an “alternative dispute resolver”, someone appointed under a contract, but not intended to act as an arbitrator or judge (par. 28). He referred to Applied Industrial Technologies, LP v Sirois, 2018 ABQB 818 for comments regarding the attributes of an expert determination, calling for the “exercise of skilled judgment”. He noted that it shared some advantages (“speed, privacy, and the ability to choose the decision-maker”) with arbitration. Justice Myers referred to the unique role of experts, who were appointed “to solve a problem themselves based on their own knowledge and expertise”, as opposed to “judges and arbitrators” who “are not supposed to bring their own personal knowledge to bear on the facts” and must therefore conduct an adversarial hearing based on evidence provided by the parties (par. 30). In Justice Myers’ view, an “expert decision is typically fast and inexpensive. Even if it takes longer that one hopes, it will virtually always be far more efficient and affordable than any form of arbitration or litigation” (par. 33).

In opposing KMH’s application to refer the dispute to arbitration, Lambardar submitted that the parties could not have intended to clothe an expert with authority to interpret their leases and to make decisions of mixed fact and law or decisions of law, which would require procedural fairness, submissions, and a neutral trier. Lambardar argued that only “simple, technical points like adding up a column of numbers drawn from invoices” were intended to be submitted to expert determination (par. 36). Justice Myers dismissed that conception of expert determination generally as “altogether too parochial” (par. 37) and unsupported by the case law cited by Lambardar.

The parties’ intention – Justice Myers underscored that the precise dispute resolution mechanism contemplated by the parties had to be determined on a case-by-case basis and therefore proceeded to “construe the appointment language in the context of the agreement as a whole to discern the breadth and scope of the parties’ intentions” (par. 37). Based on the following attributes of the leases, he concluded that the parties had agreed on expert determination:

  1. The language of the leases did not support Lambardar’s position.
  1. The dispute resolution mechanism was intended to apply specifically to the determination of operating costs in the context of the commercial leases at stake. Justice Myers remarked that this was a “field on which much expertise exists”, such that while a court may require expert evidence to rule on the matter, “any number of industry people would know the answers off the tops of their heads” (par. 41). He added that the parties should not be presumed to want to have lawyers “painstakingly parse their words seeking a supposed objectively inferred mutual intention instead of just asking someone who knows what is done by reasonable, experienced, knowledgeable, fair people in the business” (par. 42). In any event, the parties were free to appoint an expert with legal expertise, such as a real estate lawyer, if they saw fit.
  1. The parties expected a broad swath of disputes and therefore agreed that they would have to appoint someone “qualified by education and experience” to decide such disputes. Lambardar was therefore incorrect to submit that nothing more than mere arithmetical questions was intended to be referred to an expert. Similarly, the reference to disputes pertaining to the “accuracy” of Lambardar’s statements did not limit the scope of the mandate of expert envisaged to determining mere “mathematical” correctness.
  1. The parties necessarily anticipated that the type of disputes to be submitted to expert determination would involve “some judgments or interpretations” (par. 46), because they had provided that an expert would only be mandated once an audit of the operating costs had been conducted pursuant to section 4.8 of the leases. By then, the correctness of the calculations in Lambardar’s statements would already have been assessed by the auditor.
  1. The parties wished for a “prompt” decision, meaning that “formal processes are eschewed and civil litigation in court is off the table” (par. 48), considering that “[t]he civil justice system is slow and expensive in Ontario”, which practical business people would know and who would therefore prefer “prompt and affordable decisions especially to practical problems” (par. 49). Justice Myers noted that even when faced with legal question, sometimes the parties just “need someone authorized to decide”.

All in all, Justice Myers’s interpretation of the intended scope of the dispute resolution mechanism was informed by his observation that the leases were negotiated at arm’s length by “sophisticated and well-represented parties” (par. 10), resulting in a “sophisticated transaction” (par. 9). He noted that, when negotiating the leases, the parties knew what could be the value of the disputes and the materiality of the amounts, not only because they were sophisticated but because, in the specific circumstances of the matter, the “landlord was previously the operator of the sites” and, presumably, the “new owner of the tenant must have done its due diligence with all the sophisticated professionals help guiding it in the transactions” (par. 47).

Justice Myers concluded that all the disputes pertained to the “accuracy of the landlord’s operating costs reconciliation statement” and that Lambardar was therefore obligated to appoint an expert to resolve the disputes (par. 52-53).

Contributor’s Notes:

First, the drafting of the relevant sections of the leases must be commended for its clarity. Not only did the wording leave little to no room for interpretation as to the parties’ intention to resort to expert determination rather than arbitration, but it also effectively avoided the pitfalls typically associated with stepped clauses. Indeed, sections 4.7 (c) and 4.8 of the leases unambiguously delineated the process to be followed between a dispute arising and its submission to expert determination.

Second, for other judicial treatment of the distinction between arbitration and expert determination, see Alberta – expert determination allows expert to decide questions of mixed fact and law – #121, Ontario – Court rejects cross-applications to appoint valuators as the arbitrator – #593, and Québec – Expert opinion unenforceable; not an arbitral award – #601.