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Drafting tips: validity of expert determination clauses and use of “and/or”

Australia, Brisbane, Melbourne, Perth, Sydney | 21 March 2013

Adopting commonly used drafting techniques will not necessarily mean they will be effective. In this article, we briefly consider 2 techniques which may fail to deliver the intended consequences.

The first deals with clauses which provide for determination of disputed matters by an independent expert.

Expert determination clauses may fail where (as is increasingly common) nominated bodies refuse to appoint an expert on behalf of the parties. A mechanism is proposed to ensure that the intended outcome is achieved.

We also propose an alternative to the use of “and/or”, in light of another judgment criticising its use.

Expert determination

It is common for contracts in the energy sector to contain expert determination clauses, which provide for the resolution of disputed matters by an independent expert. The clauses generally require the parties to seek to agree on the identity of the expert, and state that if the parties cannot agree on the identity of the expert, the parties must request a nominated third-party to appoint the expert. The nominated third-party is generally the president (or similar) of an industry body, such as the Institute of Chartered Accountants (ICA), the Institute of Arbitrators and Mediators Australia, or the various states’ law societies.

A number of industry bodies are now refusing to comply with requests to appoint an expert, no doubt concerned by their own exposure to claims. For example, ICA has indicated that it will only provide the parties with a list of potentially suitable experts, from which the parties must still select an expert. If the parties were unable to agree on an expert in the first instance, this service may be of limited assistance.

Failure to appoint an expert

It is clear that a contractual term that requires parties to request a third-party to appoint an independent expert will fail if the third-party does not appoint the expert.1 However, if the term fails, it is unclear whether courts will come to the aid of the parties to prevent the agreement being rendered unenforceable or otherwise frustrated.

There is authority suggesting that, if a term of this kind fails, courts may substitute their own machinery for determining the disputed matter.2 However, this will only be the case where the machinery that determines the matter is a subsidiary or non-essential term, in that the machinery itself is not a key determinant of the matter.3 For example, a court may not substitute its own machinery where the term requires the appointment of an expert with particular qualities or special knowledge, or where the determination can only be made on an idiosyncratic basis.

Alternatively, some courts have found that, in cases where the nominated machinery fails, the relevant agreement contains an implied term requiring the parties to co-operate in nominating alternative machinery.4 In these cases, the implication of the term has prevented the agreement being frustrated.

There is a different line of authority suggesting it is not open for a court to substitute its own machinery (or, presumably, imply terms) where the machinery nominated by the parties fails, and that, in such circumstances, the agreement is incomplete and unenforceable.5

In light of the uncertainty regarding failure of contractual machinery, it is prudent to assume that a court would find that an expert determination clause will fail where a nominated body refuses to appoint or nominate an expert and that it is not open for the court to substitute its own machinery or imply a term.

A brief audit of whether your key agreements contain an expert determination clause providing for a nominated body to appoint the expert if the parties cannot agree may be sensible. If the nominated body still agrees to appoint experts on behalf of contracting parties, then you may consider that no further action need be taken.

If the nominated body no longer provides this service, or if the expert engagement clause is particularly critical, you should consider seeking the counterparty’s agreement to vary the agreement by substituting a different deadlock resolution mechanism. A simple option may be a new nominated body, but that may suffer from the same uncertainty if that body alters its approach to nominating experts.

More prudently, an express provision permitting a court to appoint an expert could be included. In that event, the Court would have no hesitation in acting on the expressed intent of the parties to ensure an expert were appointed to determine the dispute.

Use of “and/or”

Our judicial system is based on predictability through the clarity of precedent, yet consistency can at times elude our courts. An issue on which different courts in different jurisdictions appear to be refreshingly compatible is their shared aversion to the use of “and/or” as a drafting technique.

“And/or” has been the subject of judicial criticism for decades, but continues to provide fodder for the more acerbic of judges and entertainment to readers of their judgments. Courts have variously described the “bastard conjunction ‘and/or’”6 as leading to ‘confusion and ambiguity’7 and ‘giving rise to a serious problem of construction’8.

More colourfully, the Wisconsin Supreme Court in 1935 approached the task of interpreting the term in this way:

We are confronted with the task of first construing 'and/or', that befuddling, nameless thing, that Janus-faced verbal monstrosity, neither word nor phrase, the child of a brain of someone too lazy or too dull to express his precise meaning, or too dull to know what he did mean, now commonly used by lawyers in drafting legal documents, through carelessness or ignorance or as a cunning device to conceal rather than express meaning with view to furthering the interest of their clients.

In a recent English Court of Appeal case, Situ Ventures Limited v Bonham-Carter [2013] EWCA Civ 47, the use of the phrase “and/or” was revisited and predictably, heavily criticised.

The case involved a dispute under a sale of shares in an estate agency company. The share sale agreement provided that until the price had been paid to the vendor, the directors of the vendor (the plaintiffs in the proceeding)

shall remain as Directors of the Company in a Non-Executive capacity unless otherwise agreed and/or requested by the Purchaser…”

The court deemed the use of the expression “and/or” in the contract to be “unnecessary and confusing”.9  The court concluded that the phrase could only mean “or” because if the plaintiffs agreed not to remain as directors, the occasion for a request to be made by the purchaser would not arise. The need to make a request would only arise as an alternative to a failure to agree. The court added that the use of the expression “and/or” in any legal document is

in any case open to numerous more fundamental objections of inaccuracy, obscurity, uncertainty or even as being just plain meaningless.10

Put simply, the conjunction “and/or” should be avoided in commercial documents. It is often intended to mean either one or the other. As an alternative, the formulation “x or y or both” has been recommended and adopted by a number of commentators and judges.11

This article was written by Mal Cooke, Partner, Chris Hicks, Solicitor, and Aaron Chiong, Solicitor, Perth.

Endnotes

  1. Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 605; Rentiers Pty Ltd v Wingara Wine Group Pty Ltd [2010] VSC 156 at [22].
  2. Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444; Jezer Construction Group Pty Ltd v Lilischkies [2004] QSC 270 at [12]; Green v Wilden Pty Ltd [2005] WASC 83 at [924] - [939].
  3. Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444; Bounty Systems Pty Ltd v Odyssey Gaming Services Pty Ltd [2007] QSC 230 at [61]; Candoora No 19 Pty Ltd v Freixenet Australia Pty Ltd (No 2) [2008] VSC 478 at [14].
  4. Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600; Rentiers Pty Ltd v Wingara Wine Group Pty Ltd [2010] VSC 156 at [23]-[24].
  5. Van der Waal v Good Enough [1983] 1 NSWLR 82  at 93; Kinivan v Maoudis (1988) ANZ ConvR 320 at 321; Agmon Investments Pty Ltd v Inglis [2006] NSWSC 932 at [18].
  6. as labelled by Viscount Simon in Bonitto v Fuerst Bros [1944] AC 75.
  7. Green v R (2000) 9 NTLR 138.
  8. Neame v Neame’s Trs. [1956] SLT 57.
  9. Situ Ventures limited v Bonham-Carter [2013] EWCA Civ 47 at 26.
  10. Ibid.
  11. See Asprey M, Plain Language For Lawyers, 2nd edn, Federation Press, 1996 and Edmunds-Jones Pty Ltd v Australian Women’s Hockey Association Inc [1999] NSWSC 1014 at [214] – [215].

More information

For information regarding possible implications for your business, contact Mal Cooke.

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