Schott AG v Melton Willows Pty Ltd [2023] VSC 364

Nikki Miller  |  Michael Lo  |  Courtenay Wood

Key takeout

A court may set aside an expert determination for a ‘manifest error’ where the expert has not undertaken the task contractually required of them, or undertaken the task in a way that is not in accordance with the terms of the contract.  

Facts

Schott AG (buyer) purchased Minifab (Aust) Pty Ltd (company) from Melton Willows Pty Ltd and other shareholders (sellers) under a share sale agreement (SSA).

The SSA contained a regime for additional payments to be made by the buyer to the sellers, where the company’s revenue reached specified thresholds in the following three years.  

A dispute arose between the buyer and sellers in relation to whether the additional payment was payable to the sellers for financial year 2020-21.  The parties were in dispute as to the earn out statement which recorded the revenue of the company for the relevant financial year.  The dispute was referred to expert determination under the SSA. 

The expert determination clause of the SSA provided that the expert’s decision was final and binding on the parties except in the case of manifest error or fraud.  The expert determined that the additional payment was payable to the sellers. The buyer commenced proceedings challenging the expert determination, on the basis that the expert had made numerous and manifest errors, including not applying the hierarchy of principles, policies and procedures in preparing his determination in accordance with the terms of the SSA.  In particular, the expert had not applied the principles applicable in the preparation of earn out statements

Decision

The court found that the expert did not carry out the task required of him under the SSA and had failed to apply the applicable principles in preparing his expert determination.  Therefore, the expert had made a manifest error and the determination was not final and binding on the parties.

The court considered the phrase ‘having regard to’ in the dispute resolution clause in the SSA. The court held that a reasonable business person would have understood that phrase required the expert to strictly comply with the three-tier hierarchy in the same manner as required for the preparation of the earn out statement.

The term ‘manifest error’ was not defined in the SSA and the court adopted the position of Almond J in Funtastic Ltd v Madman Film and Media Pty Ltd [2016] VSC 353 that manifest error is confined to ‘clear and obvious errors’ and that an error that is ‘abstruse, obscure or inconsequential’ will not be a manifest error.

If an expert has carried out the task which they are contractually required to take, the fact that the expert has made errors, or taken into account irrelevant matters does not invalidate the determination in itself.  However, a determination may be set aside where the expert performed a different task or carried out the task in a way that was not in accordance with the contract.