Judicial Support for Expert Determination as a Dispute Resolution Alternative: KHM Cardiology Centres v Lambardar

An expert determination is a unique subset of dispute resolution methods, the usage of which appears to be on the rise in Ontario in respect of a myriad of different commercial arrangements. Given that we frequently see expert determinations in the context of construction and infrastructure projects, the manner in which these decisions (as well as related procedures) are considered by the judiciary is of particular importance.

In this article, we consider a recent decision on expert determinations in the context of commercial leasing arrangements. Specifically, in KMH Cardiology Centres Inc. v. Lambardar Inc., 2022 ONSC 7139, the Ontario Superior Court held that experts could determine questions of mixed fact and law, or even questions of law, if parties to a contract have clearly given that expert the authority to do so. Below, we discuss some of the implications of providing experts with this authority in the context of construction industry disputes.

Background

KMH Cardiology Centres Incorporated (“KMH”) is one of Canada’s largest providers of nuclear cardiology services, and was founded by Vijay Kanmar (“Kanmar”). KHM leased three office properties from the respondent, Lambardar Inc. (“Lambardar”), which was also owned by Kanmar and his wife (the “Original Leases”).

Kanmar subsequently sold KMH, and in the course of this sale, new leases for three of the properties were negotiated and signed as part of the transaction whereby Kanmar sold KMH to independent, third-party owners (the “New Leases”). In that regard, the executed New Leases were the product of arms’ length negotiations among sophisticated and well-represented parties. For the purposes of this article, the relevant provisions of each of the New Leases are the same.

Specifically, in relevant part, each New Lease contained language that required Lambardar (as landlord) to estimate KMH’s (as tenant) share of operating costs for the leased property at the beginning of each year. KMH was then required to pay one-twelfth of that total estimated amount each month to cover its operating cost share for that year. At the end of each year, Lambardar would then provide a statement reconciling the actual costs incurred in the year against the initial estimate; in the result, either KMH would pay Lambardar for any shortfall or Lambardar would repay any surplus to KMH.

Following the execution of the New Leases, the parties were unable to agree on the proper calculation of operating costs for the 2017 to 2020 fiscal years. In particular the parties disagreed as to three things: (1) whether the area of the basements on two of the properties should be included in the calculation of the gross leasable office area of the buildings; (2) whether Lambardar was entitled to charge a 15% administration fee on taxes; and (3) whether Lambardar was entitled to charge for the services of its site supervisor provided through a separate corporation.

All of the New Leases contained a term providing that any dispute concerning the accuracy of Lambardar’s reconciliation statement would be referred to an “independent professional consultant” who would be “qualified by education and experience to make such decision”:

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. [Emphasis added.]

In other words, if KMH had an issue with the accuracy of the reconciliation, it still had to pay in accordance with the reconciliation; however, Lambardar was required to refer the disagreement to an “expert” properly qualified by education and experience, who was to be approved by KMH, for a prompt decision.

In turn, a further provision of the New Leases provided KMH with the right to require Lambardar to provide reasonable backup information for the claimed operating costs utilized in the reconciliation. If KMH was dissatisfied with the accuracy of the backup, it had the right to have its own accountant or auditor attend at Lambardar’s office to conduct an audit, and if such audit did not resolve a dispute, then said dispute would be resolved by the same expert referred to above.

Notwithstanding the “shall be referred” language in the provision provided above, Lambardar refused to appoint an expert, instead taking the position that the disputes were matters of contractual interpretation (that is, of the lease language itself) that required consideration by a court. In that regard, Lambardar took the position that question of interpretation require procedural fairness, party submissions, and a neutral trier; and given the foregoing, the parties could not have intended to give an expert authority to decide questions of law or questions of mixed fact and law. Finally, Lambardar maintained that questions of “accuracy” of the operating costs were limited to simple, arithmetical exercises like adding up a column of numbers drawn from invoices.

The Ontario Superior Court Decision

The Superior Court declared that Lambardar was required under the New Leases to appoint an independent professional consultant (i.e. an expert) to deal with the disputes.

In its analysis, the Court first considered the role of an expert as an alternative dispute resolver, in comparison to an arbitrator or a judge. The Court found that while arbitrators and judges are neutral officials who resolve disputes on evidence submitted via rules and procedures, experts are people appointed to solve a problem themselves based on their subjective knowledge and expertise which are relevant to the circumstances of their engagement. As well, an expert decision is typically fast and inexpensive and, unlike an arbitration or court decision, there are no appeals.

Interestingly, the court also considered that the expert mandate could be broad enough to have some overlap with what may be argued to be within the realm of a legal decision. Specifically, the Court held that the inclusion of some questions of contractual interpretation or even questions of law in a dispute should not be considered a bar to the use of an expert in the resolution of that dispute. Lambardar submitted that the parties could not have intended to give an expert the authority to engage in contractual interpretation and to make decisions of mixed fact and law or decisions of law. The Court disagreed, noting that it could not be assumed that parties must prefer arbitration or court to resolve disputes. In each case, the Court emphasized that one must consider the appointment language in the context of the agreement as a whole to identify the parties’ intentions.

On that point, the Court identified four main reasons in this case why the parties in this case intended that the relevant lease disputes would go to an expert (rather than a court or arbitrator):

1. First, the expert mechanism was limited specifically to the determination of operating costs in the context of commercial leases. This is a field where plenty of expertise exists and where any number of industry people would know the answer to the issues being posed.
2. Second, the contract did not specify the appointment of an accountant or a person with any specifically defined expertise; instead, the parties agreed that whoever was to be appointed must be “qualified by education and experience to make such decision” and subject only to the reasonable approval of the other party. The Court found that this indicated that a broader scope of disputes was expected to be considered by such an expert, and that the parties agreed to pick an appropriate expert for each “such decision” required.
3. Third, the word “accuracy” denoted correctness or meeting a set standard. While it may have meant mathematical correctness, the meaning of “accuracy” was not necessarily so limited.
4. Fourth, before the parties could appoint an expert, the tenant has a unilateral right to call for documentary backup and then to audit. If the parties were not content with the outcome of an audit, it would not be sensible to conclude that the dispute would then goes to the expert is just adding up a simple column of numbers. Rather, such a dispute would necessarily involve consider of interpretations advanced by each side regarding why their column of numbers was the correct one.

Turning next to a review of certain general principles distinguishing experts from judges and arbitrators, the Court noted in relevant part as follows:

• Arbitrators and judges are neutral officials who resolve disputes on evidence, which evidence is submitted to them pursuant to rules and established procedures. Experts, on the other hand, do not necessarily hear any evidence or submissions from the parties, and there can be as much or as little process as the parties agree upon;
• Judges and arbitrators are not supposed to bring their own personal knowledge to bear on the facts, but rather, conduct an adversarial hearing in order to receive evidence; if special expertise is required, the parties will provide expert evidence to help the judge or arbitrator to draw appropriate inferences. By contrast, experts are specifically appointed to solve a problem themselves, based on their own knowledge and expertise;
• Appeals are available in litigation and sometimes in arbitration, whereas expert determinations are final and binding; and
• Whereas expert determinations are typically fast and inexpensive, arbitration or litigation will almost always be slower and more expensive.

In addition, the Court noted that there was no dollar limit or any other financial or issue-based threshold and that, since the process called for a “prompt” decision, this would eliminate civil litigation as an option. We note that even an arbitration with the best-laid of plans could hardly be considered as “prompt” in such circumstances.

As a result, the Court concluded that “it is completely within the domain of reasonable commercial parties to take a topic that is well understood in their world, like determining a proper and fair allocation of operating costs, and to decide to leave the resolution of disputes to an expert in the field.”

Analysis

Although KMH Cardiology was related to commercial leasing, it is nevertheless broadly relevant to the use of expert determination to resolve disputes, including in respect of construction projects. This decision is also arguably relevant when considering the use of project neutrals as well.

First, the Court’s finding that an expert is entitled to render a decision in respect of questions of mixed fact and law, or even questions of law, supports the proposition that an expert can engage in issues beyond purely technical questions without inevitably exceeding the scope of their authority. This is particularly important in circumstances where the technical question at issue is inextricably bound up in an interpretation of relevant contractual provisions, which scenario is not uncommon in construction disputes.

By way of example, an Independent Certifier, Payment Certifier, Consultant or other similar role is often required to make critical decisions on a Project regarding delay, entitlement to compensation, or other contractual entitlement, all of which require consideration of legal principles, contractual interpretation, and relevant facts. With respect to certain issues, these decisions are often final and binding. This decision brings clarity to those roles, and the entitlement of such individuals to make certain decisions, notwithstanding the fact that they may consider some elements that go beyond their technical expertise and would ordinarily be left for an arbitrator or judge.

Furthermore, the Court provided an important clarification in rejecting the blanket proposition that questions of interpretation will inevitably require procedural fairness, party submissions, and a neutral trier. To the contrary, and consistent with the principle of party autonomy, the Court’s conclusions support the proposition that parties to a dispute resolution agreement can craft procedural protections as they see fit, and that an expert will not necessarily be bound by the same procedural limitations as an arbitrator or judge. This is particularly important given that construction experts typically do not have a legal background, and should ideally allay some fear on the part of experts that they will be held to a similar standard as an arbitrator or judge.

That being said, the Court’s analysis also highlights the importance of a contract being very clear and precise with respect to the appointment of an expert decision-maker, including what authority the expert is given. This is particular true given that unlike arbitration, expert determination does not have a statutory framework that exists in the background to provide default rules or parameters. As a result, a poorly-drafted expert determination provision could create ambiguities as to what procedural protections are required of the expert, thus lending itself to further disputes between parties and cast a shadow over the entire process.

On balance, KMH Cardiology therefore provides strong support for the use of expert determination to resolve commercial disputes, and we are of the view that this is particularly relevant for construction projects. In this regard, the decision represents a positive development in an area of law for which there has previously existed limited judicial consideration.

In that regard, allowing parties to give an expert authority to decide questions of mixed fact and law, or even questions of law, without necessarily being bound by fulsome procedural requirements, provides the construction industry with a meaningful supplement to arbitration. As readers are aware, arbitration is commonplace in the construction industry, but may nevertheless be more cumbersome than parties would prefer due to the procedural protections associated with it.

Further, with the recent upswing in arbitration resulting from, among other things, a backlog in the court system, it may soon become more difficult to find available arbitrators given the volume of disputes in the construction industry.

In that regard, the judiciary providing endorsement for expert determinations is a welcome signal not only to the experts looking to grow this part of their business themselves, but also to commercial parties and their counsel looking to craft further alternative dispute resolution processes.  This is one more step by the courts to promote efficiency in dispute resolution, and we look forward to seeing if expert determinations grow as a viable early avenue for the resolution of disputes on construction projects.

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