Integrated Training and Services Sdn Bhd v Kerajaan Malaysia & Ors [2022] 3 MLJ 77

Federal Court (Putrajaya)

Expert determination clause in contract

1. The Appellant is a company operating a flight academy which provides flight training, flight simulator training and aircraft rental.

2. The Appellant and the First Respondent entered into two agreements which required the Appellant to provide and carry out flight training courses for the Respondents’ trainees and the Respondents were to send certain number of trainees to attend the Appellant’s training courses by batches (“the Contract”).

3.  However, the Respondent has failed to send the required number of trainees as agreed.  Due to the limited enrolment, the Appellant was forced to end the training programmes early since it could not sustain the financial burden.

4. The Appellant then filed an action against the Respondents for breach of contract in the High Court. The High Court rendered a decision in favour of the Appellant and partially upheld the claim for special damages.

5. Later on 12 May 2015, the Court of Appeal found that the High Court was correct in finding the Respondent liable for breach of contract.

6. However, the Court of Appeal has set aside the amount of damages and remitted the matter to the High Court for assessment of damages before the registrar in accordance with clause 27.4 of the Contract.

7. The clear wordings of the pertinent paragraph of the said order dated 12 May 2015 (“2015 Order”), are as follows:

“(c) Berkenaan item (1) dalam Penyataan Tuntutan Plaintif; perintah mahkamah atas kuantum diketepikan dan digantikan dengan Perintah bahawa kes diremit ke Mahkamah Tinggi untuk taksiran ganti rugi di hadapan Pendaftar Mahkamah Tinggi selaras dengan Klausa 27.4 Kontak;…:

8. In accordance with the 2015 Order, the parties agreed to appoint Messrs. Salihin, chartered accountants, as an independent auditor.  Messrs. Salihin filed a report before the deputy registrar of the High Court in which damages were estimated at RM21,735,613.50. The deputy registrar acknowledged the report and granted the Appellant damages in that amount, which must be paid.

9. Aggrieved by the award given, the Respondent appealed to the judge in chambers, the learned judicial commissioner (“JC”), and the appeal was allowed.  The JC directed the parties to appoint a new auditor to assess the damages payable in accordance with clause 27.4 (“Clause 27.4”).

10. The learned JC opined that Clause 27.4 did not state that the report of the expert must be accepted as final and conclusive.

11. Dissatisfied with the decision made by the learned JC, the Appellant appealed to the Court of Appeal.

12. The Court of Appeal on 13 March 2018 affirmed the decision made by the High Court and dismissed the Appellant’s appeal (“2018 Order”).  The Court of Appeal opined that the expert is required to justify his report to ensure it was fair and transparent as per Section 74 of the Contracts Act 1950 (“Act 136”).

13.  The Federal Court on 15 September 2020 granted the Appellant’s application for leave to appeal on the following questions:

(a) whether Section 74 of Act 136 applies to where parties to a contract have agreed to be bound by the determination of a mutually appointed expert as to the amount due and payable under a contract by reason of a breach or other specified event (“Question 1”);

(b) whether in the absence of any vitiating factors recognised in law, a report of the said mutually appointed expert determining such amount would be sufficient basis in law and fact for an award of damages in proceedings for the assessment of such amount (“Question 2”);

(c)  whether such a report is only to be rejected where it is established that the report is unreliable within the meaning of the decision of the Privy Council in Lee Kee Choong v Empat Nombor Ekor (NS) Sdn & Ors [1976] 2 MLJ 93 (“Question 3”).

1.   Whether the court may lawfully depart from what has been agreed by the parties in their contract to have a mutually appointed expert to determine expenses or damages as a means of independent valuation?

1.   The determination of auditor under Clause 27.4

(a) Clause 27.4 of the Contract provides-

“In the event that this Contract is terminated under any provision of Clause 27.3, the Government shall pay the Contractor upon demand the amount of which to be determined by an independent auditor to be appointed mutually by both parties in respect of all sums and expenses properly and necessarily incurred by the Contractor in accenting it to the obligation under this Contract up to and including the date of termination of this Contract”.

(b) The Appellant’s submission

(i) The learned counsel for the Appellant, Dato Malik Imtiaz, submitted that when parties to the Contract have agreed to be bound by the assessment of a mutually appointed expert, they are not entitled to reject the conclusions arrived at by the expert.

(ii) In this appeal, the parties agreed to hire an independent auditor to assess the amount payable under the circumstances mentioned under Clause 27.4.

(iii)  Therefore, the learned counsel for the Appellant argued that the determination of the auditor is final and parties are bound by it; unless there are vitiating factors i.e. fraud, collusion and partiality or against public policy.

(iv) Although the Respondents during a case management said they wanted to cross-examine the expert, no such application was made to the court.

(v)  The Appellant’s learned counsel contended that since Clause 27.4 does not specify the methods to be taken, it is up to the expert to decide.

(c)  The Respondent’s submission

(i)  The learned senior federal counsel (“SFC”) Puan Habibah contended that the Respondents agreed with the auditor’s appointment but the Respondents did not agree on how the amount was derived by the auditor.

(ii) The SFC further argued that the auditor’s determination can still be challenged as the said Clause 27.4 does not state ‘final and conslusive’.

(iii)  The SFC also contended that the auditor had failed to adhere the assessment principle and, that the vitiating factor is present as the auditor had considered irrelevant document that constitute a vitiating factor that led to an injustice.  She further explained that the registrar was informed of the Respondent’s plan to cross examine the auditor but on the next date the auditor proceeded with the clarification.

(iv)          The SFC acknowledged that no terms of reference (TOR) were provided to the auditor upon his appointment.

2. The Federal Court opined that the 2015 Order was clear and straight forward that the case was ordered to be remitted to the High Court for assessment of damages before the registrar of the High Court and the assessment had to be in line with Clause 27.4.

3. Since Clause 27.4 is an expert determination clause, the Supreme Court of New South Wales in the case of The Heart Research Institute Ltd v Psiron Ltd [2002] NSWSC 646 explained that the expert determination is a process where an independent expert decides an issue or issues between the parties.  The disputants agree beforehand whether or not they will be bound by the decisions of the expert.

4. Further, the Federal Court referred to the case of Campbell v Edwards [1976] 1 All ER 785 where it was held that; where the two parties had agreed the price of the property was to be fixed by a valuer on whom they should agree and the valuer gave his evaluation honestly and in good faith, the valuation could not be set aside by either party on the ground that the valuer had made a mistake, for, in the absence of fraud or collusion, the valuation was binding on the parties by contract.

5. In this recent appeal, it cannot be disputed that on the part of the Respondents that they had agreed to the appointment of the independent auditor to assess the amount due to the Appellant.

6.  The Respondent’s main grievance was that they were not given a chance to cross-examine the expert.  But the evidence showed otherwise.  The SFC had the opportunity to question the expert during clarification and during one of the meetings held on 11 April 2016, the SFC said that she is left to the auditor to determine the amount.

7. It is trite law that the parties are obligated to abide by the expert’s determination once they have mutually agreed to appoint the expert.

8. The fact that the Respondents did not agree with the expert’s methodology alone cannot be used to invalidate the expert’s determination. Additionally, the Respondents had not provided any evidence that the expert had extended beyond the scope of his duties.

9.  Therefore, under the law the expert is free to determine the procedures since Clause 27.4 does not provide the procedures to be followed by the expert.

1.  The Federal Court allowed the appeal and the 2018 Order of the Court of Appeal and the order dated 16 June 2017 by the High Court were set aside.

2.  The Federal Court reinstated the award by the registrar delivered on 2 September 2016 with costs of RM 60,000.00 here and below to the Appellant subject to allocator.

1. Expert determination provides an informal, speedy and effective way of resolving disputes which are of a specific technical character or specialized kind.

2. The purpose of having an Expert Determination Clause in a contract is to assist the parties resolving disputes without delay and expenses of going to court or arbitration, since the parties agreed to be bound by the decision of expert.

3.To avoid conflict, it is advisable to detail out the terms and conditions as well as the procedures relating to the Expert Determination Clause.