Contractual Determinations: Can they be Challenged?

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Monday, February 9th, 2015
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Many contracts call for a determination to be made by the Superintendent and/or by an independent expert.

Such determinations usually result in a decision in favour of one party and the other party is left aggrieved by the decision. At times, the determination can have great financial significance or indeed give rise to significant financial hardship.

Engineers can make, be involved in and be affected by contractual determinations.

In making a determination, it is important to have regard to the wording of the contract or instruction given. If a determination is not in accordance with the terms of the contraction or the instruction given it is of no legal effect and must be done again. If, on the other hand, the determination complies with the contract, the parties are bound by it.

Lord Denning MR in Campbell v Edwards [i] stated:

It is simply the law of contract. If two persons agree that the price of property should be fixed by a valuer on whom they agree, and he gives that valuation honestly and in good faith, they are bound by it. Even if he has made a mistake they are still bound by it. The reason is because they have agreed to be bound by it. If there were fraud or collusion, of course, it would be very different. Fraud or collusion unravels everything.

Determination can be separated into two categories: those which involve (a) a ‘mechanical’ computation and (b) those which requires the exercise of ‘discretionary’ judgment.

The first is characterised by the application of ‘detailed fixed and objective criteria as to how the result is to be determined. Application of the applicable criteria does not involve any exercise of judgment. It is a mechanical exercise. Ordinarily, there will be only one unique result that is correct. An incorrect determination will be in breach of contract and may be challenged and set aside by a court. The court will then determine the correct result in accordance with the contract.

A ‘discretionary’ judgment, on the other hand, will typically be required (or authorised):

“where no fixed or readily available standard criteria exist. There may be several possible methods of assessing value, each giving widely different results, but each being reasonable. Many subsidiary factors relevant to the valuation may be uncertain, many contingencies may have to be taken into account, wide ranges of legitimate decisions may apply, and opinions may legitimately differ as to virtually all of the relevant issues.” [ii]

In some cases, the determination may be a combination of both (a) and (b) in which case the exercise is partly comprised of discretion, judgment or opinion and partly constituted of objective fact or mechanical calculation. In some such cases, the overriding discretionary or judgmental character of the exercise may so inform each step in the determination as to put even those steps which are matters of objective fact or mere mechanical calculation beyond the scope of permissible review. In other instances, it may appear that, despite the overall character of the exercise, the various steps in the determination are severable, according to whether they are essentially discretionary or judgmental or simply matters of objective fact or mechanical calculation, and that those steps which are of the latter kind are within the scope of permissible review.

The question in each case is what the parties should be presumed to have intended, and that is to be determined objectively from the terms of the contract, bearing in mind the context in which it was created.

In making determinations, an engineer, architect, or quantity surveyor is a professional, but they are typically employed as the principal’s agent and can hardly be called independent. Nevertheless, if the contract empowers such a person to make a determination, then such determination/s will be final and binding upon the parties in the absence of bad faith or an excess beyond the power that has been so authorised by the contract.

Where engineers make value judgments, they must have regard to current industry accepted standards, codes, principles and methods, but firstly they need to have regard to the precise terms of the contract which is the authoritative source and can provide guidance as to how the determination is to be properly exercised.

[i] [1976] 1 WLR 403
[ii] W M C (1999) 20 WAR 489 at 496 [23]
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