When will “leave it to the experts” be a terrible idea?

There are many different ways to resolve contractual disputes.  As a consequence, when a contractual dispute arises, the question of which dispute resolution mechanism to use may become a further source of disputation.  For that reason, it is often a good idea to put some thought into dispute resolution clauses when the contract is being made (and the parties are basking in the glow of the successful deal which they have concluded) rather than waiting until the storm clouds of disputation start to gather.

One possible form of dispute resolution is “expert determination”, where the parties contractually agree that they will appoint an expert to resolve their dispute (and be bound by the expert’s decision).  Expert determination can be very useful for disputes which require expertise of a specific kind (for example, an expert accountant to value a minority shareholder’s shares, or an expert engineer to resolve a specific technical question in a construction contract).  However, expert determination clauses are often included in contracts where expert determination is not a suitable form of dispute resolution.

There are a number of limitations to expert determination which can make it unsuitable for disputes “at large” (rather than disputes of a specific technical kind).   First, as long as the expert carries out the determination in the manner called for by the contract, the parties will be bound by the determination without a right of appeal.

This limitation arose in a recent New South Wales case (in which the parties were not left wondering about the result – the first paragraph of the judgment was, “This is a challenge to an expert determination. It fails.“)  In that case, the expert determination clause referred to the   Resolution Institute’s Expert Determination Rules, which required the expert to determine the dispute “in accordance with law”.  The party challenging the determination said that the expert had not determined the dispute “in accordance with law” because the expert had got the law wrong.

However, the Court held that this was not what “according to law” meant, and said:

“In the context in which they appear here, however, the words ‘according to law’ mean in the manner which the law requires a person in the position of the Expert to go about the mandated task, so as to give it contractual efficacy; for example, honestly, without bias or collusion, and while not intoxicated.”  (As to the last requirement, booooo, Fun Police – where’s the challenge in that?)

If “according to law” did mean “without legal error”, then the consequence would be that a party seeking to challenge the expert’s determination would have an almost unlimited right of appeal from the expert’s determination (because any legal conclusion made by the expert would be open to challenge).  This can be contrasted with the requirements concerning arbitration (a different form of dispute resolution) where unless the parties expressly agree otherwise, appeal rights are quite limited.  Arbitration is governed by statute (whereas expert determination is not) and the Court held that the challenger here should not be permitted to challenge the expert determination on grounds which would not have been available to challenge an arbitral award.

The distinction between expert determination and arbitration was relevant in another recent unsuccessful challenge to an expert determination (this time in Queensland).  In this case, one of the challenges to expert determination was based on an argument that the expert had conducted themselves as an arbitrator (rather than an expert) because the expert had sought submissions from the parties and had then asked the parties to provide further information once those submissions had been provided.

The Queensland court rejected the argument that the request for further information involved acting as an arbitrator, and distinguished between the provision of information in response to the expert’s request, and “hearing evidence in the sense of a judicial or quasi-judicial proceeding” (which would be more likely to be a hallmark of arbitration than of expert determination).  Again, the challenge to the expert’s determination in this case failed.

So, given that challenges to expert determinations can be hard to win, a much better way of avoiding an unfavourable expert determination is not to get lumbered with such a determination the first place.  That means giving careful consideration, at the time the contract is made, to the kinds of disputes which are likely to arise.  It also means ensuring that, if there are likely is to be specific disputes for which expert determination is suitable, those disputes are corralled from “general” disputes which might arise from the contract.

The Danish physicist Niels Bohr (who, having acquired a Nobel Prize for Physics, probably had some idea about the possession of technical expertise) said that “an expert is a man who has made all the mistakes which can be made, in a narrow field”. If the expert determination can be confined within a contractually narrow field, this will lessen the prospect that including an expert determination clause might involve making all the mistakes which can be made in the wide field of the contract as a whole.

For more on our commercial law capabilities, contact Philip Stevens or Leonard Lozina or William Han

For more on our litigation and dispute resolution capabilities, contact Dennis Vuaran or Angus Macinnis

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September 7
Commercial Law Litigation and dispute resolution