Contractual parties adopting expert determination of disputes to a defined financial limit may regret omitting that specified limit from their dispute resolution clause. The NSW Supreme Court decided in The State of NSW v UXC Limited  NSWSC 530 that where an upper financial limit was omitted from a such clause, the parties were ultimately not free to litigate irrespective of the expert's findings.
An omitted upper financial limit was not be read as zero and did not imply that any expert determination made under the clause it was omitted from, (irrespective of its value) could be reviewed by the Court.
This article considers the drafting pros and cons of expert determination clauses in dispute resolution clauses included in standard government contracts (Clayton Utz acted for BDM in this matter).
The Crown in right of NSW, represented by the NSW Registry of Births, Deaths and Marriages unit of the Attorney General's Department (BDM), entered into an agreement with UXC Limited for the replacement of BDM's core computing system.
The Contract included a three stage dispute resolution process; the third stage being expert determination. Schedule 5 of the Contract set out how the expert determination was to proceed and included the following clauses, which were the subject of the proceedings:
- clause 9 provided that if the expert determines that one party must pay the other an amount exceeding the amount specified in the Agreement Details, then either party may commence litigation, but only within 56 days of receiving the determination; and
- clause 10 provided that unless a party has a right to commence litigation under clause 9, the parties must treat the expert determination as final and binding and give effect to it.
The Agreement Details (Item 8) referred to dispute resolution, but did not specify any amount for the purpose of clause 9 of Schedule 5. However, Item 12 of the Agreement Details limited the liability of each party, in respect of the Contract as a whole, to $5 million.
UXC disputed BDM's right to terminate the Contract for breach and the damages that BDM claimed to be entitled to. The dispute was referred to Mr Bathurst QC (as he was prior to his appointment as the Chief Justice of NSW) as the expert appointed under the Contract, who determined that BDM was entitled to terminate the Contract and to recover damages totalling $2,594,063.
UXC subsequently commenced proceedings challenging BDM's right to terminate the Contract. As a result, BDM commenced these proceedings, seeking to recover the amount awarded by the expert and a declaration that UXC had no right to commence the proceedings it had.
BDM contended that clause 10 of Schedule 5 provides that a party must treat the determination of the expert as final and binding unless the party has a right to commence litigation under clause 9, and that UXC had no right to commence litigation under clause 9. This is because clause9 only gives a right to commence proceedings where the expert makes a determination which exceeds the amount specified in the Agreement Details and no amount for that purpose was expressly specified in the Agreement Details (ie. no amount specified in Item 8).
UXC argued it remained free (within the 56 day time limit) to commence court proceedings challenging BDM's right to terminate the Contract, because:
- the parties intended to specify an amount in the Agreement Details for the purposes of clause 9 of Schedule 5 but overlooked doing so;
- in those circumstances, the parties must have intended that the amount recorded in the request for tender (RFT) and UXC's tender response applied;
- the RFT provided that, save for some specific terms, the terms set out in the "user guide"1 apply. Part B13 of the user guide sets $250,000 as the maximum compensation amount for expert determination;
- UXC did not object to the incorporation of that provision in its tender response; and
- accordingly, the parties agreed to specify $250,000 as the threshold amount for the purposes of Item 8 of the Agreement Details.
In the alternative, UXC contended that, by not specifying an amount in Item 8 of the Agreement Details, the parties intended the amount to be zero. Further, the construction contended for by BDM was uncommercial because it meant that neither party could commence proceedings in relation to any matter arising under the Contract and clause 9 of Schedule 5 had no work to do.
The Court found in favour of BDM. Justice Ball held that:
- BDM is entitled to an order that UXC pay it the amount determined by the expert; and
- UXC is not entitled to commence court proceedings pursuant to clause 9 of Schedule 5 of the Contract (and ordered the appropriate declaration sought by BDM).
Did the contractual dispute resolution provision prevent UXC from commencing court proceedings?
The Court did not accept UXC's contention that the RFT should be read as picking up the user guide, given that only one provision of the RFT referred to the user guide and the user guide contained terms that were contradictory to those included in the Contract. Further, the Contract explicitly provided that the Agreement Details took precedence over the RFT, such that the inconsistent provision in the RFT (ie. that the parties were entitled to commence proceedings if the determination exceeded $250,000) must be severed.
The Court held that it was irrelevant whether the parties overlooked specifying an amount in Item 8 or made a deliberate decision not to do so; the result was the same. That is, under the Contract, as properly construed, the parties are not free to commence court proceedings whatever the expert's determination (other than as set out below).
Further, the Court was of the view that, in circumstances where each party's overall liability under the Contract was limited to $5 million and the parties had not specified a threshold above which they were entitled to commence court proceedings following an expert determination, the expert's decision is binding in relation to any amount up to $5 million.
It was also accepted that the Court's interpretation of the dispute resolution clauses resulted in clause 9 of Schedule 5 having no work to do, but it was satisfied that there was no reason for the Court to endeavour to give that clause an effect when the parties did not specify a threshold that triggered its operation.
The Court found no merit in UXC's alternative argument that, by not specifying an amount in Item 8 of the Agreement Details, the parties intended the amount to be zero. This was largely because of the clarity of the structure of clause 9, ie. that the parties may commence proceedings, but only if the amount awarded by the expert exceeds the amount specified in the Agreement Details.
The Court held that, to take the parties as having agreed an amount of zero by not specifying an amount in Item 8, would produce the opposite effect to the prima facie intent of the clause, with the result that the parties could commence court proceedings regardless of the amount determined by the expert.
How enforceable are contractual provisions that require parties to submit to expert determination before commencing court proceedings?
Justice Ball found that, as a general proposition, a clause which ousts the jurisdiction of the court is unenforceable. However, the scope of that proposition is affected by two important principles:
- the parties to a contract are generally free to identify the rights and liabilities to which the contract gives rise in any way that they choose (eg. by agreeing that their rights and liabilities are to be determined by a third party); and
- the parties to a contract are free to specify conditions precedent to the accrual of rights and liabilities under it.
The Court held that, in circumstances where courts have consistently applied the above principles in respect of arbitrators, there is no reason why they should not apply equally in respect of third party experts. The Court went on to say that parties are free to make a referral to an expert a condition precedent to the accrual of any rights under a contract and they are free to agree to have their rights and liabilities determined by an expert so that the determination, once made, identifies their contractual rights and liabilities.
Accordingly, the Court held that clause 10 of Schedule 5 was a clear example of contractual parties accepting expert determination in relation to the settling of their rights and liabilities under a contract. To do so does not oust the jurisdiction of the court; rather, it provides that once the expert has made a determination, that determination (assuming it was made in accordance with the contract under dispute) is the source of the parties' contractual rights and obligations.
The Court's decision in this case:
- highlights that where an expert determination clause provides an upper limit in respect of a determination amount, but is left blank (whether by accident or design), the amount is not to be held to be set at zero. Rather, the amount will be determined by the court with reference to other provisions in the contract, such as any limit on the parties' total liability;
- reaffirms the distinction between ousting the court's jurisdiction and making an expert determination a condition precedent to it, ie. parties to a contract are free to make a referral to an expert a condition precedent to the accrual of any rights (such as a right to commence court proceedings) under that contract; and
- demonstrates the general trend of courts to encourage alternative dispute resolution and to give effect to methods of alternative dispute resolution chosen by the parties.
Lessons for the next expert determination clause you include in your contract
A monetary limit seeks to contain the risk involved in referring a dispute to expert determination. Expert determination can be useful to resolve smaller, specific disputes quickly and cheaply. However, where the dispute is large, complex, and with considerable sums of money involved, the stakes are likely to be higher. Setting a realistic upper limit against the overall contractual amounts at risk will be an important consideration and particularly so, given the limited opportunity for appealing the expert's determination.
Careful thought should be given as to whether the financial limit is tied to the award made or, alternatively, tied to the level of the claim brought under the clause. Our view is that it provides greater commercial certainty if the financial limit is tied to the claim brought under the expert determination clause, not the award made. We note that the NSW Government has recently amended its standard agreement for services ( Procure IT Framework Version 3, applicable to all purchases made under existing SCCB contracts from 1 July 2011, clause 24). The dispute resolution clause in the contract provides that the upper financial limit is applied to the claim, not the award.
1. Essentially an instruction manual to government employees on how to complete government contracts
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