Australia: Expert determination clauses in contracts - are they worth it?

In brief - Expert determination clauses can lead to cost-effective resolution of disputes if drafted with care and foresight

Expert determination of business disputes can be rapid and relatively cheap, avoiding the expense and delay of court proceedings.

Alternative dispute resolution clauses designed to avoid court proceedings and save money

It is difficult for the drafter of alternative dispute resolution (ADR) clauses to foresee everything that might arise when the relationship sours.

Courts try to enforce such clauses in contracts in general, for two reasons: legally, it is what the parties agreed ( Savcor v State of NSW [2001] NSWSC 596), and, practically, it keeps disputes from clogging up the court system. They also (presumably) save the parties money.

What happens when a business relationship sours and the ADR clause does not cover everything? A classic example is an expert determination clause.

Expert determination enables someone with specific expertise to determine the outcome

Like arbitration, expert determination is a type of ADR where an independent third party is appointed to decide the dispute.

However, unlike arbitration, there is no procedural code and the activities of an expert are subject to little control by the court. Some uncertainty will always surround expert determination.

The flipside of this is that expert determination can be short, sharp, and relatively cost-effective. This is an advantage not to be lightly discarded. It can be weakened if the expert decision is not "binding", thus allowing further dispute.

Should you include a "CEO clause"?

The earlier the dispute is resolved, the cheaper it is for both parties in the long run. The alternative is legal fees and/or delay.

A "CEO clause" is a provision requiring nominated senior management of each party with authority to agree to meet to confer prior to referral to expert determination or other step.

Bringing in senior management will focus the minds of the parties on the bottom line, and allows senior decision makers who are not caught up in the underlying dispute to approach the situation taking commercial reality into account.

These provisions often require the meeting to occur within a relatively short period of time (measured in days) after the dispute has arisen. This enables the parties to address the situation while it is still fresh and, if nothing can be agreed, identify the issue(s) in dispute that must be referred to expert determination.

What happens if a party refuses to attend the CEO meeting?

A clause should be drafted so that the steps are all clear. An ADR clause in which successive steps cascade from previous steps runs the risk of one party failing to comply with a step and derailing the process.

If the dispute is not resolved within the required time frame, courts have held that the dispute can be referred to independent expert determination, regardless of whether there has been a CEO meeting prior to the referral.

In Watpac Construction NSW Pty Limited v Taylor Thompson Whitting (NSW) Pty Ltd [2015] NSWSC 780, the Supreme Court of NSW held that a CEO meeting was not a pre-condition to the expert determination procedure set out in the contract between the parties.

If it were otherwise, either party could defeat the agreed ADR procedure by refusing to meet. This is consistent with the Victorian Court of Appeal's view in 1144 Nepean Highway Pty Ltd v Abnote Australasia Pty Ltd [2009] VSCA 308, that it is unlikely that the parties' agreement would permit frustration of the next step in the ADR clause by either of them refusing to meet.

Who chooses the expert?

The parties should agree on the expert.

As this is another area ripe for dispute, ADR clauses generally contain a provision that if the parties cannot agree on an expert within the required time frame, the expert must be appointed by an authority such as the President of the Institute of Arbitrators and Mediators Australia or a similar body.

What are the rules of expert determination?

If the ADR clause does not provide for the procedure for the expert determination, the procedure is to be decided by the expert (see Fletcher Construction Australia Ltd v MPN Group Pty Ltd (unreported, NSWSC, 14 July 1997, BC9705205); Triamo Pty Ltd v Triden Contractors Ltd (1992) 10 BCL 305; McGrath v McGrath [2012] NSWSC 578 and Barclays Bank PLC v Nylon Capital LLP [2011] EWCA Civ 826).

The rationale for this was explained in the Watpac decision. The court observed that in circumstances where parties have agreed to appoint an expert (without providing for the rules that the expert must apply), they should be taken to have accepted that the expert will impose terms on his or her appointment (see Belvino Investments No 2 Pty Limited v Australian Vintage Ltd [2014] NSWSC 978).

Even if the ADR clause sets out the terms of appointment, an expert is entitled to impose a reasonable term to protect him or herself in relation to possible court proceedings arising out of the determination (eg by an indemnity): 1144 Nepean Highway.

Are expert determinations binding?

Expert determinations are binding unless the contract clause states otherwise or it can be established that the determination is not in accordance with the requirements of the contract.

In Shoalhaven City Council V Firedam Civil Engineering Pty Limited [2011] HCA 38, the High Court held that expert determinations will be final and binding unless the expert has acted outside his or her contractual powers or the determination is otherwise tainted by illegality.

An ADR clause may, however, provide otherwise or for "appeal" steps from an expert determination, such as the ability to initiate court proceedings where a dispute exceeds a nominated sum of money.

For further information, please contact:

Toby Blyth
Alternative dispute resolution
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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