Key Points:

Parties must understand what the process entails and why it would be beneficial for the determination of their contractual disputes.

Alternative dispute resolution (ADR) is a regular feature of commerce in Australia. Parties include ADR clauses in their commercial contracts with the aim of avoiding lengthy, costly and public litigation.

Clauses providing for expert determination of disputes must be carefully drafted to ensure that they are enforceable and achieve the intentions of the parties.

What is expert determination?

Expert determination is a process by which an independent person is appointed to decide a dispute that has arisen between parties to a contract. Parties can agree, at the time of entry into their contract, the identity or expertise required of the expert, the nature of the disputes which the expert will determine and at least the basic process to be followed by the expert.

Traditionally, expert determination was used to resolve disputes of a technical nature, in respect of which the expert has relevant knowledge and experience. However, expert determination is now more regularly used to determine disputes or all kinds, which may arise in relation to a contract.

Unlike arbitration, expert determination is purely a creature of contract, and is not supported by legislation. Therefore parties must prescribe in their contract processes relating to matters such as appointment of experts, making submissions and making the determination. Alternatively, the contract could adopt institutional rules which deal with these matters.

Some contracts provide that an expert determination will be final and binding unless a notice is given within a prescribed time-frame ‒ in which case the dispute may proceed to arbitration (if prescribed) or litigation. If the contract is silent, the expert determination will be final and binding, and may only be overturned in limited circumstances discussed below.

What are the benefits of an expert determination process as a form of ADR?

There are a number of benefits to including an expert determination process in commercial contracts. The process can be conducted confidentially, informally, efficiently and cost effectively. It can be conducted "on the papers", by the parties providing the expert with information but never having to appear in person. This often means the process does not feel as adversarial as, for example, arbitration or litigation. Further, where the dispute arises during an ongoing contractual arrangement, an expert determination process facilitates the expert making a determination while the parties continue to focus on performing the contract without the distraction of an ongoing arbitration or litigation process. 

Enlivening the expert determination process

Enlivening the expert determination process under the contract is a critical step, as illustrated in a recent decision of the NSW Court of Appeal, Campbelltown City Council v WSN Environmental Solutions Pty Ltd [2015] NSWCA 299.

The contract in question contained both an expert determination clause and a general dispute resolution clause. The expert determination clause was to apply only to disputes about limited defined "variation circumstances" or if the parties otherwise agreed that the subject of the dispute was a variation circumstance. A dispute arose between the parties that did not fall within one of the defined "variation circumstances" and the parties disagreed about whether the subject of the dispute was a variation circumstance.

The Court found that, in the absence of agreement between the parties that a "variation circumstance" had occurred, the expert determination process had not been enlivened and the particular dispute could not be referred to an expert for determination.

Enforcing an expert determination

Unless expressly provided otherwise, expert determinations are generally binding and enforceable from the moment it is made.

However the courts have limited jurisdiction to overturn an expert determination where:

  • there is fraud or collusion; or
  • an expert has acted outside of the terms of the contract under which the expert was appointed by:
    • not performing the task they were required to undertake; or
    • not performing the task in a way contemplated by the agreement.

Unless otherwise stipulated in the contract under which the expert was appointed, there is no requirement for the expert to act judicially or even impartially. Courts will not uphold challenges to expert determinations where an expert made errors in reaching the decision, or took irrelevant matters into account, unless the expert also acted outside the specific terms of their appointment in doing so.

Notwithstanding the limited avenues for challenge, there may be a practical difficulty in enforcing an expert determination. In the absence of a legislative framework or court order, a party could choose to simply ignore an expert determination. In that scenario, the party seeking to enforce the determination would need to approach the courts for an order giving effect to the determination. In such a scenario, the benefits that an expert determination can provide, including the informality, cost-effectiveness and confidentiality, may be lost through no fault of the complying party.

The courts and expert determination clauses

As with other ADR clauses, where possible, courts will interpret a contract to give effect to an expert determination clause. However, the courts have also consistently held that it is essential for an expert determination clause to be clear.

In evaluating clarity, the courts have identified the following elements, which should be considered by parties when including an expert determination clause in their commercial contract:

  • what types of disputes will be referred to an expert for determination;
  • whether there is a different process for more pivotal issues ‒ for instance, the clause may contain the requirement that only disputes involving an aggregate liability of less than $500,000 are referred to expert determination. Both processes need to be clearly defined;
  • the identity of the expert or the process of appointment of an expert in the future, including what to do when there is disagreement on this point; and
  • whether a particular process must be followed by the expert, including whether certain factors need to be taken into account in making a decision.

In addition, parties should consider:

  • whether written reasons for a determination need to be provided, as this is not necessarily an implied term in an expert determination clause;
  • whether the expert has the power to award interest; and
  • what makes the expert's decision binding. That is, is the determination just an advisory opinion, is it final and binding, or do the parties need to agree to it?

Conclusion

In selecting expert determination as a form of ADR under a commercial contract, it is important that parties understand what the process entails and why it would be beneficial for the determination of their contractual disputes.

But it is not just the selection of the process that is important. Parties also need to consider how the process will be enlivened under the contract, how an expert determination will be enforced and the way courts treat expert determination clauses in the event a dispute arises about their clause.

As with ADR clauses more generally, whether the parties achieve their aim of avoiding the courts (and the associated time, cost and publicity of a litigious dispute) is largely dependent on the extent of consideration given to the ADR clause at the time of drafting, negotiating and entering into the contract.