“Expert determination” can refer to a broad range of decisions – binding or non-binding – made by a third party.  Expert determination has been used for a long time under construction contracts as a way of settling disputes by the engineer or contract administrator.  With a vast array of dispute resolution options available to contracting parties, expert determination certainly has a role to play.  But what makes it different to, say, arbitration or adjudication?  A recent Australian case (which is also relevant where English law applies) examined some of its distinguishing features.

Background

The construction contract in question provided:

  • for disputes to be resolved by expert determination, following (unsuccessful) executive negotiation;
  • that “the expert must act as an expert and not arbitrator; … and must issue a certificate in a form the expert considers appropriate, stating the expert’s determination and giving reasons…”, and
  • that the expert’s decision would be final and binding if it imposed an aggregate liability on one party to the other not exceeding AUD$500,000.

Disputes erupted between the owner and the contractor.  The disputes centred upon whether the contractor was entitled to certain time extensions, and conversely whether the owner was entitled to claim damages against the contractor for late performance.  The extension of time clause contained a time-bar provision (i.e. it made an EOT conditional upon a timely notice), but the contract also conferred upon the owner an independent power to grant an EOT to the contractor even if it failed to claim an EOT within the time limit.

The expert determined that:

  • the contractor was not entitled to any EOT, as it had not provided requisite notice or details of its EOT claim (i.e. its EOT claim was time barred), but
  • because the owner had actually contributed to the delays suffered by the contractor, it was appropriate for the owner’s independent power to grant an EOT to be exercised, so as to give the contractor an EOT (but not for the full period claimed), and reduce its liability for liquidated damages.  In other words, the expert stepped into the owner’s shoes (as he was entitled to do) and awarded a discretionary EOT.

In monetary terms, the expert decided that some AUD$497K was due from the owner to the contractor.  Being just under the AUD$500K threshold, the expert’s determination was binding on the parties unless a ground for challenging it could be made out.  The contractor – dissatisfied with the result – sought to challenge the expert’s determination.

Grounds for Challenge

Broadly speaking, under Australian law (which is similar to English law in this regard) an expert’s determination is not enforceable if:

  • it is inconsistent with the requirements for such a determination as laid down in the applicable expert determination agreement, or
  • it was arrived at by fraud or collusion.

In this case, the contractor contended that the expert’s determination was not binding because the expert had failed to “give reasons” which met the requirements of the construction contract.  In other words, the expert’s determination was not properly a “determination” under the contract due to the alleged lack of reasons.

In substance, the attack on the expert’s determination was not that he had failed to give reasons for his determination – because he had – but rather that the reasons given for the determination were illogical and inconsistent.  This, however, did not provide a basis for impugning the expert’s determination, and accordingly the challenge to the determination was ultimately rejected.  Even if the determination was illogical, inconsistent or plainly wrong, the determination would be upheld. 

Comment

It is now common for expert determination agreements to require experts to give reasons for their determinations.  This has the consequence of giving experts’ determinations the appearance of being like an arbitrator’s award or an adjudicator’s decision.  But as with adjudicator’s decisions, inadequacies in the reasons given for an expert’s determination do not usually render it unenforceable.  It will only be if insufficient (as opposed to erroneous) reasons have been given that complaint may be made about an expert’s determination, however the remedy for insufficient reasons may be a court order requiring that reasons – or further reasons – be given (see e.g. Halifax Life Ltd v Equitable Life Assurance Society, [2007] EWHC 503 (Comm)).

However, it is often unsatisfactory to contracting parties that an expert’s determination should be binding upon them if it is erroneous, i.e. it contains flawed reasoning.  There are ways in which construction contracts can be drafted to ensure that seriously erroneous decisions do not stand (short of making them non-binding altogether), including the following:

The contract provides that the decision of the expert is binding save where it contains a “manifest error”.

The contract provides that the expert’s determination is provisionally binding, in the same way as an adjudicator’s decision under the Construction Act is provisionally binding, meaning that further, final proceedings can be brought to overcome the effects of an erroneous determination.

The final point to note is that in many cases (including this one) there may be little to distinguish between expert determination and arbitration.  Contracts involving expert determination usually provide, as here, that the parties agree that the expert does not act as an arbitrator. The reason such provisions are used is to try to ensure that the dispute resolution agreement is not characterised as being an arbitration agreement, to avoid the application of arbitration legislation.  Strictly speaking such provisions are not binding or conclusive, but the courts are usually strongly influenced by them, meaning (if upheld) that the expert’s determination cannot be supported or attacked under the statutory provisions concerning arbitration and arbitrator’s awards.

Reference: Shoalhaven City Council v Firedam Civil Engineering Pty Ltd [2011] HCA 38 click here.