Expert determination - what are the choices?

Articles Written by Toni Vozzo (Partner)

Dispute resolution clauses in contracts often include an expert determination mechanism to resolve some or all disputes that might arise. Typically, an expert determination clause provides for a 'final and binding' determination by an independent expert with specialist knowledge, skill and expertise in the subject matter of the dispute. Parties need to think about whether expert determination is the 'right' process for resolving their contractual disputes and if so, what is the most appropriate mechanism for resolving disputes which are likely to arise. It is not always clear that parties have effectively addressed what work the chosen expert determination mechanism should be doing.

This article identifies issues to consider when using expert determination and looks at the benefits and disadvantages of the expert determination process.

Potential disputes

While expert determination may be an efficient and cost effective approach for resolving some contractual disputes, it may not be suitable for others.

A dispute may arise:

  • where the contract contemplates agreement of a matter provided for by the contract and the parties cannot agree;
  • where a contractual right or approval of a particular course of action is limited by a requirement of reasonableness, or some other standard or constraint;
  • regarding the construction or interpretation of the contract or a related document;
  • where the operation or effect of the contract is unclear;
  • where the performance or non-performance by a party of its obligations under the contract is in issue;
  • concerning matters of a financial, engineering or otherwise technical nature;
  • as a result of multiple unresolved issues and differences; and/or
  • as a result of conduct by a third party.

Issues to consider

When negotiating the terms of an expert determination resolution clause or mechanism to be included in a dispute resolution clause parties should consider:

  • the type of disputes that are likely to arise between the parties;
  • whether the likely disputes are suitable for resolution by expert determination;
  • whether specific types of disputes, such as those requiring specialist knowledge, skill or expertise in the subject matter of the dispute, are amenable for resolution by an expert;
  • the nature and scope of specialist knowledge, skill or expertise required for possible disputes;
  • whether more than one expert would be required to determine certain disputes;
  • the materiality of the potential adverse consequences of the expert determination;
  • whether an expert determination will resolve the dispute or would require relief only available from a court;
  • whether the procedure for the conduct of the expert determination should be specified in detail or whether the appointed expert should decide what is a suitable procedure once the particulars of the dispute are known;
  • likely enforcement issues;
  • how the expert will be appointed if the parties cannot agree on the identity of the expert and who will pay for the expert's costs; and/or
  • whether the successful party should be entitled to recover its costs from the unsuccessful party, and if so, the extent of costs recoverable and on what basis.

Benefits and disadvantages

The main reason why parties choose to resolve their disputes or differences by expert determination seems to be the desire for a speedy, final and binding solution imposed through an informal process to avoid the complexities, delay and associated costs of disputes being determined by legal proceedings or arbitration.

Expert determination will not usually provide for court procedures such as pleadings, discovery, interrogatories, witness statements, interlocutory applications or hearings which can result in lengthy and costly litigation, nor do rules of evidence apply. The informality of the process means that expert determination can be an efficient and cost effective approach to dispute resolution.

It can take years to achieve finality of outcome using litigation or arbitration. Expedited arbitration may be quicker. Although, the nature of the arbitration process, which requires the arbitrator to act judicially and in some respects can be subject to the court's supervision, can result in longer and more expensive processes than expert determination. Disputes can be resolved through expert determination quickly, sometimes in a matter of weeks, although the resolution of more complex multi-issue disputes can be more protracted.

The expert determination process is not judicial in nature and not intended to be adversarial. It is conducive to parties maintaining a relationship and continuing to perform the contract. This may be particularly relevant in long term supply and service agreements.

Expert determination is a private process. Privacy and confidentiality may be important to parties who may not wish to have their differences publically ventilated through the courts.

Courts are reluctant to set aside an expert's determination (declared by contract to be final and binding) unless the error is clear and material. This would seem to be an acknowledgement by the courts of an intention to empower parties to agree a process for resolving their disputes whose purpose is to avoid legal challenges. While this means that an expert determination is likely to achieve finality more quickly than resolution through litigation or arbitration, it also means that a party dissatisfied with the determination will have limited scope to challenge an adverse outcome.

A significant disadvantage of expert determination is that the parties relinquish the full legal processes (and associated rights and safeguards) that would otherwise be available through litigation or arbitration.

Apart from fraud or collusion, the only basis for seeking to set aside an expert's determination is if the expert has not complied with the contractual terms which specify how the determination is to be carried out. It is not enough to point to a mistake in the reasoning process of the expert. If the expert has acted within the scope of the contract, the parties will be bound by the determination even if it is wrong.1

An expert is not required to act judicially and is not bound to determine issues based on the facts presented by the parties. The expert, usually appointed because of specialist knowledge, skill and expertise in the subject matter of the dispute, may determine issues based on general observations and experience. There is generally no requirement to apply the rules of natural justice but this will depend on the process agreed by the parties.

There would seem to be much greater scope for an expert to get it wrong. The issue may then be whether the error will deprive the determination of its binding effect.

The scope of disputes to be determined and the procedure to be adopted in the conduct of an expert determination are governed by the terms of the contract. Parties can (and should) discriminate between different types of disputes when negotiating the terms of the expert determination clause. However, often 'boilerplate' clauses are incorporated into contracts without proper consideration as to whether expert determination (or another process) is the most appropriate mechanism for resolving the disputes likely to arise. Sometimes parties will only realise they have committed to an unsatisfactory 'final and binding' process with an unacceptable level of risk attached when a dispute arises.

Some tips

  • Having the 'right' expert with the requisite skill set in the subject matter of the dispute is crucial to getting the best outcome. The expert determination clause should provide for different experts to determine different types of disputes.
  • Where a dispute involves multiple issues of a different kind it may be appropriate to appoint more than one expert. For instance, an accountant may have the appropriate expertise to determine the price of services based on the contractual criteria for determining price, but may not have the appropriate expertise to resolve an ambiguity in the interpretation of the contractual provision that sets out pricing criteria. The correct interpretation of what is included in the price will be essential to obtaining the right outcome. The application of incorrect pricing criteria may result in the determination being invalid and not binding on the parties. In this instance, it may be appropriate to appoint a legal expert (in addition to the accounting expert) to determine the proper contractual interpretation.
  • Alternatively, an expert determination clause could include a mechanism to enable contractual interpretation issues (and issues on the interpretation of a related document not being a document of a financial, engineering or otherwise technical nature) to be determined by a court.
  • If parties wish to have a third party nominate the expert (where they have been unable to agree on the identity of the person to be appointed as expert), ensure that the third party is prepared to nominate otherwise the expert determination clause may be unenforceable.
  • If the outcome of the dispute resolution is likely to be material, consider whether expert determination is suitable at all.
  • If using expert determination to resolve material and significant disputes (either with regard to complexity, dollar value or both), consider whether the expert's determination should only be 'final and binding' if the direct financial implications of the determination are below a pre-determined threshold amount that is within an acceptable level of risk. Also consider a procedure which provides the parties with a reasonable opportunity to present submissions and evidence to the expert and to controvert the other party's submissions and evidence and include the right to legal representation at all stages of the process.
  • Expert determination clauses may be unenforceable if there is uncertainty in the procedure to be followed2 or if the contractual procedure is deficient and the parties are not able to agree; a court is unlikely to fill in the 'void' and determine procedures for the parties3. Alternatively, parties may be bound by an unsatisfactory process for resolving the dispute.
  • A dispute may not be susceptible to expert determination e.g. where the dispute involves a third party not subject to the expert determination process and there are a multiplicity of proceedings risking inconsistent concurrent findings; or where the relief sought can only be given by a court such as discretionary statutory remedies like a declaration that the head contract was void ab initio4
  • Due to the contractual nature of expert determination, a party must commence legal proceedings to enforce a determination by way of declaration or an order for specific performance of the contract; this could result in the matter being more protracted and costly.
  • If an international party is involved, arbitration is likely to be more appropriate given the established system of domestic and international arbitration laws and treaties that enable arbitral awards to be more efficiently and effectively enforced overseas than Australian court judgements.

Concluding comments

The current law regarding the enforceability of expert determination processes allows parties to make an initial assessment on whether expert determination is the right process for the resolution of any, all or only some of the likely disputes that may arise in connection with their contract. The reality is, however, that parties can only assess whether a dispute is suitable for resolution by expert determination when the particulars of the dispute are known. Parties should think carefully about relinquishing the rights (and safeguards) available through litigation or arbitration for all disputes when addressing the suitability of an expert determination process.

1 McHugh JA in Legal & General Life of Australia v A H Hudson Pty Ltd [1985] 1 NSWLR 314 at 335; Mason P in Holt v Cox (1997) 23 ACSR 590. See also Shoalhaven City Council v Firedam Civil Engineering Pty Ltd (2011) 244 CLR 305 & TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4 on challenges to expert determinations.
2 The Heart Research Institute Limited & Anor v Psiron Limited [2002] NSWSC 646
3 Triarno Pty Ltd v Triden Contractors Ltd unreported, July 22 1992 NSWSC
4 Savcor Pty Ltd v State of New South Wales [2001] NSWSC 596

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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