Lessons from two recent cases:
RW Health Partnership Pty Ltd v Lendlease Building Contractors Pty Ltd [2019] VSC 353
Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 576
What you need to know
- Split dispute resolution clauses can help preserve business relationships and save time and money by deploying expert determination where appropriate. However, without careful drafting these clauses can lead to further disputes about which process applies.
- Expert determination "in relation to compensation" may be interpreted as including liability to pay compensation, not just the amount of compensation payable.
- Expert determination "according to law" does not mean the expert has to get the law right, or open the door for an appeal.
- Two recent Australian cases have applied ordinary contractual principles of interpretation to decide the meaning of expert determination clauses.
What you need to do
- When drafting split dispute resolution clauses, clearly identify which types of disputes will be resolved by expert determination.
- If you want a right of appeal from an expert's decision, the right should be expressly given in the clause.
- See our Expert Determination QuickGuide for more detailed guidance.
When you draft a contract you cannot predict all of the potential disputes that may arise. Expert determination is a relatively quick and inexpensive dispute resolution process which can be used effectively where resolution of a dispute requires a degree of evaluation or judgment
An expert is typically asked to decide matters involving a discretion or opinion rather than an objective fact or question of law. These considerations are useful to bear in mind:
- in formulating split dispute resolution clauses, where certain types of dispute are to be referred to an expert determination process while others are to be dealt with in arbitration; and
- when selecting the types of disputes to be finally resolved by expert determination.
Finding the right words to achieve the desired end can, however, be very difficult. This has been reinforced by two recent cases before the Victorian and New South Wales Supreme Courts, which illustrate that the Courts will pay close attention to the natural meaning of the words in a dispute resolution clause and this may have unanticipated consequences for the types of dispute that are required to be resolved by an expert.
RW Health Partnership v Lendlease Building Contractors [2019] VSC 353
Shortly before the 10 year anniversary of the occupation of a hospital it had contracted with the respondent to build, the applicant discovered a defect in the water system. The applicant sought damages from the respondent in respect of the defective water system. With the expiry of the statutory limitation period fast approaching, the applicant sought to protect its position by filing proceedings in the Victorian Supreme Court and then by commencing arbitration.
However, the parties' contract created a split alternative dispute resolution mechanism under which any dispute “in relation to Compensation" was to be referred to expert determination, while arbitration was the chosen forum for "all other disputes". Compensation was defined as “compensation for Loss or damage suffered by a party as a result of a Default” which encompassed “any liability…of any kind whatsoever”.
In the case before the Court, the applicant sought a stay in the litigation to refer the dispute to arbitration. As explained in our recent update, such a referral would be mandatory if the dispute was the subject of a valid and operable arbitration agreement.
This was opposed by the respondent on the basis that there was no arbitration agreement between the parties. Instead, the respondent argued that the parties had agreed that the dispute (being one "in relation to Compensation") was to be resolved by expert determination.
“In relation to Compensation”
In support of its stay application, the applicant sought to argue that, consistently with the presumption that experts usually deal with evaluative matters, the right to refer a dispute to expert determination was only narrowly engaged where the subject matter of the dispute was the assessment of the amount of Compensation (and did not apply where the dispute involved questions of entitlement to Compensation).
Accordingly, the Court needed to directly address whether the informal and summary expert determination process was intended to apply to disputes regarding questions of disputed facts and law.
The Court considered the precise language of the clause, including defined terms, and noted that the task of construction requires the Court to ask "what would a reasonable business person have understood those terms to mean”. Taking into account the background, context, market and surrounding circumstances known to the parties, Justice Riordan disagreed with the applicant's position.
Instead, his Honour determined that a dispute "in relation to Compensation" covered the establishment of liability and the quantification of compensation. This being the case, the chosen forum for resolution of the dispute was expert determination, even though it involved mixed questions of fact and law as well as an evaluation.
Lainson Holdings v Duffy Kennedy [2019] NSWSC 576
This case also concerned whether it was intended that an expert resolve matters of law. However, the question for the Court in this case was not whether the parties had agreed to refer the particular dispute to expert determination, but whether the losing party had a right to "appeal" the expert's otherwise final and binding determination based on an alleged error in law.
The relevant expert determination agreement provided that any dispute arising between the parties would be resolved in accordance with the Resolution Institute Expert Determination Rules. Relevantly, rule 5 states: "the Expert shall determine the Dispute as an expert in accordance with these Rules and according to law".
The defendant in this case had failed to provide a bank guarantee as required by the contract between the parties. This was expressly agreed to be a material breach of the contract, giving rise to a termination event.
Some considerable time after the deadline for the bank guarantee to be provided and in the context of the breakdown of relations between the parties, the plaintiff terminated the contract (exercising its express rights under the contract). The defendant alleged that the termination was for reasons other than the failure to provide the bank guarantee, that the termination was invalid and sought damages.
The defendant referred the dispute to expert determination and the expert sided with the defendant. In the determination, the expert found that there was an implied term in the contract requiring the plaintiff to exercise its power to terminate reasonably, in good faith and not for an extraneous purpose, which the plaintiff breached. The expert made an award of $1.8 million in the defendant's favour.
The plaintiff commenced litigation proceedings to set aside the determination. It challenged the validity of the determination on the grounds that the dispute had not been determined "according to law", alleging that the expert's implication of a term into the contract was an erroneous application of the legal authorities.
“According to law”
Justice Hammerschlag held that, where the parties have agreed that the expert determination will be final and binding, the parties will be bound so long as the expert did not go outside the ambit of the contract in determining the dispute.
The phrase "according to law" in rule 5 was construed objectively by reference to what a reasonable person would understand it to mean, in light of the commercial circumstances of an ADR agreement. His Honour rejected the plaintiff's interpretation of "according to law" as meaning "free from legal error affecting the result" and held that the clause required the expert to comply with the law relating to the conduct of expert determination proceedings. This, the Court held, included that the expert must determine the dispute "honestly, without bias or collusion and while not intoxicated”.
The plaintiff's interpretation was considered to run contrary to the commercial reasons that parties typically employ expert determination (speed and finality), by subjecting the determination to rules of evidence or an appeal on questions of law.
This case is an important reminder that, if the parties want to create a right to appeal an expert determination where an error of law is made, they must draft into their agreement an express contractual right to do so.
Conclusion
Contracting parties must give proper consideration to the expert determination clause in their contracts. This is important both with regards to the types of dispute that may be referred to expert determination and the circumstances in which the determination will or will not be finally binding on the parties.
Given the difficulty in achieving an effective split arbitration clause using words of general application, some approaches that you might consider are:
- identifying specific issues under specific clauses that are to be referred to expert determination, with all other disputes proceeding to litigation or arbitration;
- expressly providing whether (or not) it is intended that an expert will determine disputed questions of law or fact; and/or
- expressly providing for the circumstances in which an expert determination will not be binding (for example, if the dispute is above a particular threshold or if the determination involves an error of law).
Authors: Adam Firth, Partner; Ben Judge, Senior Associate; Emily Mo, Graduate.
