How to ensure your expert determination clause helps avoid litigation and doesn't add to it

What you need to know

• Recent decisions confirm that an expert determination clause can be effective in preventing disputes being ventilated in court.
• While you can't oust the courts' jurisdiction, a court has inherent jurisdiction to stay a proceeding if the parties have agreed that expert determination is a pre-condition to establishing contractual rights.
• Expert determination clauses are interpreted liberally, not narrowly, and according to the orthodox process of contractual construction. The court will not make presumptions about matters such as the types of disputes covered, the procedure to be adopted or who is competent to resolve it.
• The court may be reluctant to imply a term to save a poorly drafted clause, even if the result of refusing to do so is that the clause is void for uncertainty.

What you need to do

• Check that the person or organisation you choose to nominate the expert is willing to do so.
• Clearly identify which disputes are within the scope of the clause.
• Ensure the clause is consistent with other provisions of the contract.

Three recent decisions illustrate the effectiveness of expert determination as an alternative to litigation in court. However, the cases also reinforce the need to approach the formulation of expert determination (and other dispute resolution) clauses with care. Critically, parties should ensure that:

• when providing for an external body to make an appointment of an expert in the absence of agreement of the parties, the body nominated is actually prepared to make such an appointment;
• expert determination clauses and jurisdiction clauses do not overlap; and
• if the parties want particular procedures, or a formal process, to be adopted by the expert, then that is specifically provided for in the agreement.

It is also important to carefully consider not only whether to prescribe expert determination for particular disputes but, if so, what is the most appropriate process to allow the expert to address the mixed legal, factual and expert issues that may be involved in the relevant dispute.

Will litigation be stopped?

Often parties agree to expert determination to avoid the cost, delay, formality or publicity of litigation. However, unless careful attention is given to the drafting of dispute resolution clauses, they can and often do produce litigation about the process itself.

In Meyertran, the Victorian Supreme Court considered whether it had inherent jurisdiction to stay a proceeding as the parties had agreed to expert determination.

The court accepted that whether it had jurisdiction to grant a stay of the proceeding depended on whether the clause ousted the jurisdiction of the court to determine a right already accrued under the contract or the clause was instead a precondition to the creation of the right.

The case involved a share sale agreement with the purchase price determined by reference to audited accounts for two years. The vendors complained that the purchaser changed the accounting policies and methods of preparing the accounts.

The agreement provided that if the accounts were disputed the dispute would be resolved by an independent accountant to be appointed by the President of the Institute of Chartered Accountants.

The court was satisfied that expert determination was a step in the establishment of contractual rights, so it had jurisdiction to grant a stay.

Her Honour expressly did not have to consider whether a stay would have been available if the clause had provided for determination of existing legal rights. However, her Honour suggested that if the clause had provided for expert determination of existing legal rights it "may have been objectionable as seeking to oust the jurisdiction of the Court". This tentative conclusion appears to potentially be at odds with the positive and expansive approach to expert determination taken in some other Australian cases.

In any event, Chartered Accountants Australia and New Zealand, the successor to the Institute, no longer performed the service of nominating experts. The court refused to imply a term in the contract that if the President refused to make an appointment, the parties would determine an alternative appointer, acting reasonably.

Accordingly, the expert determination clause could not be operated and so was not enforced and the dispute proceeded by litigation.

What disputes are covered?

One risk when agreeing dispute resolution clauses is that the clause will not cover all disputes that may arise or that a dispute will only be partly covered, resulting in both litigation and expert determination.

In Illawarra Community Housing Trust v MP Park Lane, however, the New South Wales Supreme Court took an expansive view of a clause providing for expert determination of disputes "in connection with" the agreement. It was presumed that the clause was intended to survive termination of the contract and include disputes in connection with its frustration, termination or repudiation.

Justice Hammerschlag applied the "orthodox canons of construction for commercial agreements". In accordance with this approach, his Honour warned against making presumptions or generalisations:

1. as to the type of disputes covered by an expert determination clause—departing from UK authority established in Barclays Bank PLC v Nylon Capital LLP [2012] 1 All ER (Comm) 912 and relatively recent cases in the supreme courts of New South Wales and Queensland that expert determination clauses presuppose that the parties intended certain types of dispute to be resolved by expert determination (and others by the Court) having regard to the technical knowledge that the expert would bring to bear;
2. that just because a dispute is factually and legally complex the parties did not intend to resolve the dispute informally and without judicial or quasi-judicial procedures;
3. that commercial parties intend different procedures be applied to different types of disputes;
4. that parties intended multiple venues or occasions for their disputes even though this is not part of any agreement; and
5. that the expert is not competent to resolve the dispute, including in the absence of appropriate procedures.

In Illawarra Community Housing Trust the parties not only agreed to expert determination but also submitted to the exclusive jurisdiction of the Supreme Court of New South Wales in respect of any proceeding in connection with the agreement. Although similar clauses have created difficulties in previous cases, Hammerschlag J considered that the particular clause was not inconsistent with expert determination.

The decision in Illawarra Community Housing Trust was endorsed by the New South Wales Court of Appeal in Lepcanfin.

In that case the Court of Appeal upheld the summary dismissal of a challenge to an expert determination. The case involved a clause agreeing to expert determination "if any dispute arises out of this agreement". A subsequent expert determination agreement described the dispute for expert determination as including Lepcanfin's "entitlement" to an increased fee. This was held to include a penalty issue.

Implications

The contemporary approach of the court is to uphold the intention of parties who choose expert determination. Where the language of the contract permits, the court will take a broad approach that enables disputes to be decided in one forum.

When drafting expert determination clauses, satellite litigation may result if the appointment process breaks down, the scope of the clause is inappropriate or the clause is inconsistent with other provisions in the same agreement.

These cases are also an important reminder to carefully consider not only whether to prescribe expert determination for particular disputes but, if so, what is the most appropriate process to allow the expert to address the mixed legal, factual and expert issues that may be involved in the relevant dispute.

Authors: Adam Firth, Partner; James Clarke, Partner; India Coultas, Graduate; and Tidja Joseph, Graduate.