03 Dec 2009

Expert determination - riding the crest of the new wave

by Mathew Stulic, Reuben Bowd

Expert determination is best suited to disputes with a single, or limited number of technical or valuation issues and as just one part of an overall dispute resolution regime. Parties considering using expert determination as a complete alternative to arbitration or litigation should consider the benefits of fast track arbitration.

We've seen in the first article of our dispute resolution series that there is a difference between administrative issue resolution and mature dispute resolution in project related disputes.

In this article, we consider expert determination (ED), which started life as an administrative issue resolution process but has begun evolving. The lines have become blurred, with some project participants using ED as a de facto mature dispute resolution process, occupying a space in the dispute resolution spectrum more traditionally filled by arbitration. The crux of the modern debate about the role and nature of this new wave of ED centres upon the practical and legal dimensions of the blurring of the lines between ED and arbitration.

What is expert determination?

ED is a consensual, private process in which parties to a contract agree to refer certain types of disputes to an independent expert for determination within a short timeframe. Historically, ED was used for valuation disputes with a single issue, for example, in the context of rent reviews or share valuations.

Traditional ED is usually characterised by:

  • a speedy procedure - there are no formal pleadings, hearings, cross-examination or discovery, and no statutory framework governing proceedings;
  • a third party determination of future rights or objective facts (unlike arbitration, which looks for rights that have already accrued); and
  • an inquisitorial process, with the inquisitor being an industry expert applying his or her own experience in making a determination.

Evidence of the increased use of expert determination

Due to its private and confidential nature, there is little empirical data about the use of ED. There is anecdotal evidence indicating an increased demand for ED in the construction industry in the past decade. Many dispute resolution institutions have developed their own formal rules for ED. Some standard form contracts now provide for ED (for example, the Property Council of Australia's Project Contract PC-1 (1998), and dispute resolution clauses included in many government contracts for major projects in Australia also make use of ED.

What are some of the driving forces behind the increased demand for ED?

There are two main forces behind the increased use of ED:

  • The first is a move away from contracts which have a superintendent or contract administrator, acting as both an agent of the owner and as an independent certifier. This contract model has faced challenges arising out of perceived or actual difficulties with the contract administrator's neutrality when acting as certifier. In response, some owners have been prepared to pay a premium to make the contract administrator the owner's agent for all purposes. The trade-off is usually that the contractor can challenge interim certifications or valuations using ED.
  • Secondly, contractors and government have become disenchanted with arbitration's cost and time, but still seek an alternative to litigation. As a result ED has increasingly been used as a de facto mature dispute resolution process, in substitution for arbitration, giving the confidentiality of arbitration, but attempting to exclude its worst features. The result has been a new wave of ED which extends ED beyond a technical, limited-issue resolution process.

The new wave of ED

The current trend towards the use of ED beyond the resolution of technical, limited-issue disputes has seen project participants demand more from ED than it has traditionally been equipped to provide. The perceived benefit of using ED in this manner appears to be to maintain the benefits of confidentiality plus streamlined procedures (including limitation or exclusion of hearings, exclusion of discovery and cross examination of witnesses and no formal pleadings).

While ED can potentially deliver those benefits, it is not necessarily suitable for complex, multi-issue disputes.

The first potential problem is getting the other side to an ED. As a tactic to stall or even derail the ED process a party will often argue that the ED clause is invalid because it is an ouster of the jurisdiction of the courts. Although this depends upon the particular wording of the particular ED clause, in NSW courts have been shifting towards taking a supportive role, by upholding the agreements between parties for non-valuation ED, especially where they are sophisticated commercial parties. Precisely defining the types of disputes which are to be referred to ED is critical at the drafting stage to ensure enforceability of the ED clause.

Because ED is a contractual process, a party faced with non-performance of an ED can only enforce it by suing on the contract at common law. If ED is used for multi-faceted disputes, this can be cumbersome and slow, compared to the speed of the enforcement mechanisms under the uniform commercial arbitration legislation. This is even worse in contracts with an international dimension.

Another problem is that ED does not have a statutory procedural safety net (unlike arbitration). If the ED clauses in the contract do not provide for an essential aspect of the process and the parties are unable to reach agreement, courts do not have the power to "fill the gaps", and an ED clause runs a risk of being wholly inoperable.

The paradox is that as ED processes and clauses become more sophisticated and comprehensive, ED converges (in a procedural sense) with processes more akin to fast-track arbitration, without necessarily having all of the benefits that attract parties to arbitration (such as ease of enforceability of awards).

What is the interface between ED and adjudication in Australia?

Many individual technical or valuation issues on a project have a direct impact upon contractor cashflow during a project. For example, the valuation of a variation by a contract administrator can directly impact upon the level of progress payments during the course of the project. ED would provide the contractor with a means of challenging these administrative decisions quickly, at least on an interim basis, before a final determination of a multitude of contractual rights and liabilities together, in what would usually be a complex, large, singular arbitration or court proceedings at the conclusion of a project. Statutory adjudication in Australia has, to a degree, filled the space occupied by traditional ED, by addressing the policy objective of shifting the balance of the cashflow risk to contractors pending the final and binding determination of rights and liabilities on a project in arbitration or litigation.

The new wave of ED has seen two main models emerge:

  • final and binding ED (or final and binding up to a certain value); or
  • final and binding only in an interim sense (that is, it may still be overturned in a subsequent process such as arbitration).

These models attempt to respond to the perceived time and cost disadvantages of litigation and arbitration differently to the way in which statutory adjudication in Australia addresses this issue. In the case of the final and binding model, ED is used as a poor substitute for arbitration or litigation without the benefits of enforceability. In the case of the model where ED is binding unless overturned in an arbitration, ED's role is as a first-step filter and arbitration is the final step in an overall multi-tiered dispute process. Underlying this is a view that arbitration can be made more efficient in a multi-tiered dispute clause if it is reserved for only the most complex and mature disputes, with ED playing its traditional role - as a process to deal with limited issue disputes on a fast-track basis.

The ongoing role of ED in Australia

In modern contracting forms in Australia, ED is a process that is best suited to addressing single or limited issues in dispute of a technical or valuation nature. If it is used in this way, ED can deliver time and cost savings and act as a filter when it is the last port of call before an arbitration or litigation. These processes can complement each other if used for the right type of disputes.

For more complex disputes, a private and confidential alternative to ED is fast-track or modified arbitration rules. Some of the procedural techniques commonly utilised in ED rules that can make ED a relatively efficient process can be adapted and included in bespoke arbitral rules (or incorporated via institutional fast track arbitration rules) and included in dispute resolution clauses.

For simpler disputes, it is important to define the types of disputes which are to be referred to ED precisely when the contract is being drafted, as this will help ensure the ED process is enforceable.

ED clauses must contain a completely self-contained procedure which addresses issues such as:

  • the process for appointment of the expert
  • payment of the expert's fees
  • the rules and process to be adopted for the ED
  • whether the determination should be final and binding
  • powers of the expert (including the power to award costs)
  • whether parties are entitled to make submissions and replies (and the timeframes for submissions and replies)
  • whether the expert is bound by the rules of evidence
  • whether the expert is entitled to rely upon his/her own experience
  • whether the expert is obliged to provide reasons
  • whether the expert has a residual discretion to carry out the ED as he/she thinks fit including as inquisitor.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.