16 Mar 2010
Circuit-breakers to have effective expert determination
by Frazer Moss, Logan Campbell
The court decided that one party could not effectively stymie an agreed deadlock breaking mechanism in the contract which was designed to resolve disputes between them.
It is not uncommon in modern commercial contracts for dispute resolution clauses to provide for expert determination as a step in the resolution process, often the final one. Usually, those clauses do not descend into a level of detail which lays out the terms of appointment of the expert. However, does this lack of detail, and the subsequent need therefore for the parties to agree the terms of appointments with the expert afford one party, who perhaps wishes to stymie the process, an opportunity to derail it by refusing to agree to terms of appointment that are reasonable?
In the recent decision in 1144 Nepean Highway Pty Ltd v Abnote Australasia Pty Ltd  VSCA 308 the Victorian Court of Appeal answered the question with a "no". It considered that the use of expert determination can be a valuable and effective circuit-breaker which ought not be impeded by the parties to the dispute not having settled upon all of the terms of an expert's appointment.
The court found that, to the extent that a dispute resolution clause does not already deal with all of the more detailed terms of appointment of an expert, a term could be implied that the expert's appointment will be on terms which are reasonable having regard to the qualifications they have, the function they are to perform, the expertise they are to bring to the task and the responsibility which they are to undertake. Moreover, if one party is refusing to agree to terms put forward by an expert that are reasonable, a court may exercise its jurisdiction to require (by mandatory injunction) the obstructing party to enter into the expert agreement and so allow the dispute resolution process to proceed.
What led to this
Nepean had been Abnote’s landlord for many years. After all that time, Nepean promised to give the place a facelift. Abnote agreed to a new lease, but only on the condition that Nepean got a planning permit from the local council for new buildings and fixing the car park, and did the work. A deadline was given for getting the permit, and if it was not obtained within that time either party could terminate the agreement to lease upon giving one month's notice.
Nepean missed the deadline, so Abnote gave notice that it was terminating and leaving. Nepean obtained the permit a fortnight later, but two months later still didn’t have the full permit to fix the car park. Abnote said time was up and relied on its earlier notice. A dispute ensued over whether Nepean had obtained the planning permit in time (before the notice to terminate became effective), which would decide whether Abnote could terminate and walk.
They had an expert determination clause in their agreement, with a circuit-breaker if they couldn’t agree on an expert. Either party could ask a third party (in this instance the President of the Law Institute of Victoria) to appoint an appropriately qualified expert to decide who was right in a binding decision. Abnote wanted to proceed to expert determination. Nepean thought differently, threatening an injunction if Abnote tried to use the mechanism they had agreed on. Abnote persisted. It invited Nepean to agree on an expert and said that if it did not agree, it would ask the President of the Law Institute to appoint one. Nepean commenced proceedings for an injunction to prevent Abnote from using the expert determination process. Abnote sought a stay of the Nepean's proceedings. The court granted Abnote's stay.
It looked like Nepean had to go through expert determination. However, an expert had still to be appointed. The President appointed one, but that expert had a conflict of interest and withdrew. So the President appointed another expert, who sent Abnote and Nepean his terms of appointment, which included a release and indemnity from any liability while acting as expert, something found in most agreements when parties appoint an expert to resolve their dispute. Nepean objected to the release and indemnity and the expert declined the appointment.
The President appointed another expert, whose appointment terms also included a release and indemnity. Nepean again objected to these clauses. Again the expert declined to proceed.
So, a third expert was appointed, who also wanted the usual release and indemnity from the parties. This time Abnote acted. It went to court, asking for a mandatory injunction to force Nepean to sign the agreement appointing the expert, including the release and indemnity. Nepean resisted, arguing that it was not obliged, and could not be obliged, to agree to the terms of the release and indemnity as the terms were not reasonable or necessary. The expert determination clause was silent on this point. Abnote won the injunction. Nepean appealed, and lost.
The Court of Appeal decided that one party could not effectively stymie an agreed deadlock breaking mechanism in the contract which was designed to resolve disputes between them. By giving a third party the power to appoint an expert (rather than merely nominate), the expert's appointment did not depend on any consent of the parties. But could one party object to the terms of appointment put forward by an expert if those terms were not specified in the expert determination clause (which is often the case)? The court answered "no", if the terms of appointment were reasonable. It held that it was an implied term of the contract that the expert's appointment will be on terms which are reasonable having regard to various relevant factors such as the qualification of the expert, the function they have to perform and the question they have to answer.
That was however not the end of the matter. The next question was whether the release and indemnity clauses put forward by the expert in this instance were reasonable. The court held that they were. It found that there was ample and uncontradicted evidence that a release and indemnity given by the parties in favour of the expert was a reasonable term of the expert's appointment. The court accepted that, without that term, no appropriately qualified expert worth their salt would have accepted the appointment. If Nepean had been allowed to object to this term, it would have almost certainly resulted in the expert declining the appointment (as had actually happened with two previous experts) and the expert determination clause would have been unworkable. Nepean was forced to sign the terms appointing the expert to make a binding decision. The court was therefore, in this case, able to readily ascertain what the reasonable terms of the appointment would be, thereby answering any argument that the appointment should fail because its terms were uncertain or unreasonable.
Expert determination can be a faster and cheaper way of sorting out commercial disputes. Frequently though expert determination clauses are often skinny on detail about the terms of appointment of an expert. In the past this has led to such clauses being struck down for being uncertain. Although it will very much depend on the actual content of the clause in issue, 1144 Nepean may afford the parties an opportunity for an expert determination clause to survive and an appointment effected (provided the terms of appointment are reasonable). As well, it reveals the potential for a reluctant party to be forced to agree to such an appointment.