21 October, 2015
What you need to know
- When two Australian entities are contracting, expert determination can be a quick and less expensive means of resolving technical or valuation disputes. These decisions are generally binding and not open to the court's review, unless the expert has acted fraudulently.
- However, where two international parties are contracting, parties should be aware that in some foreign jurisdictions the law relating to expert determination is relatively untested, which may result in less certain outcomes.
- Further, expert determination may not be appropriate if the dispute involves questions of fact or legal issues, or the parties require a reviewable decision or a decision supported by a legislative enforcement regime.
- Dispute boards are a form of expert determination used in Australia. These boards have a dispute avoidance function as well through increasing communication between the parties. However, this must be balanced against the costs of maintaining a dispute board, particularly if it is never called on to resolve a dispute.
A snapshot of expert determination
Expert determination is a contractual form of dispute resolution in which parties to a contract agree certain disputes will be referred to an expert if and when the dispute arises. The advantage of expert determination lies in the ability of parties to receive a recommendation or determination on discrete technical and valuation issues. In this situation, an expert determination can be:
- quick and less expensive than other forms of dispute resolution (such as arbitration);
- confidential, which may be of importance in valuation disputes;
- impartial and unbiased, with a determination made by an industry expert;
- flexible as the parties may select whether the expert will decide their own procedure for the determination, or whether (and which) institutional rules may apply; and
- potentially binding, depending upon the parties' agreement.
Expert determination in the energy and resources sector
It is not uncommon for energy and resources agreements (be it construction contracts or supply agreements) to include expert determination clauses, although there are no available statistics around its use. The prevalence of expert determination clauses was observed by Wheeler JA in Straits Exploration (Australia) Pty Ltd & Anor v Murchison United Nl & Anor [2005] WASCA 241:
"There is increasingly, as a matter of commercial practice, a tendency of parties to provide for the determination of some or all disputes by reference to an expert. There are a number of reasons for that course, including informality and speed; suitability of some types of disputes for determination by persons with particular expertise; privacy; and a desire to resolve disputes in a way which may be seen as reasonably consistent with the maintenance of ongoing commercial relationships. The law has long recognised that those are proper considerations to which the Court should give appropriate weight, and that it is desirable therefore that parties who make such a bargain should be kept to it."
Expert determination and international contracting parties
Ousting the court's jurisdiction?
In Australia, courts are generally willing to enforce the requirements of dispute resolution clauses, provided that these requirements are sufficiently certain. If:
- an expert determination is required under the relevant clause;
- this expert determination does not occur; and
- either party commence proceedings,
- upon application by a party, the courts will generally stay the proceedings until expert determination has occurred.
Whether requiring expert determination as a condition precedent to litigation acts to oust the jurisdiction of the court was considered in Straits Exploration (Australia) Pty Ltd & Anor v Murchison United Nl & Anor [2005] WASCA 241. Finding that there is no ousting of the court's jurisdiction, Wheeler JA held:
"The effect of a valid expert determination clause, however, is not to oust the jurisdiction of the court, but to limit, in some circumstances, the matters which the court can consider. Prior to the conclusion of the expert determination procedure – that is, prior to the making of a determination – any party to a contract containing such a clause remains free to sue upon the contract, unless the contract itself makes compliance with some form of dispute resolution procedure a condition precedent to the enforcement of rights under the contract. In relation to the latter type of contract, the effect of the clause is not to invalidate an action brought in breach of it, but to provide a defence and to 'postpone' but 'not annihilate the right of access to the Court'…"
While this position is generally accepted in Australia, this may not be the position globally. Particularly in civil law jurisdictions, the law regarding expert determination, and whether an application to stay proceedings is considered to oust the court's jurisdiction, is significantly less tested.
Enforcement of expert determinations
In Australia, expert determination is not supported by any legislative regime for its procedure and enforceability of outcome (unlike arbitration). The expert's determination is not enforceable in the way in which a judgment of a court or an arbitral award is enforceable. It does, however, create a binding contractual obligation and unless voluntarily complied with, court or arbitral proceedings are necessary to enforce the determinations.
Traditionally, expert determinations are subject to little control by the courts in the absence of fraud. A recent decision by the NSW Court of Appeal in Australian Vintage Limited v Belvino Investments No 2 Pty Ltd [2015] NSWCA 275 has held that the question of whether an expert's determination is reviewable is to be answered by looking at whether the expert has carried out the task which the expert was contractually required to undertake. If so, then the determination will not be reviewable, even if affected by mistake or irrelevant matters.
Despite parties having sought to avoid litigation through including an expert determination clause, this may result in a court considering both:
- the drafting of the expert determination clause and whether the expert has carried out the task they were contractually required to do; and
- enforcement of the determination as a binding contractual obligation.
In international transactions, the outcome of the expert determination procedure is not (of itself) enforceable, unlike an arbitral award. To enforce an expert's decision will usually require separate proceedings for breach of the underlying agreement in a national court of a foreign jurisdiction (which the parties had probably hoped to avoid). Again, in some jurisdictions, the law regarding expert determination is relatively untested which may add an additional layer of cost and procedure.
Dispute boards: a form of expert determination?
Dispute boards are creatures of contract, described as "on-the-run" and "real-time" procedures. They generally consist of three independent members jointly selected by the parties at the beginning of the project. Members are generally selected on the basis of their experience, technical qualifications, impartiality and independence from the project.
Throughout the life of the project, the members of the dispute board regularly attend the site with the parties and are provided with relevant documents, such as monthly progress reports. The dispute board continues to operate throughout the life of the project, attempting to resolve, on an informal basis, any disputes which the parties are unable to resolve for themselves.
The purpose of dispute boards is to avoid disputes by actively engaging with the parties throughout the construction process, and depending on the process agreed, to issue a binding or non-binding recommendation if a dispute arises.
Dispute boards gained popularity in the late 2000s on transport and utilities projects where the principal was a government authority. According to the Dispute Resolution Board Foundation, there are now only 52 projects in Australia utilising a dispute board with the majority of these projects in Queensland and New South Wales. None of these projects are in the energy and resources sector. However, internationally, dispute boards have been used on energy projects such as:
- the Ertan Hydropower project in China, with a project value of US$2 billion;
- the El Teniente mine expansion in Chile with a project value of US$3.4 billion; and
- the Changunola Hydro Power Plant in the USA with a project value of US$280 million.
Dispute boards are an extension of expert determination, with the following similarities:
- both procedures are creatures of contract with the option to be binding or non- binding. If binding, they are enforceable as a term of the contract only;
- all experts are appointed for their legal and technical expertise and use their own experience and knowledge to determine a dispute; and
- both procedures are similar in that they usually:
- involve a fast tracked decision;
- involve written submissions only and no oral evidence; and
- the experts have the power to request further information and/or call a conference.
The main difference lies in the time the experts are appointed. Having been appointed at the beginning of the project, dispute boards are already familiar with the project and the parties, and therefore require less background briefing documents.
Another difference is the number of experts appointed. Dispute boards generally consist of three individuals selected at the outset to deal with dispute avoidance/ resolution procedures irrespective of the subject matter of the dispute. In contrast, through expert determination parties are afforded greater flexibility to select an expert with the relevant expertise based on the subject matter of the particular dispute that has arisen.
The use of dispute boards needs to be balanced against the ongoing direct costs (such as dispute board panel member fees and travel expenses) and indirect costs (such as the cost of employees preparing for dispute board meetings) throughout the life of a project.
These costs are incurred even if the dispute board is never required to make a recommendation. These costs can be substantial and should be an important consideration for parties prior to the adoption of a dispute board mechanism.
Further, if a party loses confidence in the dispute board, there is usually no mechanism for replacement of the dispute board. The dispute board procedures will still have to be followed and costs incurred, irrespective of whether it has become somewhat obsolete. Courts both domestically and internationally have held a procedure under a dispute resolution clause is mandatory and so parties should not bypass the mechanisms in place and attempt to refer a dispute directly to litigation or arbitration.
Final thoughts
As with any form of dispute resolution, parties must consider whether expert determination suits the agreement, the project and the parties. As the determination of the expert is generally final and binding, parties should also exercise caution when drafting an expert determination clause.
Due to the technical nature and potential high value of energy disputes, any expert determination clause should:
- clearly specify the dispute(s) which the expert has jurisdiction to determine and the factors which the expert may take into account in reaching their decision;
- expressly define the skills required by the expert in order to be appointed;
- specify that the expert must be independent and include an obligation for the expert to disclose any conflict of interest;
- identify an appropriate appointing authority that will select the expert where the parties cannot agree;
- identify the procedure or the institutional rules that will govern the expert determination process (such as the IAMA Expert Determination Rules);
- specify that the process is not an arbitration and ensure that any procedure in the clause or the selected rules allows the expert to make the decision as an expert and not as an arbitrator; and
- specify whether or not the expert's determination is final and binding.
Where two international parties are involved, a disputed expert determination may result in a foreign domestic court rehearing the dispute, and thereby requiring parties to continue with litigation (a path sought to be avoided by including an expert determination clause). As this may result in further expense and uncertainty of outcome, parties should consider whether perhaps an expedited arbitration (which affords confidentiality and finality of outcome) is the more appropriate dispute resolution mechanism.
Finally, in circumstances where the dispute is not purely technical or the accuracy of the decision is more important than achieving a quick resolution, arbitration or litigation may be more appropriate.
For further information, please contact:
Georgia Quick, Partner, Ashurst
georgia.quick@ashurst.com
