Expert determination clauses – when will they be enforceable to prevent court proceedings?

Expert determination is an increasingly popular method of resolving disputes without the need for lengthy, costly and public litigation.

However parties should not assume that the presence of an expert determination clause in their contract will mean that all court proceedings will be stayed unless the clause is complied with. It is possible that the wording of the clause will permit litigation in certain circumstances (see Lipman below) or the particular nature of a dispute will mean it is not suitable for expert determination or falls outside the scope of the clause. The parties should also not assume that an expert determination is only an interim step on the way to litigation. 

This article looks at three recent cases involving the enforceability of expert determination clauses. It shows the diversity of outcomes that can occur, and the importance of careful drafting to ensure an expert determination clause achieves the parties' intentions.

Stay of proceedings commenced in breach of a clause requiring expert determination

Generally speaking, courts have wide discretionary powers to "stay" litigation that has been commenced in breach of a clause requiring expert determination. By granting a stay, the court effectively forces the parties to honour the alternative agreed procedure. By way of distinction, section 8(1) of the Commercial Arbitration Act 2010 (NSW) provides that where a proceeding relates to a dispute which is the subject of an arbitration agreement, the court must refer the dispute to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

Factors a court may take into account when considering whether to grant a stay in the face of a clause requiring expert determination include whether:

• honouring the expert determination clause would result in "a multiplicity of proceedings";
• there are procedural rules or safeguards to be observed by the expert;
• the specified procedural rules are adequate for determination of the dispute in question; and
• the subject matter of the dispute is appropriate for determination by the expert (eg. does it involve questions within the expert's expertise).

By way of example, in Buurabalayji Thalanyji Aboriginal Corporation v Onslow Salt Pty Ltd [2017] FCA 1240, the Court stated that the inadequacy of the procedures for complex disputes was not a "deficiency" of the expert determination clause, but rather an indicator that it was only intended to deal with "simpler, more specific issues" than those the subject of the litigation. In this regard the Court noted the clause's "time constraints", the "very limited content" of its procedural aspects, and the fact that it contained "no facility… for compelling witnesses to give evidence and permitting cross-examination", as reasons why a stay should be refused and the litigation permitted to proceed.

In Hooks Enterprises Pty Ltd v Sonnenberg Pty Ltd [2017] QSC 69, the Court stayed the proceeding, compelling the plaintiff to complete the expert determination procedure that the defendant had triggered by issuing a notice of dispute under the contract. This was despite the fact that the relevant clause did "not expressly provide a bar" to the commencement of legal proceedings. The Court did acknowledge that "a stay will not be granted if it would be unjust to deprive the plaintiff of the right to have his claim determined judicially" (Zeke Services Pty Ltd v Traffic Technologies Ltd [2005] 2 Qd R 563). However, the onus of proving that exception is a heavy one - "The court should not lightly conclude that the agreed mechanism is inappropriate."

Challenge to expert determination: Lipman Pty Ltd v Empire Facades [2017] NSWCA 217  

When considering potential challenges to an expert determination, the key principles for consideration are as follows.

• The effect of an expert determination depends on the terms of the contract (Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314).
• The absence of the words "final and binding" is not determinative of whether the parties intend a determination to be final and binding.
• A determination will not be binding if it has been obtained by fraud or collusion, or was not made in accordance with the contract.
• A determination may be binding, but not final until expiry of a period for issuing a "notice of appeal" or "notice of dissatisfaction".
• If a "notice of appeal" or "notice of dissatisfaction" is issued within the prescribed time period, then the dispute may be pursued in another prescribed forum or the courts.

The recent case of Lipman Pty Ltd v Empire Facades [2017] NSWCA 217 provides a good illustration of the importance of considering the terms of the contract. 

Lipman concerned a contract which provided for the giving a notice of appeal. Lipman (as principal) and Empire (as contractor) were parties to a contract for the refurbishment of premises in the Sydney CBD.

The Contract contained the following provisions:

"42.11 Determination of expert

The determination of the expert:... (b) will be:… (ii) final and binding, unless a party gives notice of appeal to the other party within 15 Business Days of the determination; and (c) is to be given effect by the parties unless and until it is reversed, overturned or otherwise changed under the procedure in the following subclauses.

42.12   Litigation

If the determination of the expert does not resolve the dispute then, subject to clause 42.11, either party may commence proceedings in relation to the dispute.

Disputes arose about the performance and termination of their contract. As required by the contract, the disputes were referred to senior executive negotiation, then expert determination.

The appointed expert made a finding in favour of Lipman. Empire gave Lipman a "notice of appeal" under clause 42.11 within 15 business days. On the same day, it commenced court proceedings about the very same issues that had been considered by the expert.

Lipman applied to stay the proceedings. Lipman argued that a party could only commence proceedings if the expert did not "resolve the dispute", and the party gave a notice of appeal within 15 Business Days. As there was no suggestion that the expert determination was void or invalid, Lipman argued that the expert had "resolved the dispute", so there was no right to give a notice of appeal.

Both the trial judge and NSW Court of Appeal rejected Lipman's argument. The Court interpreted clause 42.12 as providing a right to commence court proceedings on issuance of a notice of appeal. To interpret clause 42.11 as preventing court proceedings in these circumstances would "not really provide for a right of appeal at all".

In making this decision the Court rejected Lipman's argument that the expert determination had "resolved the dispute" because the expert had carried out the task required by contract and expert agreement, and the determination itself was in accordance with the requirements of the contract. The fact that the determination was "valid" did not mean that it had "resolved the dispute".