Expert determination is a contractual process where parties agree to appoint an independent person – usually with specialist understanding or technical knowledge in a particular area – to resolve a dispute between those parties by issuing a binding decision.
Expert determination may be used where parties to a contract disagree about a matter particularly relevant to the performance of the contract and wish to have an expedient and simplified dispute resolution process, particularly where the disagreement may not justify the cost and time delay of arbitration or another dispute resolution forum.
Expert determination in general
The process of expert determination is different to other commonly used methods of alternative dispute resolution.
- In arbitration, the parties agree to appoint an arbitrator to make a decision about a dispute in a similar manner to a judge. Although an arbitrator typically has a large degree of procedural discretion, the Arbitration Act 1996 prescribes minimum standards of procedure to which the arbitrator must adhere. The decision reached is typically binding – and if the decision is made in New Zealand, the decision can sometimes be appealed if the arbitrator made an error of law
- In mediation, the parties agree to appoint a third party (called a mediator) to assist them to reach a settlement. The mediator has no power to determine any issues between the parties
- By contrast, in expert determination, the procedure is usually whatever the parties agree (or the expert determines). The expert's decision is usually binding and may only be challenged on very limited grounds. The process is usually cheaper, simpler and faster than arbitration.
An expert with particular skill and expertise may be in a better position to resolve a disagreement between the parties than a judge or arbitrator, without the additional costs of litigation and risk of subsequent appeals. Experts can range from accountants, valuers, real estate agents and quantity surveyors who are instructed to make decisions of a technical nature, to senior legal practitioners who are instructed to determine legal questions such as contractual interpretation.
Examples of disputes commonly referred to expert determination include share and property valuations, construction/development disputes, breaches of warranty, rent/lease reviews, and pricing disputes under a contract.
Expert determination procedure
The expert's mandate to determine the dispute is based on the agreement of the parties. A dispute is typically referred to an expert under agreed terms of reference and procedure. Some contracts will specifically include a clause that permits or mandates the parties to refer a dispute to an expert of particular skill, judgment, knowledge and experience to determine. Alternatively, if an issue arises during the course of a contract or course of dealing, the parties may voluntarily agree to appoint an expert to determine the issue.
There is no legislation governing the expert determination procedure and there are no specific standards of procedural fairness that the expert and the parties must follow (unless agreed otherwise). As the process is based on a contractual arrangement, the parties are free to agree on the parameters of the expert determination. Unless the parties agree on a specific procedure, the expert will usually determine how to proceed. At a minimum, the expert should hear both sides of the argument and be impartial when making a decision. An expert determination is usually carried out "on the papers" based on the written evidence and/or submissions of the parties, but the expert and the parties may agree to a procedure which involves oral submissions and questioning of witnesses.
Court intervention
It is common for an expert determination clause in a contract, or a clause in the expert's terms of reference, to provide that any determination by the expert is final and binding with no right of appeal by the parties. While ordinarily the inability to appeal a determination would be in breach of the rules of natural justice, parties may agree to dispense with certain natural justice rules such as procedural fairness and the right of appeal for commercial reasons, including lower cost, speed and finality. In that respect, the courts will keep the parties to their bargain and will not interfere with an agreed process of expert determination, except in limited circumstances. However, the jurisdiction of an expert is ultimately a matter for the courts if subject to dispute, even if the agreement between the parties purports to confer jurisdiction on the expert in a manner that is final and binding.1
Procedural unfairness will not usually be a ground to challenge an expert's decision, but the court may intervene if an expert does not discharge their mandate due to a process error. The courts will not set aside the expert's determination if the expert has made a mistake, was negligent or even wrong in its findings.2 There is no recourse to the court if the expert has made an error of law but proceedings could be issued against the expert if one party has suffered loss due to the expert's negligence.3
Once an expert has made its determination, any award must be enforced separately through the courts.
Points to consider
When drafting an agreement for expert determination, parties should:
- Clearly identify and select expert determination as their chosen means of dispute resolution
- Clearly define what disputes the expert can determine
- Specify what qualifications or expertise they want the expert to have (which should usually reflect the subject matter of any disputes expected to be submitted to expert determination)
- Think carefully about what procedures, if any, they want the expert to follow and on what timeframes (we often see timeframes that are unrealistic)
- Seek legal advice to minimise the risk of future disputes about the scope of expert determination.
Conclusion
Expert determination is an effective form of alternative dispute resolution whereby parties can obtain a binding decision from an appropriate subject matter expert in a relatively short timeframe compared to arbitration or another dispute resolution forum. Parties referring a dispute to an expert determination should be aware that the options to challenge the expert's decisions are significantly limited and a court may only intervene where the expert has departed from their agreed mandate and did not carry out the task they were instructed to perform.
This article was prepared by Luke Sizer (partner),Kelly Paterson (partner), Calina Tataru (senior associate) and Alastair Cameron (solicitor).
1 Barclays Bank PLC v The Nylon Capital LLP [2011] EWCA 826
2 Waterfront Properties (2009) Ltd v Lighter Quay Residents' Society Inc [2015] NZAR 492
3 Peregrine Estate Ltd v Hay [2018] 2 NZLR 345.
