James Ebert and Steven Fleming | Jones Day
In Short
The Situation: Construction disputes face unique challenges in addition to those faced in other types of commercial disputes. Parties often agree to adopt independent expert determination as a means of managing these challenges.
The Concern: Many boiler-plate independent expert determination clauses are not sufficiently tailored to the nature of construction projects or the particular circumstances of the project.
Looking Ahead: Independent expert determination can be a useful tool for the management of disputes in construction projects. In order to obtain this benefit, expert determination clauses should be carefully drafted to ensure that the prescribed process reflects the intention of the parties and is tailored to the circumstances of the particular project.
Construction disputes face additional challenges compared to other commercial disputes for various reasons, including:
- projects involve a multitude of participants and stakeholders, including principals, contractors and subcontractors with a range of different interfaces and interests;
- the disputes concern complex technical matters in addition to legal issues;
- huge volumes of documentation from many sources are generated during projects, including technical documents, correspondence and emails; and
- participants are required to balance the legal and commercial aspects of claims and timely resolution of disputes with good project execution and the maintenance of ongoing relationships.
To overcome these challenges in major projects, parties often agree to adopt independent expert determination for disputes that may arise. This is a process in which an independent expert is appointed to decide disputes. The types of dispute that can be determined, the relief that can be awarded and whether the expert’s decision is binding will depend on the terms of the expert determination clause.
The popularity of the mechanism has increased due to the flexibility it can offer compared to full-scale litigation in terms of simpler procedure, expedited timing and reduced costs, as well as the perception that it is less subject to judicial intervention. However, parties should also consider whether it will be appropriate to the type of disputes anticipated. For example, a likely lack of a right to appeal and the typical absence of features of litigation such as discovery and cross-examination may be less attractive for higher-stakes disputes.
Status of Expert Determination / Role of the Courts in Expert Determinations
Typically, there are two stages of an expert determination process where courts may become involved:
- at the outset, when a party seeks to engage the expert determination process, the other party might seek to restrain the process from proceeding by seeking a stay of the process; or
- after a determination has been made, an aggrieved party might seek to have a court overturn the determination.
In both stages, Australian courts are generally reluctant to interfere and typically interpret clauses liberally so that parties are held to the agreed expert determination process. This has resulted in few instances where an expert determination has been stayed or overturned. The circumstances where this has in fact occurred are generally limited to where:
- enforcing the expert determination procedure could result in a multiplicity of proceedings;
- persons not party to the contract have an interest in the outcome of the determination;
- the expert’s determination goes beyond the task that the expert was engaged to perform (e.g., they have misconceived their role or function or asked themselves the wrong question); or
- there has been an error of law in the expert’s determination.
Judicial reluctance to interfere with expert determination was recently confirmed in The Illawarra Community Housing Trust Limited v MP Park Lane Pty Ltd [2020] NSWSC 751. The plaintiff argued that an absence of express procedural rules, mechanisms and safeguards in the expert determination process rendered the clause unenforceable. The court disagreed and held that the lack of prescribed steps meant the parties had agreed to leave it to the expert to determine the process.
Tips for Drafting
When drafting the expert determination clause, parties should carefully consider the language they are using and ensure that the clause:
- accurately defines the scope of the disputes to be resolved by expert determination so that there can be little argument as to which disputes are subject to expert determination, and considers how to deal with any possibility of multiple and differing types of disputes;
- clearly identifies the circumstances in which an expert determination will be binding, or will be open to further agreed review mechanisms or still permit a party to litigate the issue in court;
- considers what expertise the expert should possess and how they will be selected;
- provides adequate time periods and allows the expert to test the veracity of key factual matters for the nature of construction disputes. Many boilerplate commercial dispute resolution clauses include short timeframes that are unrealistic, and lack sufficient avenues for testing key facts, given the significant volume of documents and complex technical and legal matters that arise on projects; and
- does not imitate traditional court procedure too closely. Clauses that imitate court procedure too closely, e.g., by requiring witness evidence under oath or cross-examination, risk losing the benefits provided by the flexibility of expert determination.
These aspects should be tailored to the parties’ commercial objectives, and made as clear as possible to minimise the risk of ancillary disputes over the scope or procedure for expert determination.
Two Key Takeaways
- Adopting contractual expert determination mechanisms may assist the parties to manage disputes in a way that better supports the project and minimises costs.
- Parties should avoid adopting generic boilerplate clauses and instead tailor expert determination processes to the needs of the project.