Expert Determination - Uses, Problems and Pitfalls
Article, Commercial Litigation Journal – October 2006
Legal / Disputes
Peter Ashford of Cripps Harries Hall and Tony Levitt, Partner in the London office of RGL guide us through the minefield of expert determination and offer some practical assistance.
Expert determination will be familiar to practitioners as one of the many available options to resolve disputes. It is a process by which an independent third party, acting as an expert rather than judge or arbitrator, is appointed to decide the dispute. In general terms there is no right of appeal and the expert’s determination is final and binding on the parties. It is particularly suited to disputes of valuation or of a purely technical nature, across a range of sectors.
Expert determination has many advantages: it is quick, cheap and relatively certain. In terms of speed it can be resolved in weeks rather than months or years. Cost can be restricted to that of an expert undertaking a desktop review (eliminating or substantially reducing the costs that the parties themselves may incur), although the determination is often as legally intensive as small-scale litigation or arbitration. Certainty is discussed in greater detail below.
Using expert determinations
They are best used where the issue to be determined is a technical one that will ordinarily turn on expert opinion regardless of the mechanism chosen to resolve it. In cases such as this, dealt with by litigation or arbitration, the judges or arbitrators will not generally second guess the opinion of an expert and so any recourse to litigation or arbitration is likely to add unnecessary cost and delay to the process.
Furthermore, the litigation or arbitration process can also irreversibly damage the relationship between the parties, whereas an expert determination is more suited to situations where there is to be an ongoing connection between the parties.
Expert determinations are also useful where the parties are involved in a long-term contract and need to continue working together for the duration. The dispute can be resolved quickly, leaving them free to maintain a good working relationship as the contract proceeds.
If the amount in dispute is relatively small, expert determination provides a cost-effective solution. However, the procedure can be effective irrespective of the size of the dispute.
Expert determinations can be used in conjunction with other alternative dispute resolution systems. It need not be seen as a stand-alone procedure, but could be part of an overall dispute resolution mechanism, thus providing legal advisers with flexible solutions to their clients’ needs. For these reasons, expert determinations are most often found in contracts relating to the following:
- the oil and gas industry for periodic determination of interests in unitised fields;
- commercial real estate transactions (especially in rent reviews);
- valuations of shares or assets;
- completion accounts in corporate sales and purchases, where the price is subject to adjustment based on subsequent events (such as achieving a predetermined level of sales);
- and construction contracts (particularly in resolving specific disputes without holding up the execution of the contract).
- This does not mean that expert determination is right for every situation. It is not well suited where there are serious issues of fact, especially where, for example, there are likely to be allegations of fraud. Also, if an expert needs to seek assistance from a third party because the matter to be considered involves issues outside their area of expertise, this may fundamentally undermine the perceived fairness of any decision reached. Most determinations by an expert derive from contractual machinery for the resolution of disputes. There is no reason however, why an ad hoc submission cannot take place after a dispute has arisen.
Certainty of the decision
The law of mistake in expert determination is fundamental to its effectiveness as a system of dispute resolution. There is little point in using expert determination if it is easy for the losing party to challenge the decision. A challenge adds a layer of cost (a conventional litigation challenge), delay and uncertainty that the parties sought to avoid by the expert determination.
Until 1990 and the decision in Jones v Sherwood Computer Services plc , the law was rather uncertain about this, but since that date the law has been very robust, some might say too much so. Where there is a contractual agreement to refer matters to determination by an expert, the courts will uphold such provisions and strike out any proceedings commenced in breach of that contractual provision (see Inmarsat Ventures plc v APR Ltd  and Campbell & ors v OCE (UK) Ltd ).
Although the courts robustly enforce the expert determination provision, they will entertain actions relating to the construction of the expert’s task before a decision has been made (Mercury Communications Ltd v Director General of Telecommunications ). In Mercury the House of Lords held that intervention in this manner was permitted provided the contract did not exclude the right to do so.
This is quite different from interfering with the final decision of an expert, although some of the issues in the case could be applied to arguments about final decisions. This has yet to be done, at least not successfully.
After the expert has made the decision, the court is extremely reluctant to interfere and the leading case, Jones, makes this abundantly clear. Jones was a case about a sale and purchase agreement, with part of the consideration deferred. Payment of that deferred consideration depended on the amount by which the acquired company’s sales exceeded a certain figure. The vendor and purchaser’s accountants disagreed about the figure and, under the agreement, an expert was appointed to determine the correct figure.
The expert’s decision was conveyed by means of a brief letter that simply stated the answer as a figure. The purchaser said that the letter was a nullity because the sale agreement called for a report and the figure could not be properly construed as a report. The Court of Appeal did not agree and held that the expert did not need to set out reasoning or calculations. By referring back to the earlier documents, it was obvious that the expert had agreed with the vendor’s accountants. It did not, however, follow that the expert had reached the same conclusion by following the same reasoning.
The purchaser alleged that the expert had made mistakes of mixed fact and law and they were entitled to ask the court to decide whether this was so. The Court of Appeal considered this was not the sort of mistake that would be sufficient to upset the expert’s decision. It said that only if an expert departed from their instructions in a material respect, for example where the expert was called upon to value shares in a company and valued the wrong number of shares or shares in the wrong company, would that be sufficient. The test was whether the expert had done what they were appointed to do. If they had, the court would not interfere.
The Court of Appeal also addressed the practical problem of how the alleged mistake could have been rectified by the court, were it to allow the appeal. This would merely have involved yet more accountants, this time as experts on both sides, to resolve the question of accountancy opinion. As the parties had agreed to refer the dispute to a final and binding decision of one accountant, they would have to live with the result.
The decision in Jones was swiftly followed by Nikko Hotels (UK) Ltd v MEPC plc . In this first-instance decision the judge paraphrased the decision of the Court of Appeal in Jones by saying that if the expert had asked and answered the right question, albeit in the wrong way, the decision would be binding.
It was only if the expert had asked and answered the wrong question that the decision would be a nullity. The judge held that this would be the case for any dispute, whether arising out of fact or law.
Notwithstanding the decision in Nikko, there remained a question of whether an expert, to the exclusion of the courts, could decide questions of law. That remaining issue was, however, resolved by Norwich Union Life Assurance Society v P&O Property Holdings Ltd , which held that there was no rule preventing issues of law, such as how a contract should be interpreted, from being determined by an expert in precisely the same way as other issues.
If the court is satisfied that the expert has answered the right question, even if it is in the wrong way, the court will not interfere.
Expert determinations are accordingly robust and the courts are unlikely to interfere with determinations where the right question has been asked and answered. There is one main exception to the court’s reluctance to interfere.
If the contractual mechanism lays down a system or formula, for example for determining a value, and the expert uses a different system or formula, then that failure to adhere to the contractual mechanism is a material departure from the expert’s instructions, irrespective of the effect on the result.
The expert’s decision cannot stand in those circumstances (Shell (UK) Ltd v Enterprise Oil plc ). Similarly, the decision cannot stand if the nominated expert has not actually made the determination (Jones v Jones ).
Wording of the contract
It follows from this that the more the contract says about how an expert should carry out their task, the greater the risk of it being subsequently challenged in the courts.
It is also possible that the way in which a contract is worded can lead the court to infer that the parties did not intend that the expert decide questions of interpretation. This would be the case where, for example, the contract sets out in detail which matters the expert should and should not take into account.
Such questions would then be susceptible to interference by the court and usually the parties would want such issues determined in advance under the principle in Mercury.
- Expert determination is quick, flexible and not too expensive. Though not a panacea for all ills, it is a useful tool, particularly in cases that are likely to turn on expert evidence.
- Thankfully, it seems that, save in exceptional circumstances, the court will be reluctant to interfere with what the parties have agreed between themselves.
- The expert has a high degree of autonomy. As long as they do the job, then the methodology may be of limited importance – the expert may not even need to be objectively impartial!
- Keep the mechanism as simple as possible. More complex wording may increase the likelihood of challenge.
- Unlike judgments or arbitration awards, the ability to enforce expert determination awards outside the jurisdiction is far less certain.
Keep it simple
Simple wording is likely to make a decision less susceptible to attack, although there can equally be problems at the opposite end of the spectrum, where parties fail to give sufficient consideration to the wording of the contract.
Parties who simply refer each and every dispute to an expert may well end up regretting that decision when the eventual disputes are not of a kind to which any particular area of expertise can sensibly be applied, or if they are left with a less-than-satisfactory result from the expert determination process.
Many contractual provisions for expert determination try to give themselves a let-out to the finality that would otherwise apply by providing that the expert’s decision shall be final and binding ‘save in the case of manifest error’.
These words probably make no real difference bearing in mind the current state of the law and the determination of the issue of whether or not the expert has asked and answered the right question (Conoco (UK) Ltd v Phillips Petroleum Company ). Essentially, the courts will regard the only manifest error as not asking and answering the right question.
The wording of an expert determination provision can also permit considerable freedom to be inventive in dispute resolution. This is most obvious in socalled ‘pendulum’ determinations, where the expert must choose one of two rival contentions. An example might be a rent review where the expert must chose the fairer of the rents proposed by the landlord and the tenant. This makes the parties advance more reasonable cases than they might otherwise have done.
Authority of the expert
The expert will thus have a great deal of authority to determine the parties’ rights and duties but may often not have had any formal training, unlike a judge or arbitrator. While it is clear that an expert must not act fraudulently or collude with one of the parties (Hickman v Roberts ), unlike a judge or arbitrator there is no requirement for an expert to be entirely impartial. Indeed, the expert may be closely connected with one of the parties, for example as an auditor (Marco v Thompson (No 3) ).
In cases such as this the aggrieved party would need to show that the expert had in fact shown actual partiality. Nevertheless, it appears that there is no requirement that information provided to the expert by one party must be made available to the other (Amex Civil Engineering Ltd v Secretary of State for Transport  and Re Benfield Grieg ).
The expert appointed is under no obligation to receive evidence or submissions, or to accept the opinions of experts appointed by the parties. They are entitled to arrive at their decision solely upon the results of their own expertise and investigations, unless the contract or accepted practice provides otherwise.
Enforceability outside the jurisdiction
One issue that is often forgotten when providing for expert determination clauses in contracts is that of enforceability outside of the jurisdiction. Unlike an award given at arbitration, which is recognised in many foreign jurisdictions under the New York Convention, the ability to enforce a decision reached by expert determination is less certain and can result in recourse to costly litigation, effectively removing one of the key benefits of expert determination.
The construction industry has a modified version of expert determination. Under Part II of the Housing Grants, Construction and Regeneration Act 1996 there is a provision for parties to a dispute to refer it to adjudication. The statute provides that the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings, arbitration or agreement.
Thus, unlike a true expert’s determination, an adjudicator’s decision is binding only in a temporary sense. A whole body of jurisprudence has built up around the decisions of adjudicators and, although outside the scope of this article, many principles are the same.
The use of expert determination will often be governed by the underlying contract between the parties. It is usually a quick, flexible system to resolve disputes in a variety of situations, and provides relative certainty in resolving the dispute. It is cost-effective and allows the parties to deal with a dispute while preserving their ongoing relationship. It is also informal and adaptable to suit the parties’ needs and requirements. It therefore provides an important tool for litigators to consider in resolving disputes and for their colleagues to consider when drafting contracts, but their usual enthusiasm for complexity needs to be restrained, for simplicity in drafting is usually preferable.
This article first appeared in Commercial Litigation Journal September/October 2006