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Focus: Construction – October 2003

Expert Determination v Arbitration

In brief: The recent Victorian Supreme Court decision in Age Old Builders Pty Limited v Swintons Pty Limited has overruled a VCAT decision that an expert determination was an arbitration and void by reason of breaching the Domestic Building Contracts Act. Partner Leighton O'Brien(view CV) and Lawyer Lisa Ziegert review the case.

Background

An expert determination can be described as a process where an independent expert decides an issue or issues between parties, in which the parties agree in their contract whether it will be binding.

Expert determination and arbitration are both processes that depend on the parties' contract for their existence. Their foundations being in contract, the parties are free to agree as to what their process will be, including the speed, formality and complexity of the process.

This freedom to formulate the elements of the dispute resolution can blur the distinction between the processes. Although it may be considered of little importance for participants whether their dispute resolution process is characterised as an expert determination or arbitration, this distinction is significant where:

  • arbitration agreements are prohibited by legislation (such as in domestic building contracts); or
  • the parties are seeking to avoid the regulation of the Commercial Arbitration Act.

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Age Old Builders Pty Limited v Swintons Pty Limited

In December 2002, the Victorian Civil & Administrative Tribunal (VCAT) decided, controversially, that an agreement, which incorporated the Institute of Arbitrators and Mediators Australia (IAMA) rules of expert determination, was in fact an arbitration agreement and void by reason of the provisions of the Domestic Building Contracts Act 1995 (Vic) (the Act).

In August 2003, the Victorian Supreme Court overturned that decision and, in applying the test of whether a process was 'in the nature of a judicial inquiry', rejected VCAT's reasoning and held that the process was not an arbitration but was in fact, an expert determination.

This case considered the determination made by an expert of a dispute that had arisen regarding alleged defects between parties to a JCC-D 1994 domestic building contract. It was alleged that the expert determination agreement was void because of its contravention of section 14 of the Act which provides that:

Any term in a domestic building contract or other agreement that requires a dispute under the contract to be referred to arbitration is void.

The engagement agreement of the expert included 'Rules for the expert determination of commercial disputes' formulated by IAMA. These rules provided that the determination of the dispute by the expert would be final and binding upon the parties. The rules stated that 'the expert is not an arbitrator of the matters in dispute and shall not be deemed to be acting in an arbitral capacity'. The rules also set out the conduct of the process, including:

  • the process must provide procedural fairness to the parties involved;
  • the parties could make initial submissions; and
  • the determination was to be made in accordance with the law.

Although VCAT accepted that parties are able to enter into arrangements for dispute resolution that do not infringe s14 of the Act, it found in these circumstances the expert had acted beyond the role required for an expert determination. VCAT decided:

  • the identity given by the parties to their process and to the person determining their disputes is irrelevant; and
  • there were a large number of indicators that supported a finding that the parties in this case had in fact an arbitration agreement, because they had agreed to an inquiry of a judicial nature.

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Issues before the Supreme Court

On appeal, VCAT's decision was attacked on two points:

1. it was an agreement to refer an actual present dispute for determination rather than an agreement to refer future disputes; and

2. it was an agreement for expert determination, not arbitration.

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Key findings

The Supreme Court found that VCAT erred in its conclusion that the referral to the expert was not an expert determination and the agreement was not void.

Section 14 applies to future agreements only

The court held:

  • that s14 was susceptible of two meanings;
  • an interpretation that promotes the purpose and object of an act is to be preferred;
  • s14 was not infringed in this case because:
    • the language of the section 'to be referred' as opposed to 'refers or requires a dispute to be referred';
    • extrinsic material such as the second reading speech of the Minister responsible for the legislation; and
    • the consequence of VCAT's construction to the contrary would lead to a draconian result.

It was consistent with the purpose and intention to enable disputes involving domestic building contracts to be resolved as quickly, efficiently and cheaply as possible. Therefore, the court concluded that s14 of the Act applies only to terms of a domestic building contract or other agreements that refer future disputes to arbitration.

In the nature of a judicial inquiry

The critical question considered by the court was whether the process contemplated was in the nature of a judicial inquiry. The court found that the essential character of this procedure was not arbitration, and in particular:

  • that the parties' agreement that the expert was not an arbitrator was not conclusive, but it was significantly indicative of the parties' intention. Their intention was critical as a matter of properly interpreting the agreement;
  • there was no right to a hearing and that is one of the fundamental characteristics of an inquiry of a judicial nature. The prospect of a preliminary conference dealing only with administrative matters is not enough;
  • the core procedure was for submissions only. After that point the expert had almost complete discretion as to the process to be followed;
  • the expert's expertise was not decisive of the characterisation of the role. It was not correct to suggest that the matters for determination went beyond the expert's expertise;
  • it is not critical in deciding the true nature of the process whether the expert is being called upon to prevent or settle a dispute; and
  • the ancillary procedural aspects relied upon by the VCAT (lack of immunity, required propriety and powers of the expert, reasons for decision) did not govern the fundamental character of the expert's role.

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Consequences of the decision

This decision means that ad hoc submissions of existing domestic construction disputes sent to arbitration should survive challenge under the domestic construction legislation.

Generally, to ensure proper characterisation of a dispute resolution process as an expert determination:

  • the agreement should refer to expert determination and not arbitration, and provide that the expert is not an arbitrator;
  • the parties may submit information, evidence and submissions, and attend a meeting but have no right to a hearing; and
  • the expert should have discretion as to the process and not be bound to rules of natural justice and evidence.

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Postscript

An application for leave to appeal has been granted but it may be at least a year before the matter comes to court. The outcome is awaited with interest.

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For further information, please contact:

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