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Focus: Arbitration – June 2003

Appeals from expert determinations

In brief: A recent decision of the Victorian Civil and Administrative Tribunal may have a profound effect on the use of expert determinations to resolve disputes. Special Counsel Nick Longley explains the tribunal's decision in Age Old Builders Pty Limited v Swintons Limited which held that, notwithstanding its name, the expert determination agreement under consideration was in reality an agreement to arbitrate.

Introduction

In the wake of increased dispute resolution costs, parties to contracts have sought alternative and quicker ways of resolving their disputes. One of those alternative dispute resolution methods is determination or adjudication by an expert. This expert is a creature of the contract between the parties, and the rules and procedures for expert determination are not subject to any legislation, which gives parties some degree of freedom.

There is one perceived advantage of expert determinations, which is that they are intended to be final and binding and neither party should be able to appeal that decision. This is in sharp contrast to arbitrations where the respective Arbitration Acts give limited rights of appeal to the losing party.

The increasing popularity of expert determination, however, has meant that it has been used to resolve disputes in cases where it might not be the most suitable dispute resolution method. Contracting parties have attempted to resolve complex factual and legal disputes by using expert determination, particularly in the building industry. This was the case in Age Old Builders Pty Limited v Swintons Pty Limited.

Although the decision in Age Old Builders, concerns the application of the Domestic Building Act in Victoria, the reasoning behind the decision will be relevant to any expert determination agreement in any industry in any jurisdiction.

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Age Old Builders Pty Limited v Swintons Pty Limited

In Age Old Builders Pty Limited v Swintons Pty Limited, the Deputy President of Victorian Civil and Administrative Tribunal (VCAT) was asked to consider, as a preliminary issue, whether an agreement to submit disputes to expert determination was void under section 14 of the Victorian Domestic Building Contracts Act 1995 (the Act). Clause 14 of the Act voids any agreement in domestic building contracts to refer a dispute to arbitration.

The underlying dispute between the parties related to the construction of a building in Acland Street, South Yarra, Melbourne. The disputes concerned delay, extensions of time, prolongation costs and liquidated damages.

The parties referred these disputes to expert determination governed by the Rules for the Expert Determination of Commercial Disputes prepared by the Institute of Arbitrators & Mediators Australia (the Expert Determination Rules). Relevantly, the Expert Determination Rules include the following:

Clause 3(b): The Expert is not an arbitrator of the matters in dispute and shall not be deemed to be acting in an arbitral capacity.

Clause 4(b): The Expert must make the determination according to law and must conduct the Process in accordance with the requirements of procedural fairness.

Clause 4(c): ... the Expert is not bound by the rules of evidence and may receive any information in such manner as the Expert thinks fit.

Clause 4(g): The parties may be required by the Expert to attend a preliminary conference to make such procedural and administrative arrangements as are necessary and appropriate.

Clause 4(h): At any conference with the Expert a party may have legal or other representation.

The parties also had the right to make written submissions.

After submitting the disputes to the expert for determination, but before the determination was received, the respondent, Swintons, attempted to avoid the expert determination agreement.

The VCAT Deputy President found that the expert determination agreement was, in reality, an arbitration agreement and therefore void under s14 of the Act.

In what is a lengthy and considered decision, the Deputy President considered a number of authorities from both Australia and overseas on what constitutes an arbitration agreement. In particular, he referred at length to a decision of Justice Menhennitt in Hammond v Wolt (1974) and the criteria set out in that decision as to what constitutes arbitration.

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Substance not form

The crux of the Deputy President's decision was that in considering whether the agreement was an arbitration agreement, it was necessary to look at the substance of the agreement rather than the name the parties had given it. He said:

Its real nature, in my view, cannot be masked by calling it an agreement for expert determination.

The Deputy President reviewed the Expert Determination Rules in the context of the dispute between the parties and considered that they had (among other things) the following characteristics that made the agreement an arbitration agreement:

  • The Expert Determination Rules required an enquiry in the nature of a judicial enquiry. The conduct of a judicial enquiry is one of the main characteristics of an arbitration. The Deputy President considered that the obligation on the expert to decide the dispute according to law (as required by Clause 4(b) of the expert determination agreement) amounted to a judicial enquiry. The obligation to adopt procedural fairness also suggested that a judicial enquiry was taking place.
  • The Expert Determination Rules established a 'right to be heard', which would exist as part of the 'procedural fairness' and allowed the right to have legal representation.
  • The Expert Determination Rules allowed the expert to correct mathematical errors and 'defects of form'. As the Deputy President pointed out, if the expert was acting purely as an expert, he need not be concerned to have the capacity to correct a determination for 'a defect of form'. The correction of such defects, however, would be of great interest to an arbitrator.
  • The Expert Determination Rules stated that the determination would be 'final and binding'. The Deputy President considered that this was in fact a 'hallmark of a judicial enquiry' (Re Advisory Opinions Case (1921)).
  • The Deputy President considered those matters in the Expert Determination Rules that are intended to distinguish an expert determination from an arbitration, including the fact that the Expert was obliged to determine the dispute using his own expertise. However, as the Deputy President pointed out, the use of 'expertise' is not inconsistent with an arbitration.

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Consequences of the decision
  1. The importance of the decision in Age Old Builders is not its outcome, but its reasoning. The reasoning and the distinctions made between a true agreement to submit to expert determination and an agreement to arbitrate could be applied to any dispute resolution agreement in any jurisdiction, not just in Australia but anywhere in the world. There could be some debate on the precedential value of a VCAT decision. However, the fact that the Deputy President's decision was lengthy and well considered and that the decision was an application of Hammond v Wolt, which is a judicial authority of 30 years' standing would suggest that it will have persuasive authority in higher courts and tribunals. 
  2. The main consequence of the decision could be to redefine the scope of the disputes submitted to expert determination. In arriving at his decision, the Deputy President commented on what would be a valid expert determination. In essence, he considered that issues of valuation would be appropriate for expert determination where, 'the function of the expert [is] not to settle disputes, but to prevent or preclude them'. The pre-existence of a 'dispute' would suggest that a judicial function is required and an arbitration would be more appropriate.
  3. In construction disputes, issues of delay and entitlements to extensions of time by necessity require a lengthy investigation and any determination by a third party is likely (following Age Old Builders) to require a judicial process. As a consequence, the scope to use expert determinations for such disputes is likely to be limited. Although it is likely that the rules governing the expert determination will need to reviewed as a whole to consider whether they are in reality an agreement to arbitrate, where an 'expert determination agreement':
  • requires a judicial enquiry;
  • allows a right to be heard; and
  • requires a determination of the dispute in accordance with the law,

then there is a possibility that a court will consider than any such agreement is in reality an arbitration agreement.

  1. Parties should now give consideration to tailoring the dispute resolution clauses in their contracts to ensure that the right dispute resolution method is adopted. For instance, in a construction context, it may be appropriate to appoint an expert to assess the value of variations. However, where the issue concerns an entitlement to a variation and questions of fact and law become involved, the use of another form of dispute resolution may be appropriate. Further, appointing institutions may wish to consider amendments to their rules of engagement of experts to ensure that the powers given to the expert, and the types of disputes that the expert considers, are appropriate to the role.
  2. Losing parties in an expert determination may now wish to consider whether they have any rights of appeal under their existing dispute resolution agreement. If the expert determination is in reality an arbitration, notwithstanding the parties' preconceptions at the outset of the contract, rights of appeals may exist under the appropriate arbitration legislation. Whether a right of appeal does in fact exist will depend upon the wording of any agreement, the intentions of the parties and possibly their conduct during the expert determination. Further litigation can be expected.

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