Complex projects are seldom completed without some disputes arising, and IT projects can be amongst the most complex. When a dispute arises usually at least one party is looking for a means of resolving it which is speedy, and all parties are interested in something that is efficient and inexpensive. Contractual requirements for senior level negotiation between the parties’ senior executives, reference to dispute resolution boards, or for mediation, may do the trick, but they may not, particularly if one party is ‘playing for time’. The conventional route thereafter has been to refer the dispute to the court or to arbitration. Both these routes, especially in complex cases (such as IT disputes involving technical issues) tend to be slow and expensive. This is exemplified by two of the reported IT cases, which occupied respectively 70 and 109 days of court time.[1]
However, there is another form of dispute resolution which is being seen with increasing frequency in the field of IT contracts i.e. the process known as expert determination. Of venerable origin, but for many years used only in relation to very few species of transactions such as non-contentious valuation issues (as for example where a merchant agreed to buy goods at a future date at the market price prevailing at that date), it has, in recent years, been taken out of the cupboard, dusted down, and put to more general use. However, to many, including even practising lawyers, its nature and its usefulness remains obscure. The purpose of this article is to cast a little light on the subject.
Defining Features
Expert determination is a process where an independent expert decides an issue or issues between the parties. The disputants agree beforehand whether or not they will be bound by the decisions of the expert. Expert determination is an informal, speedy and effective way of resolving disputes, particularly disputes which are of a specific technical character or specialised kind.[2]
Such an expert is not to be confused with an expert witness, who performs an entirely different role.
The defining features,[3] and principal attractions, of an expert determination, are that:
- unlike a judge or arbitrator, the expert appointed to decide the dispute is not bound by the ordinary rules of procedure or evidence, can carry out his/her own investigation of the facts, and can decide the issues using his/her own expertise;
- unlike a judgment or an arbitrator’s award, the expert’s decision is effectively unappealable[4] and hence in a real sense is ‘final and binding’.
An expert determination is inherently quicker and cheaper than litigation or arbitration.
Distinguished from Arbitration
Expert determination has obvious similarities with arbitration. In both procedures, a dispute is referred by agreement to a third party for decision. As with arbitration, an expert determination may arise from the dispute resolution provisions included in a contract, or from an agreement made between the parties to a dispute after it has arisen. Both derive their efficacy from the agreement of the parties, but whereas an arbitration is subject to the rules of evidence and of natural justice and the controls imposed by the Arbitration Act 1996, an expert determination is not, and since the parties may make any agreement, provided that it is lawful and not contrary to public policy, it is a dispute resolution procedure of great flexibility.
In both arbitration and expert determination the identity or characteristics of the arbitrator or expert, and timetable to be followed, are dependent on the agreement of the parties but, in the case of arbitration, the procedure and legal framework is not – hence the essential difference between the two processes.
Saving Time and Cost
Except in the case of emergencies or issues relating to the meaning of contractual terms, remedies in the courts tend to be slow and expensive, depending as they do on the number of cases waiting for trial, the availability of judges, and on compliance with court procedures. The judge is chosen by the court administration, not by the parties. The timetable will be set by the judge.[5] Set-piece trials of technical issues will generally involve expert witnesses on both sides and may be long and drawn out.[6] Expert witnesses are likely to give oral evidence supporting their reports, and to be cross-examined. The technical issues will be decided by the judge, who only exceptionally will have any relevant technical expertise. Even if the judge does have such expertise, it can only be used to assist his or her understanding of the expert evidence. This may help in expediting the hearing, but the judge must decide the case on the evidence presented and not by the use of his or her own knowledge. Lastly, the parties cannot require the judge to deliver a judgment by any particular date.[7]
An arbitrator may be chosen by the parties, who can include in their criteria the dates of availability of any candidate. The parties can by agreement exercise a greater control over the timetable than they can in the case of litigation, and in particular can agree an early start and a time limit for the making of the arbitrator’s ‘award’ (i.e. decision). A reference of an issue as to the meaning of a contract to an able lawyer who can be relied upon to come to the correct conclusion may be dealt with more speedily than it would be in court, and would be subject to a significantly more limited right of appeal.[8] Otherwise, it may offer little advantage over a reference to the court. Technical issues may, if there is a suitably-worded arbitration clause, or by agreement, be referred to an arbitrator with qualifications and expertise appropriate to the dispute, but unless the parties otherwise agree, either expressly or by implication, he or she would have to follow a procedure which would be very similar to that of the court,[9] and like a judge would have to decide the case on the evidence and not by the application of his or her own expertise. In practice, arbitration will generally be quicker than litigation, but may well not be less expensive.
In the case of an expert determination the parties also get to choose to whom they submit their dispute, and can make a particular expertise, availability, an early start, and time-tabling convenient to them (including a time-limit for the delivery of the expert’s decision), essential criteria. As stated, unless the parties agree otherwise, the appointed expert need not apply the rules of evidence or procedure, can adopt an inquisitorial approach, and use his or her own expertise to decide technical issues – all potentially saving in time and cost.
Finality
The ‘finality’ of expert determination can be its greatest attraction – depending on the priorities of the parties to the dispute. An expert’s determination which the parties have agreed is to be ‘final and binding’ can result in a decision which is erroneous in law or fact or both, but in the absence of dishonesty or actual bias, it will still be effective and the courts will enforce it, provided that the expert has not materially departed from his instructions.
As Knox J held in Nikko Hotels (UK) Ltd v MEPC plc [1991] 2 EGLR 103:
‘ a mistake by an expert will not render the determination invalid, provided that he has answered the question which was put to him: ‘If he has answered the right question in the wrong way, his decision will be binding. If he has answered the wrong question, his decision will be a nullity’.
The rationale of these principles was explained by Cresswell J. in Halifax Life Ltd v Equitable Life Assurance Society [2007] Const LJ 373:
‘Mistake and material departure distinguished
80. A mistake is made when an expert goes wrong in the course of carrying out his/her instructions. The parties are bound by it for the reason that they have agreed to be bound by it. Where the expert departs from instructions in a material respect, the parties have not agreed to be bound (Veba Oil Supply & Trading GmbH v Petrotrade Inc (The Robin) [2001] EWCA Civ 1832; [2002] 2 Lloyd’s Rep. 295 at 300-301, Simon Brown LJ).
Departure by expert from instructions in a material respect
81. If the expert departs from his/her instructions in a material respect, either party is able to say that the decision is not binding because the expert has not done what he/she was appointed to do (Jones v Sherwood at p. 287A to B, Dillon L.J.). Once a material departure from instructions is established the decision is not binding on the parties. A material departure vitiates the decision, whether or not it affects the result. Any departure from instructions is material unless it can properly be characterised as trivial or de minimis, in the sense of it being obvious that it could make no possible difference to either party. (Veba Oil, at 301, Simon Brown LJ)’
Examples of material departure from instructions would be cases in which an expert valued the wrong number of shares, or valued shares in the wrong company, or where an expert, instructed to appoint an expert valuer, valued the shares himself. In this context it should be noted that an expert’s terms of reference may be strictly construed, and may exclude authority to decide issues of law or as to the meaning of a contract, so that the courts will not enforce the expert’s decision if it is based on an incorrect view of the law or as to the meaning of the contract.[10]
In contrast, a litigant who is dissatisfied with the decision of a judge at first instance can obtain permission to appeal to the Court of Appeal if he can show that he has a ‘realistic prospect of success‘ or that there is ‘some other substantial reason’ for him to be allowed to appeal.[11] The Court of Appeal can then look at the issue afresh. Even if an appeal is ultimately unsuccessful, permission to appeal itself will have resulted in substantial delay, the case-load of that court being such that only emergencies can be dealt with speedily.
The award of an arbitrator can be challenged for want of jurisdiction or serious irregularity (which includes fraud, breach of the rules of natural justice, and other procedural irregularities).[12] Additionally, an award can be appealed to the High Court on a point of law,[13] but permission to appeal is only given if certain conditions are fulfilled, the most important of which are that on the basis of the findings of fact in the award:
- the decision of the tribunal on the question is obviously wrong; or
- the question is one of general public importance and the decision of the arbitrator is at least open to serious doubt.
As can be seen, therefore, the grounds of appeal against the award of an arbitrator are substantially more restricted than those upon which a judgment can be appealed to the Court of Appeal. Nevertheless, if a challenge or appeal is mounted, the enforcement of the award is likely to be subject to significant delay even if, in the end, the award of the arbitrator is upheld.
Whilst, therefore, the finality of the decision of an expert is not absolute, it is significantly less vulnerable to challenge than either a judgment or an award of an arbitrator, and this can be an advantage which outweighs the risk of the expert making a decision which is palpably erroneous.
Flexibility
It is not possible at the time contracts (IT or otherwise) of a complex nature are entered into for the parties to predict whether disputes will arise, or if they do, what their nature will be, or whether their resolution needs to be immediate or can be deferred.
A contract for the provision of bespoke software may, for example, give rise to disputes of a purely legal nature, disputes as to whether the software is compliant with specified functionality, disputes as to whether a particular variation was an employer request or a contractor’s ‘repair’, disputes as to the causes of delay etc and an IT services contract may typically involve accountancy issues.
For this reason, the ideal dispute resolution procedure for such contracts is an extremely flexible one. For reasons already given, both litigation and arbitration, to a degree, lack flexibility, whilst an expert determination is readily tailored to the needs of the parties and to the particular dispute.
An agreement for determination by an expert may provide for the expert:
- to be a particular individual, partnership, or company
- to have an expertise applicable to the nature or subject-matter of the particular dispute
- to decide the matter using his own expertise, or to adopt an inquisitional investigative approach, or to adopt a procedure akin to that required in an arbitration
- to act in private and confidentially
- to comply with a particular timetable
- to give a decision without reasons, or give a reasoned decision;
- to have the power to give a final and binding decision, or a decision which is binding in the absence of ‘manifest error’,[14] or subject to some other qualification or provisionally binding,[15] or simply a non-binding neutral evaluation or recommendation.
Further, a provision for an expert determination may be deployed in company with other dispute resolution procedures. For example, in an IT service provider contract one might now see a multi-tiered and multi-faceted dispute resolution procedure, which provides for negotiation at a particular technical or executive level, and in the case of failure, for disputes to be escalated through mediation, to expert determination or arbitration or from the former to the latter, with, for example, technical legal disputes, or accountancy disputes being directed towards the final and binding decision of an individual to be chosen or appointed as appropriate from agreed lists of competent persons with the relevant expertise.
Disadvantages
The potential for an expert determination to be final and binding, which is sometimes perceived to be the prime advantage of the procedure, may also be regarded as its principal disadvantage. In each case, therefore, before signing up to such an agreement, the parties need to consider the degree of risk of the expert arriving at a decision which is palpably wrong, and the practical consequences of having agreed a process which excludes any prospect of appeal. Unlike an arbitrator, an expert who gives a negligent decision or otherwise is in breach of the terms of his or her appointment can be liable in damages to a party who suffers loss as a result of the enforcement of that decision.[16] However, the expert may have insisted, as a condition of the appointment, that any such potential liability he excluded and, even if that is not the case, unless the expert is adequately covered by insurance there may in practice be no adequate remedy against him or her.
The risk may be modified by ensuring that the agreed expert, or panel of experts from which an expert is to be chosen, is one in whom, or which, on the basis of past experience and track-record, the parties can have confidence. Again, as has been seen, provision can be made to ensure that the parties do have some input into the decision-making process, for example, at one extreme, by requiring there to be a ‘hearing’ or, at the other extreme, by simply entitling them to comment on a draft decision before it is finalised. Alternatively, the parties may agree that the decision will only be provisional (eg effective unless and until superseded by the decision of an arbitrator or the court) or only final and binding in the absence of, for example, ‘manifest error’.
A well-drafted provision for resolution of a dispute by expert determination will include a term requiring the parties to comply with the decision of the expert. As a contractual obligation this is capable of enforcement by the courts in the same way as any other contractual obligation. However, the enforcement of an expert decision made pursuant to an international contract can give rise to practical difficulties because although there are various international treaties by which judgments and arbitral awards may be enforced by foreign courts, there are no such treaties in relation to experts’ decisions. This problem can be overcome, but the enforcement of an expert’s decision in foreign courts is undoubtedly more cumbersome than the enforcement of judgments or awards.
Conclusions
Expert determination is a form of dispute resolution with many potential advantages over the more conventional forms of litigation and arbitration. It may be of particular value in the context of technical disputes in IT contracts in that, if the parties are able to identify an expert with suitable expertise and in whom they have confidence, it can provide a satisfactory resolution which is both quicker and cheaper than those other more conventional procedures. Further, it has an inherent flexibility which can render it an extremely useful tool in those large projects which can give rise to multi-faceted disputes.
David Blunt QC and Richard Osborne are barristers at 4 Pump Court: dblunt@4pumpcourt.com
[1] The hearing of Salvage Association v Sema Group Plc [1995] FSR 654 (TCC), a dispute arising out of a bespoke software development, occupied 70 days of court time. In BSkyB Limited and Sky Subscribers Services Ltd v HP Enterprise Services UK Ltd (formerly Electronic Data Systems Limited) and Electronic Data Systems LLC (formerly Electronic Data Systems Corporation) [2010] EWHC 86 (TCC) proceedings were commenced on 17 August 2004, the trial started in October 2007 and concluded on 30 July 2008 after 109 court days and judgment was handed down on 26 January 2010.
[2] The Heart Research Institute Ltd v Psiron Ltd. [2002] NSWSC 646 per Einstein J.
[3] Kendall: Expert Determination 3rd Ed, Chapter 17.
[4] Unless the agreement between the parties provides otherwise by providing, like an adjudication, that the decision is to be only provisional.
[5] Litigation is governed by the Civil Procedure Rules, which subordinate any procedural agreement between the parties to the overriding discretion of the judge.
[6] See footnote 1.
[7] In Cobham v Frett [2001] 1 WLR 1775 a delay of 12 months between the end of a trial and the giving of the judgment was held not to be a ground of appeal because there was no reason to believe that the judge had forgotten or overlooked any material evidence.
[8] See Arbitration Act 1996, ss 67 to 69.
[9] See Arbitration Act 1996, s 33. Whilst s 34 does provide for an arbitrator to decide what procedure he will follow and whether to apply the rules of evidence, this power is subject to the agreement of the parties, and an arbitrator would need to inform the parties if he proposed to depart from the normal adversarial procedure and rules of evidence.
[10] See eg Menolly Investments 3 Sarl v Cerep Sarl [2009] EWHC 516.
[11] CPR, r 52.3.
[12] Arbitration Act 1996, ss 67 and 68.
[13] Arbitration Act 1996, s 69.
[14] In the Veba Oil case cited in the Halifax Case above, Simon Brown LJ construed ‘manifest error’ to mean ‘oversights and blunders so obvious and obviously capable of affecting the determination as to admit of no difference of opinion‘ – see p. 302.
[15] As, for example, is the case with an adjudication under Housing Grants, Construction and Regeneration Act 1996.
[16] Arenson v Casson Beckman Rutley [1977] AC 405
