Expert determination1 has been around for many years but its use has largely been in limited applications such as share and commodity valuations, and other areas, where the crux of the dispute often rests more on informed opinion than legalities. Used correctly, it represents an ideal way of achieving a relatively quick and cheap solution and, for these reasons, it is now regularly cropping up in IT contracts. However, like most quick fixes which promise a great deal, a health warning must be given. Far from providing for a quick and cheap solution, the provision of expert determination in a standard boilerplate dispute resolution clause could seriously expose your client and ultimately your firm.
A Comparison with Arbitration
A simple definition of expert determination is where both parties under a contract provide for a third party to decide an issue, the ‘reference’, which is binding on them. At first sight this appears very similar to arbitration, but the different laws that apply to arbitrators and experts have far-reaching effects. As a result, the often fuzzy distinction between the two has provided fertile grounds for litigation over the years.
The first point to make clear is that it does not matter that the parties specifically provide in the contract for the process to be an ‘Expert Determination’. Whilst this may reflect the parties’ intention, the court will merely treat this as a starting point2 and will actually look at the nature of the issue arising, the evidence and the procedure followed, before deciding whether the process is in fact an arbitration or expert determination.
Some very helpful and distinguishing features were identified by Lord Wheatley in a 1975 case relating to a share valuation Arenson v Casson Beckman Rutley and Co.3 These are known as the Arenson Guidelines; no individual guideline is conclusive but their application is a useful way of understanding the differences.
1. A Formulated Dispute?
A lot of commentators say that expert determination is not dispute resolution at all. Rather it is a form of preventative medicine. For example, the seller will want the highest price, the buyer the lowest. Rather than getting into a dispute however, both parties agree to refer the valuation issue to an expert. In contrast, an arbitration involves a situation where both parties have already taken a defined position, a difference actually arises and both have agreed that a third party shall settle it.4
This distinction, between an expected and existing difference, may seem a little trite. After all, there will often be cases where a dispute has arisen but the parties do not want the reference to deal with issues of evidence. This leads to the next guideline.
2. A Judicial Function
An arbitration involves an adversarial process during which an arbitrator, although given a great deal of procedural flexibility, must follow the rules of natural justice. To assist them, arbitrators are given by statute extensive powers – for example, to subpoena witnesses and award costs.5 Most importantly, an arbitrator must not make an award based on their own expertise but, like a judge, must properly assess the submissions and evidence heard. This legal process means their actions are subject to control by the court.
Experts on the other hand are not subject to such constraints. It is precisely because the parties want the expert’s opinion that the issue has been referred to them. Therefore, as soon as an expert is obliged to exercise a judicial function in coming to a decision based on evidence rather than their own opinion, then they act as an arbitrator.6
3. The Presentation of Evidence and Submission
This exercise of a judicial function will involve acting in whole or in part on the evidence and submissions made by the parties, rather than relying on the expert’s own opinion.
This does not mean the expert cannot hear evidence of what was done by whom and when, etc, but the more the parties and the expert move towards a formal process and a decision based, if only in part, on conflicting evidence, so the greater the likelihood that the process will be deemed an arbitration and subject to review by the court.
4. Agreeing to Accept the Decision
This is a further differentiator. Although rights of appeal against an arbitrator’s award are very limited, if the award is clearly wrong or serious issues of public importance arise, the court may vary, remit or set aside the award. An arbitrator’s award is also enforceable as a court judgment, without further action and, subject to appropriate Conventions, internationally.
In contrast, expert determinations are usually agreed by the parties as being final and binding. Save in the case of a material departure from instructions,7 no right of appeal therefore arises. Further, the fact that the expert’s decision is purely contractual means separate enforcement proceedings must be taken.
Immunity
Although not one of the Arenson Guidelines, a further important difference is that arbitrators, save in the rare case of bad faith, have statutory immunity and cannot be sued. Experts on the other hand are very mindful that they can be sued for professional negligence, based on breach of contract or their tortious duty to exercise appropriate skill and care. For this reason, experts will usually look to exclude liability – and most practitioners have no problem with this, subject to the term being reasonable. Therefore, I would want to ensure that the expert has no better protection than an arbitrator and does not seek to exclude their obligation to deliver a decision within a reasonable time.
Suitability?
The above comparison with arbitration illustrates that expert determination is not suitable for every occasion. It has a number of benefits, but should only be used in specific circumstances. In particular, I believe it is an essential pre-requisite that the parties are able to define and agree exactly what ‘issue’ is to be put to the expert. If this cannot be done, then the process is unlikely to get to first base and should go no further. Similarly, wherever there are important evidential issues, I do not believe it is appropriate to refer issues to an expert. To do otherwise means your client is submitting to a process over which it has little control and in respect of which there is no right of appeal or real prospect of recourse against the expert.
By way of example, in an Australian case8 about a Sydney shopping centre development, the contract provided for all disputes to be referred to an expert. Faced with variation claims, the developer applied to court arguing that legal and other issues meant the reference was inappropriate. The court however upheld the contract and said the developer should have thought about the consequences more carefully when he signed the contract.
An Illustration
Let us take perhaps the most fertile ground for a dispute, a software development contract. Within this, let’s say that the contract distinguishes between ‘technical’ disputes, which are to be referred to expert determination, and ‘legal and commercial’ disputes.
A dispute arises over whether the software passes or fails acceptance. This could be said to be a technical issue and (if scope, the test process and acceptance criteria are not disputed) it would seem one ideally suited for expert determination. Situations do arise though where a customer may want the software to fail and disputes can arise both about scope and the test process. What problems could arise?
- Firstly, there is scope for secondary litigation about the categorisation of the dispute. On the face of it, with issues of fact there appear good grounds for saying the dispute should not be referred to the expert. However, whilst this case is distinguishable from the Australian case mentioned above, the supplier’s position is by no means clearcut.
- If the parties proceed with the determination then questions of fact arise which the expert will have to determine, but over which the parties have little control.
- With no right of appeal or action against the expert, one party may seek to attack the decision on the grounds that the expert has acted as an arbitrator.
In reality, an experienced expert is likely to recognise the conflict that arises and feel exposed, notwithstanding any exclusion, to a potential action by one party in negligence. Therefore, in the absence of agreement between the parties, it is likely that the expert will seek agreement that the reference cannot proceed any further, on the grounds of uncertainty. By then however both parties will have wasted substantial time and money on the dispute and are very likely to feel frustrated and disillusioned.
An Answer?
Because they are private and there is no published data, it is hard to know how much IT-related expert determination work is out there. However anecdotal evidence suggests that determinations are few and far between, numbering no more than a handful, say a dozen, a year.
This small number reflects the fact that most IT disputes involve questions of evidence that render them unsuitable for expert determination. It is for that same reason that I and a number of other practitioners believe attempts to categorise disputes into legal, commercial or technical issues is artificial and unhelpful. I therefore:
1. Strike out any references to expert determination from boilerplate dispute resolution provisions.
2. Seek to educate my clients’ senior commercial managers about its use (i) as part of the general escalation procedure during project management (ie before the formal ‘dispute’ arises) or (ii) treat it as a form of ADR for consideration as part of a standard dispute provision in the following form:
‘1. Disputes
1.1 The parties shall attempt to resolve any dispute arising out of or relating to this Contract through negotiations between senior executives of the parties who have authority to settle the same.
1.2 If the matter is not resolved through negotiation, the parties will attempt to resolve the dispute in good faith through an agreed form of Alternative Dispute Resolution (ADR) procedure or in the absence of agreement one recommended to the parties by the Centre for Dispute Resolution.
1.3 If the matter has not been resolved by an ADR procedure within 60 days of the initiation of that procedure, or if either party will not participate in an ADR procedure, the dispute shall be decided by the High Court of England and Wales and the parties submit to its exclusive jurisdiction for that purpose.
1.4 This Contract shall be governed by the laws of England and Wales.’
If one party is insistent on an expert provision and seeks to categorise the disputes, I would add a clause that if the parties cannot agree on which category the dispute falls into (ie technical or legal/commercial), then the determination shall be dealt with via mediation or litigation, as appropriate, in the normal way.
A Precedent?
Reading the above, some might think I am strongly against expert determination as a resolution process. Far from it, but I support it only when used in the correct circumstances. If the parties can agree on the ‘issue’ and no substantive evidential disputes arise, then it can represent an ideal form of dispute resolution process. Possible examples that come to mind, could include software copyright infringement disputes, or acceptance testing, where the specification, test process and test criteria/scripts are agreed.
If expert determination can be agreed, then being subject to contract law, I look to prepare a bespoke agreement along the following lines:
1. The parties agree that a problem has arisen relating to [insert definition of the problem] (‘the Issue’) and agree that the Issue should be referred, to be determined by the Expert as follows:
2. The Expert shall be [insert name], being jointly nominated by the parties. Or
In the absence of agreement within 10 business days from the date of the request to refer in writing by one of the parties, the Expert may be nominated on the application of either party to the President for the time being of the British Computer Society (the ‘President’). If the Expert appointed is unable to complete their reference, another Expert shall be appointed by the parties, or if no agreement can be reached within 21 days of a request to do so by one of the parties, the President.
3. The Expert shall act as an Expert and not as an Arbitrator. In the absence of fraud or manifest error, the decision of the Expert shall be final and binding on the parties and is enforceable as a matter of contract between the parties, not an Arbitral award.
4. The Determination of the issues between the parties shall be based solely upon the documentary submissions and supporting written evidence produced by the Parties to the Expert, and the Expert’s own professional knowledge and experience in the interpretation and evaluation of the documents and evidence supplied by the parties.
5. There will be no formal hearing and each party shall agree, unless the parties otherwise agree in writing, to:
5.1 accept such terms and conditions as the Expert may seek to impose in relation to the discharge of their functions;
5.2 give the Expert such assistance, facilities and information as the Expert requests to discharge the Expert’s functions and such party is reasonably able to provide.
5.3 make all reasonable efforts to ensure the Expert is able to provide their decision as soon as reasonably possible.
5.4 in the event that a party or the parties fail to comply with a final notice by the Expert requiring compliance with a direction within 28 days, then the Expert shall have the power to make their Determination on the information available to them and their own knowledge and experience;
5.5 the Expert fees shall be paid by the parties in equal shares unless the Expert determines that the conduct of either party is such that it should bear all or a greater proportion of such fees, in which case the parties shall abide by the Expert’s determination. For this purpose, the Expert may refer the question of the assessment of costs to an independent costs draftsman to be agreed between the parties or in the absence of agreement, nominated by the Association of Law Costs Draftsmen.
6. The Expert shall not be liable for anything done or omitted to be done in the discharge or purported discharge of their appointment, unless the act or omission is shown to be fraudulent or in bad faith. However, nothing in this foregoing exclusion shall relieve the Expert of their duty to provide their decision as soon as reasonably possible.
7. The Expert shall be released from any requirement to supply documents or give evidence in any legal proceedings that may arise from the reference.
8. Pending the outcome of the Determination and thereafter, the parties agree that work to be carried out [insert contract details] shall proceed with due diligence. Further, in agreeing to this Expert Determination neither party shall prevent the other party from invoking other Dispute Resolution procedures as appropriate. Subject thereto, both the parties and the Expert agree to keep the existence and the subject matter of this Expert Determination private.
Clearly, this precedent is merely a starting point and will require tailoring to fit the particular circumstances. For example there may be a need for the expert to carry out site inspections and run tests. Similarly, experts often prefer not to have to deal with the issue of costs and you may be prepared to agree to this, if these are to be relatively limited and leaving them to the expert is likely to produce arbitrary results. It may in certain situations be far easier to let each party bear their own, if as a side issue extra work is imposed on one party, then the parties can agree to deal with that cost between themselves.
Conclusion
Expert determination can be a highly effective resolution process, one that should always be on a lawyer’s checklist. However it should be used only in limited, largely pre-defined circumstances and coupled with attempts to categorise disputes; it should not be found in boilerplate clauses. Far better, if the parties are seeking to use third party experts effectively, to put in place an Expert Project Supervisor or some form of adjudication type process. Now therein lies another step for the IT industry.
Tim Toomey is a director of v-lex limited.
Endnotes
1. For those of you looking for a textbook, I highly recommend John Kendall’s book Expert Determination (third edition) published by Sweet & Maxwell which I have used for source materials for this article.
2. Taylor v Yielding (1912) 56 SJ 253.
3. [1975] 3 WCR 815.
4. Per Romily MR in Collins v Collins 1858 16 Bear at 312.
5. See Arbitration Act1996, ss43 and 61.
6. Mars-Jones J in Palacath Limited v Flanagan [1985] 2 All ER at 166.
7. Jones v Sherwood Computer Services plc [1992] I WLR 277.
8. Public Authority Superannuation Board v Southern Int Dev Corp Pty Ltd (1987). The Supreme Court of New South Wales referred to by Burke and Chinkin in ICLR 1990 443.
