One of the main reasons that parties choose to arbitrate is the ability to select their own arbitrators. Parties are able to choose arbitrators that, they believe, will have the requisite expertise to resolve their arbitration effectively. This ability has now evolved somewhat and parties are increasingly carving out discrete issues to be resolved by an independent expert selected by the parties.
Expert determination is seen by many as a quick and cheap alternative to arbitration. However, while there are benefits to such an arrangement, poorly drafted carve-out clauses can result in a number of problems which could lead to additional delay and costs caused by further arbitration or litigation. This is exacerbated by the fact that, unlike arbitration, there is no statute underpinning the expert determination process. It is purely a creature of contract which starts and ends with the strength of the contractual clause. While this gives parties the power to decide exactly how disputes are to be determined, it is also a risk, and one which parties may not appreciate when they request the incorporation of an expert determination clause.
The two most common issues which arise relate to the scope and status of the expert determination. It is therefore imperative that parties ask themselves the following questions when drafting the agreement:
- Scope: Which issues should be determined by the expert?
- Status: Is the expert’s decision binding, and, if so, to what extent?
The recent High Court decision in J v K illustrates the consequences of a failure to consider these two questions in practice.
Parties need to be clear from the start exactly which issues will be determined by an expert and which issues will be determined by arbitration. While this may seem clear-cut to the parties at the outset, it may be a different story once a dispute actually arises, at which point parties suddenly finding their clause to be ambiguous and uncertain.
In J v K, the parties had entered into a yacht construction agreement (YCA) which contained two conflicting clauses:
- Clause 9.3 provided for disputes relating to valuations of rectification works to be referred to expert determination, with such determination being “final and binding”.
- Clause 22.2.1(b) provided for expert determination to be used to resolve technical matters “as well as any other matters specifically mentioned in this Agreement in this regard”. However, unlike clause 9.3, this clause then provided for any determination, if still in dispute, to be the subject of further arbitration.
The court found that in order to resolve the jurisdictional challenge before it, it had to determine which carve-out clause the original dispute between the parties fell under.
The original dispute related to the method and cost of rectifying a defect that had arisen, and seemed to fall squarely within the specific issue identified in clause 9.3. However, the court also found that the wording in clause 22.2.1(b) meant that it applied to all cases where the YCA provided for matters to be referred to an expert. The original dispute which was referred to an expert under clause 9.3 therefore fell within the regime of clause 22.2.1(b). This meant that the arbitral tribunal did have jurisdiction to determine the dispute.
The contradiction in the two carve-out clauses deprived the parties of some of the main benefits of expert determination; it was not a quicker or cheaper solution and it almost certainly did nothing to preserve the parties’ relationship. The parties undoubtedly ended up spending all of the time and costs they had expected to save when they first drafted the expert determination clauses.
The need to draft carefully to avoid ambiguity is all well and good, but what happens if you already have a clause in place, and one which is far from certain? In such a situation, it would be a good idea for the parties to agree on the appointment and scope of any expert as soon as a dispute, or potential dispute, arises. Of course, the accusing party will lose any element of surprise and tip off the other side that it is about to refer a matter for expert determination. In the long run, however, it could save the additional time and costs of having this resolved in further arbitration or litigation.
Expert determination clauses also need to spell out what the status of any decision reached by the expert will be. Will the decision be final and binding? If the answer to that is an emphatic yes, would it still be a yes if the decision is not in your favour? Or, what happens if the expert makes a mistake? Would the parties still be happy to be bound by a decision made in error?
This was exactly the situation in J v K; the parties were in agreement that the expert made a mistake, but the expert refused to revisit his decision when asked to do so. As the dispute had been referred to the expert under clause 9.3, did this mean that the decision was “final and binding” despite the error?
As set out above, the court found that disputes under clause 9.3 also fell within the expert determination regime of clause 22.2.1(b). This meant that the decision was not “final and binding” and the arbitral tribunal had jurisdiction to substitute the expert’s determination with its own.
As most carve-out clauses fail to include any provision for challenging a determination, parties could potentially be stuck with an erroneous decision. This may be acceptable to some, at least at the outset, as it allows them to obtain a quick answer and move on with the project. However, parties may find such a result difficult to swallow, particularly if perceived as lacking legitimacy. Whether or not the parties decide the decision should be final and binding, it is crucial that this is an issue the parties turn their minds to at the drafting stage and provide the necessary mechanisms to deal with challenges to, and enforcement of, the expert’s decision. A failure to do so may result in the parties finding themselves tied up in unnecessary arbitration and litigation, as they did in J v K.
If the parties are particularly keen to have expert input on discrete issues, it might be an idea to suggest that any expert’s decision be given as guidance only, rather than as “final and binding”. This could be particularly useful before or during settlement discussions, with discrete questions being sent to an expert in order to break deadlocks and allow parties to proceed with negotiations.
Parties often choose to use an expert determination process because they think it will be quicker and cheaper than arbitration. While this might well be the case, for these clauses the devil is in the detail.
In the absence of a statutory safety net, expert determination can be a dangerous creature of contract. Parties should tread carefully and have both the scope of the expert’s jurisdiction and status of any decision in mind when drafting expert determination clauses.