THE COMMON LAW PERSPECTIVE

INTRODUCTION

In England & Wales there are two types of dispute resolution procedure which are generally available to obtain a binding decision which resolves the dispute:

• arbitration

• expert determination.

More recently, a third type of procedure has been introduced for disputes about building contracts, known as adjudication.

A third party expert may also be appointed by the parties to provide a non-binding recommendation — this is sometimes referred to in England as "early neutral evaluation".

ARBITRATION

When parties to a contract agree in writing to submit their disputes to arbitration, they agree to a dispute resolution procedure governed by the Arbitration Act 1996. The Arbitration Act 1996 contains provisions dealing with (among other things):

• stay of legal proceedings in the courts

• the appointment of the tribunal

• immunity from suit

• jurisdiction

• duties of the tribunal

• powers of the tribunal

• the duty of the parties to do all things necessary for the conduct of the reference

• enforcement of procedural orders

• the form of the award

• interest on the award

• correction of the award

• costs

• enforcement by the courts

• challenging the award on the ground of lack of jurisdiction

• challenging the award on the ground of serious irregularity affecting the tribunal, the proceedings or the award, where the irregularity has caused or will cause substantial injustice to the applicant

• a limited right of appeal to the courts on points of law.

EXPERT DETERMINATION

Parties typically agree to submit disputes to expert determination by using the words "acting as expert and not as arbitrator". In contrast with arbitration (and adjudication of disputes concerning building contracts, referred to below), there is no legislation governing expert determination. The procedure to be followed and the jurisdiction of the decision-maker are governed by the express terms of contract between the parties, supplemented by terms implied by the courts and by principles which the courts have deduced over the years as being necessarily applicable as a result of the parties’ decision to refer the dispute to a third-party decision-maker.

An example of a term implied by the courts is the duty owed by the parties to cooperate in enabling the expert determination to be performed. In an appropriate case this duty may, for example, include the duty to supply documents to the expert or to permit the expert to inspect property which is related to the dispute.

Examples of principles which necessarily apply are the court’s power to stay court proceedings where a party has disregarded an expert determination clause, and the principle that the court will not enforce an award in an expert determination

• where the decision has been made by someone other than the designated expert,

• where the expert has exceeded jurisdiction, or

• where in reaching the decision the expert has materially departed from instructions.

EXAMPLES OF EXPERT DETERMINATIONS

Expert determination may be used in a wide variety of situations. Some of the most common are

• the review of the amount of rent payable by the tenant under a lease at the end of the initial period of the lease

• the valuation of shares in a company whose shares are not listed on a stock exchange

• adjustments to the price payable under a share sale agreement

• disputes of a technical nature

• disputes under long-term agreements where the parties will remain in a contractual relationship for a number of years.

ADJUDICATION

In the construction industry, "adjudication" refers to a system of interim determination of disputes arising in relation to building contracts. Decisions are made by an impartial third party (usually a construction professional or a suitably qualified lawyer), and the decision is binding and becomes final if not subsequently challenged in court or by arbitration using the contractual dispute resolution mechanism. A distinct body of case-law has been established for adjudication of building disputes, and this is considered below.

WHO CAN BE AN EXPERT?

Contracts often state the qualifications which the expert is required to possess. No other specific qualifications are required. In the absence of language which expressly requires independence, independence may not be required. Generally, no objection may be made to a contract term requiring the appointment of auditors to value shares in an unquoted company, despite their close association with one of the shareholders, or to the appointment of an employee of the building-owner as the certifier under a construction contract. Thus an expert’s decision is not generally held to be invalid on the ground of conflict of interest or the appearance of partiality unless the expert determination clause used the word "independent", or the clause, as construed by the court, showed that the parties intended to exclude decisions made by persons having a conflict of interest, or the expert had a conflict of interest which was unknown to one of the parties at the time when the contract containing the expert determination clause was made.

Where an expert has been properly appointed notwithstanding a close association with one of the parties, actual partiality has to be shown in order to impugn the expert’s decision.

Appointing a named individual provides greater assurance that the decision-maker will be someone in whom the parties will have confidence, but there are complications if that person ceases to be available (death, retirement, conflict of interest, etc.). The contract should therefore make provision for an alternative appointment by an appointing body should the named expert be unable to act.

ENFORCING THE USE OF THE AGREED EXPERT DETERMINATION PROCEDURE

In a case where the parties to a contract have agreed to refer disputes to expert determination or adjudication, the court has the power to stay proceedings commenced in the courts. A stay will normally only be granted if the expert determination clause meets (at the least) the following conditions:

• the process must be sufficiently certain, in that there should not be the need for an agreement at any stage before matters can proceed;

• the administrative processes for selecting a party to resolve the dispute and to pay that person should also be defined;

• the process or at least a model of the process should be set out so that the detail of the process is sufficiently certain.

In contrast to cases where the parties have agreed to arbitration, the court has a discretion to decide whether a stay of court proceedings should be granted, even if the clause meets the above conditions. The court may decide that having regard to the circumstances of the particular case, it would be better to allow court proceedings to continue, rather than expert determination. For example, in Thames Valley Power Ltd. v Total Gas & Power Ltd1 the judge declined to grant a stay so that the dispute could be referred to expert determination. He held that

• the issue between the parties related to the interpretation of an agreement, the point had been fully argued before him, and he had concluded that one side’s position was unsustainable,

• a reference to an expert would involve duplication of effort and expense, and

• the matter was urgent, but a reference to an expert would cause delay.

The court may also decide that the dispute is unsuitable to be determined by expert determination by the nominated expert.2 The burden is on the party seeking to litigate in breach of the expert determination clause to show grounds for refusing a stay.

Sometimes a party to a contract containing an expert determination clause obstructs the process by refusing to agree to the expert’s proposed terms of engagement. In one case3 one of the parties objected (among other points) to the expert’s proposed limitation of liability to £500,000. The court held that it was necessary to imply a term that the parties could not object to terms of engagement which were reasonable and which were consistent with the rights and obligations of the parties.

ENFORCING A DECISION BY AN EXPERT

A decision by an arbitrator can typically be enforced in a similar manner to a decision of a court, both in England and in many other countries (for example section 66 Arbitration Act 1996). However a decision by an expert can only be enforced by commencing proceedings in the normal way, making a claim based on the contract between the parties. Unless there are sufficiently arguable grounds for challenging the award, the court is likely to grant summary judgment to enforce the expert’s decision. The grounds on which an expert determination can be challenged are very limited, and are considered below.

LIMITATIONS ON THE SCOPE OF EXPERT DETERMINATION CLAUSES?

There is no general limitation on the scope or effectiveness of an expert determination clause. In one case the judge said: "Indeed, I am inclined to think that, in these days, this is not simply a bargain which the law permits parties to make but it is one which the law positively encourages them to take".4 Parties to a contract may choose to refer "all disputes" under the contract to expert determination.

Parties should be careful with designating different dispute resolution methods for different types of dispute. Where there are different procedures for different types of dispute, there is scope for disagreement about which dispute resolution procedure should be followed, especially if imprecise language is used.

CHALLENGE ON THE GROUND OF EXCESS OF JURISDICTION

The determination can never be binding on the parties if the expert has exceeded jurisdiction.

The most common ground of jurisdictional challenge is that on the terms of the contract in question the expert had no power to decide questions of law, such as how the contract should be interpreted. There is no general rule preventing parties from conferring on the expert jurisdiction to decide questions of law. However in a particular case the court may consider that this was not what the parties intended and that the expert lacks jurisdiction to decide a question of law, such as how the terms of the contract should be interpreted. Factors which may lead to the conclusion that the point of law is to be decided by the court are that

• the contract sets out in detail matters which the expert should or should not take into account

• the question of interpretation was one which the parties had not known would arise when they made their contract

• the expert is a professional who has no legal qualifications, or

• the dispute concerns the meaning of a clause on which the jurisdiction of the expert depends.

In one case in the Court of Appeal a judge said this:

I appreciate that, in cases of this sort, the advantage of leaving all points of law to the final determination of the expert is that it results in a relatively quick and cheap process for the parties. However, it must be questionable whether the parties would have intended an accountant, surveyor or other professional with no legal qualification, to determine a point of law, without any recourse to the courts, even if it has a very substantial effect on their rights and obligations." 5

On the other hand there are many cases in which the court has held that the expert, even if not legally qualified, had jurisdiction to decide questions of law. In another case, concerning the valuation of shares in a company by an accountant, the court said this:

Questions of law pervade many of the issues that are likely to arise on a valuation of this kind and it is inherently unlikely that the parties intended that on none of them should the valuer’s view be binding. Parties who refer a matter to an expert for decision usually do so in order to obtain a quick and relatively inexpensive decision of a binding nature on a matter that calls for informed judgment. Often that involves the application of principles and expressions that are familiar and well understood in the particular field of endeavour, whatever that may be. In such cases, it would be surprising if they had intended the expert’s decision to be of no effect if it could be shown that he had made a mistake in the application of some well recognised principle. Parties who refer a dispute to an expert must be taken to have recognised that mistakes may be made, both of fact and law, but they are prepared to take that risk because they place a high degree of confidence in their chosen expert." 6

In the absence of both parties’ consent the court generally has no discretion to decide interpretation issues which the expert has exclusive jurisdiction to decide. However the court may decide issues which the parties had agreed to refer to expert determination if both parties to consent to this, or if the court is asked to stay the court proceedings and in the exercise of its discretion refuses to grant a stay.

Where one party asks the court to give a ruling on how the contract should be interpreted on a point on which the expert’s decision will not be binding, before the expert has reached any decision, the court may or may not decide to rule on the interpretation of the contract before the expert has reached a decision on the point. The court will decide what is the most convenient course to take in the particular circumstances of each case. The fact that one of the parties has threatened to apply to the court for a ruling does not prevent the expert from proceeding with the determination in the meantime.

CHALLENGE ON THE GROUND OF MATERIAL DEPARTURE FROM THE TERMS OF THE CONTRACT

The determination cannot be binding on the parties if it has not been made in accordance with the terms of the contract. Examples of cases where an award has been held not to be binding on this ground include the following:

• a determination which had not been made by the nominated expert;

• the expert had not been correctly appointed;

• the expert had departed from his or her instructions in a material respect, e.g. by making a determination on a different basis from the basis expressly or impliedly specified in the contract. Examples are using a different computer mapping package from the one specified in the contract, valuing shares in one company by reference to the value of the assets of another company, valuing an asset at the wrong date, and misinterpreting the terms of the contract.

It should be noted that the more the contract says about how the expert should go about resolving the dispute, the greater the risk that a dissatisfied party may find grounds for challenging the determination in the courts. When the contract says very little about what the expert must do, it will be harder to allege that the expert has failed to act in accordance with the requirements of the contract.

CHALLENGE ON THE GROUND THAT THE DECISION WAS MISTAKEN

Unless the contract contains some limitation such as "in the absence of manifest error", the court cannot go into the question of whether an expert who has complied with the requirements of the contract has reached a wrong decision. If the expert has answered the right question, but has reached the wrong answer, the determination is still binding.

"The fact that he [the expert] may be patently wrong does not mean that he has not done what he was appointed to do nor that he has asked himself the wrong question. To take any other view would lead to the sort of refined arguments such as have been deployed here and go a long way to emasculate the requirement that the decision of the expert, as a matter of contract between the parties, be final and binding. Thus, the advantage of cost, speed and finality would be seriously diminished."7

The position is different if the expert has answered the wrong question, or has materially departed from his or her instructions. In this case the decision is not binding. (It may in limited circumstances be possible for an accidental clerical or arithmetical error to be corrected if the error is promptly notified to the expert.)

Attempts to discover the expert’s process of reasoning by making the expert a defendant to a claim in negligence or by trying to require the expert to give evidence as a witness have been unsuccessful. However, where the terms of the contract require the expert to give reasons for the decision, the reasons must be intelligible and adequate in the circumstances, and the court may order inadequate reasons to be supplemented.

CHALLENGE ON THE GROUND THAT THE EXPERT WAS NOT INDEPENDENT

While it is clear that the expert must not act fraudulently or collude with one of the parties, there is no general rule that the expert must be entirely independent of the parties and neutral (the position is different for adjudication of building disputes, as explained below). For example auditors appointed to value shares in a company may be closely associated with one of the parties, and the architect/engineer appointed to issue certificates in a construction contract is usually the agent of the building-owner. The latter may potentially face a claim by the building-owner arising out of the very matters on which he or she has to reach a decision.

Whereas in the case of a decision by a judge or arbitrator the decision will not be upheld if there is the appearance of partiality, in the case of an expert determination it may be necessary to establish that there has been actual partiality.

CHALLENGE ON THE GROUND OF UNFAIRNESS

There is no objective standard of fairness which must be complied with in expert determinations. There is no general requirement that

• a party has the right to prior notice and an effective opportunity to make representations before a decision is made,

• that information provided to the expert by one party must be made available to the other party,

• that the expert may not communicate with one of the parties without the knowledge of the other party,

• that the expert may not reach a decision on the basis of his or her own knowledge and expertise, without giving the parties the opportunity to make representations on the points which the expert intends to rely on, or

• carry out his or her own investigations, form his own opinion and come to his own conclusion regardless of any submissions or evidence adduced by the parties themselves.

Even though there is no general rule that an expert must comply with the same requirements as to fairness as a judge or arbitrator, the court may decide that the terms of a particular contract, in the factual context in which the contract was made, require the expert to do so. For example, a term which requires disputes to be referred to "adjudication" is likely to be interpreted as meaning that parties must be given prior notice and an effective opportunity to make representations before a decision is made, and that the expert must not only be impartial but must not act in a manner which would lead a fair-minded and informed observer to conclude that there was a real possibility, or a real danger, that the expert was biased.

Notwithstanding the absence of a general requirement not to behave in a manner which could give rise to suspicions of bias, an expert is always well-advised to act fairly and to avoid conduct which could give rise to suspicions, as this will minimise the risk of the losing party finding grounds for challenging the decision (whether or not that challenge might ultimately be unsuccessful).

EXPERT’S LIABILITY FOR NEGLIGENCE OR BREACH OF CONTRACT

Unlike arbitrators (who are immune from claims except in relation to acts or omissions shown to have been in bad faith), expert decision-makers do not have immunity from negligence claims unless their terms of engagement so provide. Experts often exclude or limit liability for negligence, but terms excluding or limiting liability for negligence cannot be enforced unless they are reasonable: Unfair Contract Terms Act 1977. An immunity clause may not be effective against persons who have not entered into a contract with the expert. It is prudent for experts to obtain insurance against liability to the parties.

PRINCIPAL DIFFERENCES BETWEEN EXPERT DETERMINATION AND ARBITRATION

1. Expert determination may be more informal, quicker and less expensive.

2. There is much less scope for challenging the decision of an expert.

3. There is generally no requirement to comply with the rules of natural justice, ie there is no general requirement that each party has an equal opportunity to present its case, and there is no general requirement that the decision-maker must be independent and may not have unilateral communications with one of the parties.

4. There is no general requirement that the expert cannot rely on his own expertise (without first warning the parties that he intends to do so).

5. An expert has no power to award interest on the amount of the award unless the parties confer such a power.

6. Commencing an expert determination does not stop time running for the purpose of calculating the period of limitation.

7. A decision by an arbitrator can typically be enforced in a similar manner to a decision of a court, both in England and in many other countries (e.g. section 66 Arbitration Act 1996). However a decision by an expert can only be enforced by commencing proceedings in the normal way.

8. The expert has no immunity from liability for claims for negligence or other breaches of duty, unless the terms of

ADJUDICATION

As mentioned above, in the construction industry, "adjudication" refers to a system of interim determination of disputes arising in relation to building contracts. Decisions are made by an impartial third party (usually a construction professional or a suitably qualified lawyer), and the decision is binding and may become final if not subsequently challenged. The system was used in some major projects in the 1990s, and since 1998 it has been mandatory for most building contracts where the works are situated in the United Kingdom.8

This statutory system was not enacted with the aim of providing definitive answers to complex questions, but was intended to provide a means of meeting the legitimate cash-flow requirements of contractors and their sub-contractors by requiring parties to building contracts to give effect to interim determinations by a neutral decision-maker.

The mechanism used to ensure that adjudication is available to parties to building contracts is to require that building contracts contain terms which provide for adjudication to be available for the resolution of disputes. The machinery is therefore contractual, albeit that parties are obliged by statute to include the contractual machinery which makes adjudication available.

Adjudication of building disputes differs from most kinds of expert determination in that the decision is an interim decision. Both parties remain entitled to have their dispute resolved by litigation in the courts or by arbitration in accordance with the contractually agreed dispute resolution procedure. They must however comply with the adjudicator’s decision until some other decision takes its place, and the adjudicator’s decision can be enforced by making a claim in the courts in the usual way. Difficult questions arise if a relevant period of limitation has expired at the time when a party commences proceedings to recover a payment ordered by an adjudicator.9

The adjudicator must issue normally a decision within 28 days. The parties may agree to a longer period if this is agreed after the dispute has been referred, and the adjudicator may extend the period of 28 days by up to 14 days with the consent of the referring party. Extensions of the period beyond 42 days require the agreement of both parties. A decision is invalid if it is reached after the period for reaching a decision has elapsed.

A distinct body of case law has been established for adjudication of building disputes. Although, as explained below, there is no requirement that the rules of natural justice are complied with in expert determinations generally, an adjudication award is not enforced if there has been a serious breach of the rules of natural justice. The rules of natural justice require that (a) the person affected has the right to prior notice and an effective opportunity to make representations before a decision is made, and (b) the person affected has the right to an unbiased tribunal. Cases where enforcement of an award by an adjudicator has been refused on the ground of failure to comply with the rules of natural justice include the following:

• the adjudicator prepared his own analysis of delay or relied on his own method of assessing compensation for delay without giving the parties an opportunity to comment on it;

• reaching a decision on the basis of a clause in the contract which had not been relied on or referred to by the parties from start to finish of the adjudication and which that the adjudicator did not raise with the parties before he published his decision;

• failing to give a party a fair opportunity to respond to evidence served late by the other party (though there have been cases in which the court has held that the expert may disregard submissions which have been supplied out of time);

• failing to consider a material line of defence or wrongly excluding a response document from consideration;

• reaching a decision on the basis of a document which the adjudicator had been told by the parties to ignore;

• before reaching his decision the adjudicator had meetings with each party separately and assisted them with settlement negotiations;

• the adjudicator had had undisclosed telephone discussions about the case with one of the parties.

The experience since adjudication of building disputes became a requirement in 1998 has been that there have been a considerable number of adjudications, and only a very small proportion of adjudicator’s decisions are disputed by the unsuccessful party. By 2013 a judge was able to say this:

Another factor to bear in mind is that of the many thousands of adjudications pursued over the last 15 years only a small percentage end up in the Courts on disputed enforcements. Although there are no statistics, it is not unreasonable to assume that many contractual parties either accept the adjudication decisions or negotiate their final accounting without any challenge through the final resolution tribunal." 10

Parties to building contracts have saved considerable sums in legal costs as a result of the availability of adjudication, and have been able to reach a resolution of their dispute far more quickly, with very significant benefits to the cash-flow of building contractors and sub-contractors. The requirement to participate in adjudication of building disputes may itself be a factor which encourages parties to reach agreement rather than become locked in dispute.

It is open to parties to contracts other than building contracts to agree that disputes shall be resolved by adjudicator reaching an interim decision within 28 days. It is rare for parties to contracts to take this course, though adjudication clauses are now being seen more often in IT and outsourcing contracts, and in particular long-term contracts. Where the terms of the contract refer disputes to "adjudication" it is likely that a court will interpret this to mean that the general principles which apply to adjudication of building disputes will apply.

SUMMARY

1. Whereas arbitrations are governed by the Arbitration Act 1996, expert determinations are governed by the contract between the parties.

2. In the construction industry, "adjudication" refers to a system of interim determination of disputes. Decisions are made by an impartial third party (usually a construction professional or a suitably qualified lawyer), and the decision is binding and becomes final if not subsequently challenged in court or by arbitration.

3. The court may grant a stay of proceedings where a party commences court proceedings concerning a dispute which falls within an expert determination clause.

4. It is the law of contract which determines the status of a determination by an expert. In general, if the expert has reached a decision in accordance with the terms of the contract, and if under the terms of the contract the parties are to be bound by the determination, then the determination will be enforceable in the courts. It is necessary to commence court proceedings in the normal way in order to enforce the decision of the expert.

5. The decision of a third party decision-maker acting as expert and not as arbitrator may be challenged in the following circumstances.

a. The decision of an expert will not be binding if the expert has exceeded jurisdiction.

b. The decision of an expert cannot be challenged on the ground that questions of law can never be the remitted to the exclusive jurisdiction of an expert (though the terms of a particular contract may be terms which do not confer on the expert jurisdiction to decide questions of law, such as the interpretation of the contract).

c. The decision of an expert will not be binding if the expert has materially departed from instructions.

d. In the absence of express wording in the contract such as "in the absence of manifest error", the decision of an expert cannot be challenged on the ground that the expert reached the wrong result, so long as the expert has answered the right question.

e. The decision of an expert may be challenged on the ground of fraud, collusion with one of the parties, or actual partiality.

f. The decision of an expert cannot be challenged on the ground that experts must always be independent of the parties (though the terms of a particular contract may require that the expert be independent).

g. The decision of an expert cannot be challenged on the ground that experts must always comply with the rules of natural justice and act fairly, though the terms of a particular contract may require compliance with the rules of natural justice or require the expert to act fairly.

For further information, see Kendall on Expert Determination, Freedman and Farrell (Sweet & Maxwell, 2015)

NOTES

1
[2006] Lloyd’s Rep. 441.

2
For example Cott UK Ltd v FE Barber Ltd. [1997] 3 All E.R. 540.

3
Cream Holdings Ltd v Davenport [2011] EWCA Civ 1287. See [2008] EWCA Civ 1363 for an earlier judgment in the same dispute.

4
Inmarsat Ventures plc v APR Ltd (Lawtel, 15 May 2002).

5
Barclays Bank Plc v Nylon Capital LLP [2011] EWCA Civ 826, at [70].

6
Premier Telecommunications Group Ltd v Webb [2014] EWCA Civ 994, at [12].

7
Pontsarn Investments Ltdv Kansallis-Osake-Pankki [1992] 1 E.G.L.R. 148, at 151L-M.

8
Part II of the Housing Grants, Construction and Regeneration Act 1996.

9
Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc [2015] UKSC 38, [2015] 1 WLR 2961, where it was held that for the purpose of calculating the period of limitation, the cause of action for repayment accrues when the amount awarded by the adjudicator is paid.

10
Per Akenhead J. in Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc [2013] EWHC 1322 (TCC), [2013] WLR(D) 211 at [29].