Binding or non-binding expert determinations – say what you mean and mean what you say

The Supreme Court of Victoria in Aligned Services Group Pty Ltd v Citi-Con (Vic) Pty Ltd [2022] VSC 286 (AS Group v Citi-Con) recently found that an expert determination was not final and binding even though expert determination rules expressly providing for a final and binding result were referred to the contract. The expert determination clause in this contract was ambiguous as to what was intended and the case is a reminder that these issues need to be set out clearly.

Non-binding determinations do still serve a commercial purpose and the case provides guidance on when the courts are prepared to find that such a purpose was intended by the parties.

The court also found that although the determination was late, it was not invalid. This was important as it meant that it unnecessary for the parties to go through another expert determination process before litigating.

What happened?

A dispute arose between a head contractor Citi-Con (Vic) Pty Ltd (Citi-Con) and subcontractor Aligned Services Group Pty Ltd (AS Group) regarding Citi-Con’s claim for liquidated damages under contracts with identical dispute resolution clauses. AS Group issued notices of dispute and foreshadowed its intention to refer the disputes to expert determination under clause 16.3(b) of the subcontracts.

The relevant parts of the dispute resolution clauses are extracted below:

16.1 Notification and procedure
…
Unless agreed otherwise in writing by the other party, a party’s compliance with this clause 16 shall be a condition precedent to a party issuing legal proceedings … in relation to any dispute.
…
16.3 Expert determination

The Resolution Institute Expert Determination Rules (ED Rules) referred to in clause 16.3(b) provide that “unless otherwise agreed in writing by the parties, the determination of the Dispute by the Expert shall be final and binding between the parties”.¹

Citi-Con put AS Group on notice that it did not consider any expert determination to be final and binding. This, it said, was clear from, amongst other things, the wording of clause 16.1 which provides that expert determination is a condition precedent to issuing legal proceedings and the fact that clause 16 itself does not refer to any determination as being final or binding. In the circumstances, Citi-Con suggested that should AS Group wish to agitate the dispute, it should do so by commencing legal proceedings with a view to avoiding wasting time and unnecessary costs of a non-binding expert determination.

AS Group nevertheless pressed on with an expert determination and, relevantly, an expert was appointed under clause 16.3(b) as the parties did not agree on an expert under clause 16.3(a). Citi-Con informed the expert that it was not prepared to participate in the process as it did not consider the process to be final and binding.

The expert considered that the process was final and binding and issued his determination in which he found that AS Group was liable to Citi-Con for $155,746 in liquidated damages rather than the $778,033 claimed by Citi-Con. The determination was issued outside the 28 days of the referral to the expert.

AS Group applied for a declaration that the expert determination was final and binding.

Issues in dispute

The following issues arose for determination:

1. Does the dispute resolution clause (clause 16) provide for an expert determination that is final and binding? (Issue 1)
2. Did the expert comply with the timing requirements of clause 16 and if there has been a departure from the timing requirements, does that departure render the expert determination invalid? (Issue 2)

Issue 1 – was the expert determination final and binding?

Justice Stynes held that the expert determination was not final and binding for the following reasons:

1. There are two pathways through expert determination under clause 16.3:
   (a) clause 16.3(a), where the parties agree on the appointment of an expert; or
   (b) clause 16.3(b), where the parties are unable to agree on an expert
2. The expert determination had proceeded under clause 16.3(b) as the parties could not agree on an expert.
3. On AS Group’s construction of clause 16, it is only where the parties are unable to reach an agreement on the expert, that the expert determination proceeds under clause 16.3(b) and the ED Rules, specifically rule 3(2), that the expert determination will be final and binding.
4. This meant that different dispute resolution procedures apply to different disputes not by reference to the quantum or subject matter of the dispute for example, but as a result of whether or not the parties could agree on an expert. As a result, one party could unilaterally force a dispute to go to a final and binding expert determination simply by withholding agreement in relation to the appointment of an expert.
5. Her Honour held that such a construction is not commercially sensible.
6. Properly construed, clause 16 provides for notification, negotiation and non-binding expert determination as preconditions to legal proceedings.
7. The tight timeframe of 28 days from the referral of the dispute to the expert for the expert to issue a determination, no matter how complex or technical, is consistent with a construction providing for a non-binding but speedy, informal alternative dispute resolution process aimed at avoiding, or otherwise minimising, the time and costs involved in full-blown litigation.
8. Rule 3(2) of the ED Rules (which provides for a final and binding expert determination) is not expressed in absolute terms, but is expressed to be subject to any written agreement between the parties. Citi-Con had submitted that the parties had “otherwise agreed in writing” for the purposes of the Rule 3(2) of the ED Rules. If the determination was intended to be final and binding, there is a lacuna in the Subcontracts about what happens if the tight timeframe for delivering the determination is not met by the expert.

Issue 2 – was the late expert determination still valid?

Her Honour found that the determination had not been made within the 28 day timeframe prescribed in clause 16.3. This, however, did not render it invalid as it was considered unlikely that the parties intended that, having expended time and money going through this process to the point of receiving a determination, they would be deprived of the benefit of its contents and its standing as the final step prior to litigation.

Discussion

There are two aspects of Her Honour’s decision in relation to Issue 1 that may be open to an alternative interpretation:

1. It does not appear to have been argued by AS Group that the ED Rules could also apply under clause 16.3(a) as “rules determined by that expert”. It is therefore not entirely clear that the ED Rules are only engaged under clause 16.3(b).
2. In support of its contention that Rule 3(2) of the ED Rules was excluded by the terms of the contract, Citi-Con referred to clause 16.1, which provides that negotiation and expert determination is a condition precedent to issuing legal proceedings. But this is not an express exclusion of Rule 3(2) of the ED Rules. Clause 16.1 is similar to a Scott v Avery clause. Under such a clause, the parties can agree that no right of action shall accrue in respect of any differences which may arise between them until such differences have been adjudicated upon. Usually a Scott v Avery clause applies where arbitration is the alternative to litigation but there is no obvious reason why this would not apply equally to expert determination.

Nevertheless, the short timeframe for resolution of the disputes is hardly consistent with a final and binding process for all disputes regardless of complexity. Together with the general ambiguity in the drafting, this appears to be the most compelling reason for holding that the determination was not final and binding.

Why is this case important?

This case is important as it highlights the need for careful drafting to ensure that an expert determination results in a final and binding decision if that is what the parties intended. As the case demonstrates, relying on default provisions in expert determination rules may not be enough.

An expert determination that is final and binding can be a quicker and more cost effective alternative to litigation. Non-binding expert determination still serves a useful purpose of narrowing the issues and facilitating negotiations ahead of litigation. Both have their merits and whether a binding or non-binding process is preferable can depend on a range of factors such as the nature and complexity of the dispute, the quantum involved and whether witnesses need to be cross examined.

HWL Ebsworth Lawyers has a dedicated team with expertise in drafting and reviewing construction contracts to protect business in addition to providing support throughout each stage of the dispute resolution process. If you would like more information about the services we provide please contact us.

This article was written by Leighton Moon, Partner, Brian Rom, Special Counsel and Fin Neaves, Associate.

¹ Resolution Institute Expert Determination Rules, r 3.2.