Expert determination is an Alternative Dispute Resolution (ADR) procedure which can be particulalry effective where arbitration or litigation would cause unnecessary expense and delay. Expert determination differs from other forms of dispute resolution such as litigation or arbitration, in that an independent third party considered ‘an expert’ in their field determines the dispute. The ‘expert’ will have specific technical knowledge relevant to the dispute. Whether parties can elect to resolve their dispute through expert determination arises through the dispute resolution clause of their contract. Below, we revisit the importance of a dispute resolution clause as well as the importance of clear drafting.
The Dispute Resolution Clause
The construction of a dispute resolution clause will determine how parties conduct expert determination and its binding effects. A building and construction contract typically prescribes that when used, the expert’s decision will be ‘final and binding’. As such, once the expert makes the determination, the parties are legally bound by her or his decision with no right to appeal. In itself, this is one of the benefits of using expert determination to resolve a building and construction dispute.
Just How ‘Binding’ Is It?
The New South Wales Court of Appeal considered this issue in Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd  NSWCA 275. The Court of Appeal unanimously decided that an expert’s decision will not be final and binding if made outside the scope of the contract.
A dispute arose in relation to a lease between Australian Vintage (the Lessee) and Belvino Investments (the Lessor). Under the lease agreement, the premises were to be used for the development and operation of a vineyard. The lease made a provision for circumstances where a natural disaster affected the productivity of the vineyard. The parties were required to consider whether the production (or production capacity) of the vineyard was reduced by 50% of the average production capacity, and if so, whether that reduction was due to a natural disaster. The lease stated that if the parties could not reach an agreement, the dispute would be referred to expert determination.
After a severe frost, Australian Vintage informed Belvino Investments that more than 50% of the vineyard’s production capacity was reduced. The dispute was referred to expert determination.
The Expert’s Decision
The expert determined that:
- A natural disaster had occurred; and
- The formula for determining a reduction in production capacity was to compare both the post-frost production and the pre-frost production capacity, with that of the average production capacity.
Based on this formula, the expert determined that the overall production capacity of the vineyard did not amount to a 50% reduction, and therefore, Australian Vintage was not entitled to any remedy under the contract.
Australian Vintage claimed that the expert used the wrong formula in making its decision and appealed to the Supreme Court. Australian Vintage argued that the expert should have compared the pre-frost production capacity with the post-frost production capacity.
Appeal in the First Instance
The Supreme Court found that the expert’s determination was made consistently with the terms of the contract, and accordingly that Australian Vintage had no right to appeal. Australian Vintage appealed this decision, putting it before the NSW Court of Appeal.
The Final Decision
The Court of Appeal held that the lease required the expert to compare the pre-frost production capacity with the post-frost production. As the expert’s determination was not made in accordance with the lease, the parties were not bound by the decision. Ultimately, the appeal was allowed, and the Court referred the matter back to the expert for further determination.
How Does This Decision Impact on Building and Construction Disputes?
There are two key findings that we can take from this decision:
- If an expert makes a determination under the contract, that decision will be final and binding. The fact that an expert makes errors or takes irrelevant matters into account will not be a sufficient reason to have the determination set aside.
- An expert’s determination will only be reviewable if a task or decision is carried out in a way that is ‘not within the contractual contemplation of the parties’.
Building and construction contracts must be drafted clearly and prescribe what issues an expert has authority to determine.
If not drafted with precision, an expert may erroneously make a determination outside their scope of expertise. If that decision is made in accordance with the contract, the parties will not have a right to review. Nobody wants to be bound by a wrong decision, so when drafting your construction contract, be clear, be precise and be pre-emptive.
If you have any questions or require further assistance with drafting or reviewing your contract, get in touch with our building and construction lawyers on 1300 544 755.