Expert determination for technical disputes – efficient alternative or jurisdictional battleground?

December 2019 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

December 2019 Issue

Expert determination is a form of alternative dispute resolution (ADR) in which parties refer disputes to an industry expert for resolution, whether binding or non-binding. Binding expert determination is often seen as a more efficient and cost-effective alternative to arbitration or litigation, as well as a means of ensuring that complex technical issues are determined by those with the right expertise.

In some sectors, it has become industry standard when drafting dispute resolution clauses for parties to refer all disputes of a technical nature to binding expert determination, while leaving all other disputes to arbitration or litigation. While this may seem a sensible approach, parties should be aware of the potential pitfalls, particularly the scope for recalcitrant parties to raise jurisdictional challenges and obstruct efficient settlement of disputes.

What is expert determination and why use it?

Resolving a dispute through arbitration or litigation can be a long and expensive process, potentially taking years to conclude and requiring millions of dollars in associated expenditure. In many commercial disputes, the outcome will hinge on complex technical or scientific issues such as why a piece of equipment failed, or how to calculate the market value of privately held shares. In arbitration or litigation, the resolution of these issues will require evidence from industry or subject-matter experts. It is not uncommon for both sides to lead evidence from multiple experts, each producing numerous lengthy expert reports, potentially providing supplementary presentations at the hearing, and then being cross-examined by opposing counsel.

Furthermore, despite extensive expert involvement, the decision as to which expert evidence to prefer remains in the hands of the court or tribunal. Courts and tribunals are often made up of lawyers without any technical training and who may not be best placed to weigh and assess that evidence. As a result, there is considerable scope for the court or tribunal to misunderstand or misapply the expert evidence.

These kinds of difficulties have prompted parties to appoint technical experts themselves as the decisionmakers. This is known as expert determination. While expert determination can take many forms, it usually involves: (i) the appointment of a single technical expert, by agreement between the parties or, if the parties cannot agree, by an impartial, third party, such as an industry body; (ii) an expedited timetable often involving direct investigations by the expert with an opportunity for parties to provide brief written submissions on their respective cases along with supporting evidence; (iii) no formal hearing or cross-examination of witnesses; and (iv) a final and binding decision within a relatively short, specified time frame (within a specified number of days from appointment of the expert, for example).

This process is seen by some as being more efficient and cost effective than arbitration and litigation, as well as increasing the likelihood of a correct decision where a dispute turns on highly technical issues. Expert determination is also generally viewed as a less hostile measure than commencing arbitration or litigation. This is particularly important in long-term contracts, where maintaining amicable commercial relationships is crucial.

The trend of splitting disputes between expert determination and arbitration

Given the perceived benefits of expert determination, it has, in some sectors, become industry standard when drafting dispute resolution clauses for parties to refer all disputes of a technical nature to binding expert determination, while leaving all other disputes to arbitration or litigation.

We have recently encountered a clause, for example, in which the parties provided that: “any Dispute of a technical nature (and any other matters agreed by the parties) shall be referred to and finally resolved by an independent person (expert) who shall be selected by agreement of the parties”. The clause went on to specify the expert determination procedure. A separate clause referred to arbitration all disputes “other than those disputes referred to an expert pursuant to [the expert determination clause]”.

Other clauses aim to be more specific, sending all disputes to arbitration, except for certain technical disputes under particular clauses, which are referred to expert determination. For example, the expert determination provisions of a recent LNG SPA provided: “Any dispute between the parties which may arise in respect of quality of the LNG under clause [ ], in respect of mismeasurement under clause [ ], or as to whether an event or circumstance constitutes force majeure under clause [ ], shall be referred to an independent expert (expert) for a final and binding determination in accordance with the procedure set out in this clause [ ]”. All other disputes were referred to arbitration.

Potential pitfalls

On its face, these clauses represent a sensible, commercial approach to dispute resolution, ensuring different types of disputes are sent to the most appropriate decisionmaker. Often overlooked, however, are the potential problems that these split clauses can create.

Taking the first example noted above, there is significant uncertainty and scope for argument as to what exactly constitutes a dispute of a ‘technical nature’. What is meant by ‘technical’? Does this clause cover only purely technical disputes, or does it extend to disputes that involve mixed questions of law, fact and technical issues? Is a dispute regarding quality of goods, for example, a dispute of a ‘technical nature’?

While the second example is less ambiguous, there is still scope for argument as to which disputes should go where. In any dispute concerning force majeure provisions, for example, there are likely to be issues, among others, of: (i) whether an event constitutes ‘force majeure’ as defined; (ii) whether or not there was compliance with notice provisions and the extent to which those notice provisions are pre-conditions to relief; (iii) the extent to which the event of force majeure prevented or delayed the affected party’s performance; and (iv) the extent to which the affected party mitigated the effect of the force majeure. On its face, the dispute resolution clause appears to refer only the first issue to the expert. There is clearly scope for disagreement, however, as to whether the other issues should also be referred to the expert or whether they must be referred to arbitration.

Similarly, a dispute over the quality of the LNG is also likely to engage other clauses in the contract, such as the payment or termination clauses. There is significant scope for argument about whether disputes over these clauses, if triggered by a dispute about LNG quality, can be considered disputes “in respect of quality of the LNG under Clause 14” that must go to expert determination.

As the above examples demonstrate, disputes are rarely contained to only one issue or clause of an agreement and it is very difficult to define with precision which parts of the dispute fall within which mechanism. For this reason, such clauses often provoke time consuming and costly jurisdictional battles as to where a particular dispute should be heard before the underlying dispute is even considered and can result in some issues being determined by one decisionmaker and other related issues being determined by a different decisionmaker, resulting in inefficiency and potentially, inconsistent decisions.

Tips for avoiding these pitfalls

There are several alternative solutions to these issues, as outlined below.

Drafting precisely. The most obvious solution is to ensure that the clause specifies precisely which disputes are to be referred to the expert. Delineating the expert’s jurisdiction in detail can limit the scope for disagreement if a dispute arises. However, even tightly drafted clauses can sometimes leave room for argument as disputes can encompass multiple technical and legal issues at the same time.

Refer all disputes to arbitration. Experts can still be used to testify before a tribunal and the parties can appoint subject matter specialists as arbitrators if they are concerned about the tribunal’s lack of relevant expertise. This has the obvious advantage of removing the scope for jurisdictional ambiguities but of course may hinder the rapid and cheap resolution of disputes.

Making litigation or arbitration the default dispute resolution mechanism for all disputes but providing parties the option to go to expert determination if the parties so agree in writing at the time the dispute arises. The problems associated with the split clauses identified above usually arise when one of the parties adopts a recalcitrant stance and a ‘good faith’ approach to resolving disputes collapses. Requiring both parties’ consent to proceed to expert determination allows cooperative parties to assess whether expert determination is appropriate for the dispute in question and if so, to take advantage of the speed and cost savings of expert determination. If the relationship breaks down and the parties cannot agree, however, the dispute can nevertheless be referred to the mandatory arbitration or litigation procedure provided in the dispute resolution clause without the need for costly jurisdictional battles.

In our experience, solution three is usually the most appropriate and most widely accepted compromise. As always, however, the parties will need to consider the circumstances of their case and adapt accordingly.

Rob Palmer is a partner and Michael Weatherley is a senior associate at Ashurst LLP. Mr Palmer can be contacted on +65 6416 9504 or by email: rob.palmer@ashurst.com. Mr Weatherley can be contacted on +65 6416 9509 or by email: michael.weatherley@ashurst.com.

Rob Palmer and Michael Weatherley

Ashurst LLP

International dispute resolution