Australia: Avoiding the common pitfalls when drafting an expert determination clause in a contract

The State of NSW v UXC Limited [2011] NSWSC 530

The recent case of The State of NSW v UXC Limited serves as an important reminder to parties of the importance of clarity when it comes to expert determination clauses.

Expert determination has become an increasingly popular mechanism for resolving narrow compass disputes. It is particularly useful for resolving discrete contractual and technical issues and is generally considerably cheaper and more time efficient than litigation or arbitration.

A carefully drafted expert determination clause is imperative. There are a number of common pitfalls in expert determination clauses which this article will caution against. Firstly, we turn to the case at hand.

The facts of State of NSW (NSW) v UXC Limited (UXC)

This case concerned a contract between UXC and NSW for UXC to replace the Office of Births, Deaths and Marriages' computing system (Contract). The parties ran into dispute over NSW's right to terminate the Contract for breach by UXC and the damages to which NSW was entitled. The dispute was referred to an expert who determined that NSW was entitled to terminate the Contract and awarded NSW damages of $2,595,063.

UXC alleged that on the proper construction of the dispute resolution clause of the Contract, UXC was able to commence proceedings challenging NSW's right to terminate the Contract. UXC had commenced the proceedings. NSW brought these proceedings seeking to recover the amount determined by the expert and an order that UXC had no right to commence its proceedings.

The dispute between the parties turned on the wording of the Contract. Under the Contract, the matter would be referred to expert determination and the expert's determination would be final and binding, unless a party had a right to commence litigation where the amount determined by the expert exceeded the amount in the 'Agreement Details' of the Contract. Crucially, there was no amount set out in the 'Agreement Details' of the Contract.

The parties' submissions

UXC argued that the Court should refer to other Contract documents (lower in the precedence of documents as set out in the Contract) which stated that expert determinations were binding up to $250,000. In the alternative, UXC argued that the amount, not having been expressly set out in the Contract, should be interpreted as $0.

UXC further submitted that the clause contravened public policy because it had the effect of ousting the jurisdiction of the Court by limiting a party's ability to bring proceedings.

NSW relied on the Contract and submitted that in the absence of a limit in the 'Agreement Details', there was no limit to the amount which was final and binding pursuant to the expert's determination.

Findings

The Court agreed with NSW and determined that there was no limit on the amount that could be determined by the expert¹ because no amount had been included in the Contract: "It does not matter whether the parties overlooked specifying an amount in Item 8 of Sch 1 or made a deliberate decision not to do so. The result is the same." Therefore the expert's determination of $2,595,063 was binding on the parties and could not be challenged by litigation on a purely quantum basis.

The Court's decision confirms that parties should carefully review the dispute resolution provisions prior to execution to ensure a high level of certainty in their operation. Not addressing the upper limit of an expert determination will not result in the amount being determined as $0, but will indicate that there is no limit (subject to an overall limitation on liability).

Does an expert determination clause oust the jurisdiction of the Court?

UXC also contended that the clause which required the parties to treat the expert determination as final and binding was unenforceable because it ousted the jurisdiction of the Court. The Court analysed this issue and noted that a clause which ousted the jurisdiction of the Court was unenforceable, subject to two key principles.

Firstly, parties are free to contract as to how their rights and liabilities under the contract will arise and an agreement that these rights are to be determined by a third party is acceptable. Such a third party's decision would be valid provided it complied with the terms of the contract between the parties.

Secondly, parties to a contract are free to specify conditions precedent to the accrual of rights and liabilities under that contract. The Court was clear that referral to an expert as a condition precedent to accrual of rights under a contract was acceptable, provided that the terms of the contract were complied with.

In NSW v UXC, the Court said of the expert determination clause: "It does not oust the jurisdiction of the court. It simply provides that, once the expert has made a determination, that determination (assuming it was made in accordance with the contract) is the source of the parties' contractual rights and obligations. For that reason, the determination is not unenforceable."

The Court also noted "a general trend to encourage alternative dispute resolution and to give effect to methods of alternative dispute resolution."

How do I make sure my expert determination clause is enforceable?

The following checklist is a useful tool in ensuring that your expert determination clause does not succumb to one of the common enforceability pitfalls.

1. Agree a mechanism for the appointment of the expert

   The contract should contain a clear procedure for the appointment of the expert. A good example is a clause which provides a time period for the parties to agree on a nominated expert and, failing agreement within that time period, the expert is then nominated by an independent body.

2. Agree the rules of the expert determination

   Similar to 1, it is important that parties are aware of the procedure for the expert determination to ensure that there is no procedural dispute between the parties. A lack of certainty for the procedure of an expert determination can lead to potential unenforceability. Incorporation by reference to the rules of an outside body can overcome this.

3. Ensure that the expert determination clause is not in fact an arbitration clause

   It is important that the process agreed and the powers granted to the expert do not amount to an arbitration. An arbitrator commonly has similar powers to a judge, eg ordering discovery, ordering costs, etc, whereas an expert does not have those powers. A court could analyse a clause and determine that it is an arbitration clause, in which case, the dispute would be subject to the Commercial Arbitration Act 2010 (NSW), a legislative regime which contains strict rules as to the conduct of arbitral proceedings which should not encumber expert determination.

4. Place an upper limit on the 'amount claimed' that will be final and binding

   Parties should take heed of the decision in NSW v UXC and be careful to ensure that there is an upper limit on the amount which is final and binding by expert determination. While it is common for such limits to refer to the amount 'determined' by the expert, we would recommend that parties refer to the amount 'claimed' in the dispute. A simple example of the usefulness of this difference would be if a party claimed an amount of $20m under a contract, but the expert determined that the party was only entitled to $50,000. If the expert determination clause was final and binding for amounts determined up to $100,000, this would be a final and binding decision and the party claiming $20m would have no subsequent recourse to litigation.

Expert determination has been the subject of further recent case law and we refer you to our article entitled 'High Court set standard for expert determination' which can be viewed here.

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Footnote

This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.