Japan: Expert Determination: What, When And Why?

During the recent Brexit debate in the UK, one of the politicians leading the 'OUT' campaign, Michael Gove, famously said that the British public "have had enough of experts." Fortunately for the experts, this isn't the case for international construction disputes.

Our previous Construction Newsletter (August 2016) considered multi-tiered dispute resolution clauses. One option that parties can include in such clauses is expert determination as either an interim step or for a final and binding determination.

Despite remaining rare in domestic disputes within Japan, Japanese companies are increasingly being exposed to expert determination in international disputes. This is particularly the case in the construction industry, where expert determination is common in many jurisdictions.

This newsletter gives an introduction to expert determination:

  • What is it?
  • When should it be considered?
  • What are the pros and cons?
  • When can an expert's decision be challenged?

What is expert determination?

Expert determination is a contractual process by which parties agree to refer a dispute for determination by an independent expert.

Unlike litigation and arbitration, expert determination is not governed by legislation or procedural rules (other than those agreed between the parties). This means that the parties can (and should) tailor the procedure to suit the circumstances, and in particular the type of disputes that might arise from the contract. Parties have the freedom to choose the type of disputes that should be referred to the expert (although it can in theory also apply to all disputes arising from the agreement),1 the procedural rules that apply and, more importantly, whether the expert's determination is intended to be binding on the parties.

When should you consider expert determination?

Expert determination can be effective where parties disagree over technical or engineering issues, or have different views on what the contract requires, particularly in a long-term contract where there is considerable benefit to the parties to have a determination part-way through the contract in order to facilitate future discussions on the same issue.

Although expert determination is commonly used to resolve technical or valuation issues, it can also be helpful to resolve discrete legal questions (where the answer is complex, or involves an unsettled area of law, for example).

It is important to take care in drafting dispute resolution clauses (or standalone agreements) providing for expert determination. Poorly drafted clauses or agreements can lead to unnecessary delay and increased costs – and, in the worst case scenario, challenges on enforcement. This is particularly important where the parties agree that the expert's determination is to be binding, but even if not then without clear wording the determination may well still be submitted in evidence in any future litigation or arbitration.

Issues to consider in drafting expert determination clauses include the following:

  1. Whether the determination is to be final and binding.
  2. If not binding, whether the determination can be used as evidence in future agreements.
  3. Providing for a set of established procedural rules that will apply to the process (e.g. the CEDR Expert Determination Agreement2 or the ICC Expert Rules3).
  4. Establishing the scope of the issues that are capable of being determined by the expert. For example, while a technical expert may be wholly capable of determining whether the contractor provided sufficient tolerance in its design, that same expert may well not be qualified to determine questions of quantum, extensions of time, or indeed legal issues surrounding the claim.

The Pros and Cons of expert determination

Pros

  • Usually much quicker than formal proceedings (e.g. litigation) and therefore much cheaper.
  • Normally confidential (provided that the parties have expressly agreed the same).
  • Gives the parties a lot of control over the process compared to more formal proceedings (provided they can agree).
  • If the parties agree that decisions are to be final and binding then it may well be very difficult to challenge the decision (see further below).
  • Commonly viewed as being less confrontational than formal proceedings (hence its common use in long-term contracts).
  • Even when it is not binding, the opinion of an independent expert can nevertheless be helpful in identifying key issues, highlighting weaknesses in arguments and encouraging settlement.

Cons

  • The main disadvantage of expert determination is the mirror of one of its strengths. If the decision is agreed to be final and binding then it can be difficult to overturn even if the expert made a mistake (see further below).
  • Contracts commonly provide for a single expert. There is inherently greater risk of a single expert missing an important fact or making a technical or legal error.
  • There is no straightforward system available to enforce an expert's decision (such as the New York Convention for arbitral awards). Should the losing side refuse to comply with the result, the victorious party will usually have to sue for breach of the contractual agreement to be bound by the expert's determination.

Before entering any agreement to refer a dispute to expert determination, it is therefore prudent to check that any jurisdiction where the decision might need to be enforced is friendly to such enforcement procedures. Failure to do so could render the process a waste of time and money.

Can the expert's decision be challenged?

As can be seen from the following, if the parties have agreed that the expert determination will be final and binding, then it can be very difficult to overturn the decision:

England & Wales

An expert's determination has been held to be binding even where the expert made errors in his reasoning.4 Unless the parties have provided expressly for grounds of challenge in the relevant clause or agreement (which is rare in practice), an expert's decision can only be challenged in very limited circumstances. Examples include:

  • If the expert has not performed the task agreed by the parties and therefore acted outside his authority (for example, by answering the wrong question);5
  • Actual bias or a real danger of injustice (for example, where the expert has, without good reason, granted one side more time than the other to make submissions);6 and
  • Fraud or collusion.7

Singapore

Similarly to England & Wales, the only errors a Singapore court will correct are those that appear on the 'face' of the decision,8 the court will not re-examine the expert's reasoning. The parties will therefore be bound by the decision, even if the expert makes a mistake (provided the mistake was not made dishonestly, or in bad faith). Errors of law or fact will not usually invalidate the decision (unless the expert had acted outside the contractual scope).

Australia

Continuing the same themes, an Australian court will set aside an expert determination only where there is fraud or collusion, or the expert's decision is not 'in accordance with the Contract'.9

Summary

As is clear from the above examples, the grounds for challenging an expert's decision are generally very narrow. Provided the expert has acted in accordance with the parties' instructions, and the parties have agreed so, the decision will be upheld as final and binding – even if wrong. Even where the decision is not binding, it can still have severe consequences for the losing party (for example, by weakening its settlement position).

Although there are numerous possible benefits of referring a dispute to expert determination (for example, in terms of cost and flexibility), parties need to be prepared to face the consequences if the decision goes against them.

Footnotes

1 Straits Exploration (Australia) Pty Ltd v Murchison United NL [2005] WASCA 241; (2005) 31 WAR 187 [16]

2 Centre For Effective Dispute Resolution, Model Expert Determination Agreement: Including Guidance Notes, 2015

3 International Chamber of Commerce, ICC Rules for the Administration of Expert Proceedings, February 2015

4 Owen Pell Limited v Bindi (London) Limited [2008] EWHC 1420 (TCC)

5 Jones v Sherwood Computer Services plc [1992] 1 W.L.R. 277

6 Hickman v Roberts [1913] AC 229

7 Campbell v Edwards [1976] 1 W.L.R. 403 at 407

8 Geowin Construction Pte Ltd (in liquidation) v Management Corporation Strata Title Plan No.1256 [2006] SGHC 245

9 Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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