Introduction
Expert determination is a binding form of dispute resolution that is often used in matters of a technical nature. In addition to technical expertise, expert determination can provide for a quicker and more cost effective means of determining a dispute than a court or arbitral process.
Expert determination is a mechanism used in a number of commercial agreements. For example, it may be used in share purchase agreements to resolve disputes in relation to completion accounts. In the joint venture context, it may be used, particularly in forced sale situations, where it is necessary to determine the value of shares but the shareholders cannot reach agreement between themselves. Such expert determination mechanisms are employed for specific purposes and are additional to an overall dispute resolution regime which ultimately provides for arbitration or litigation in relation to other disputes. There are important factors that parties need to consider when electing for expert determination (and the form that this should take), which we consider below.
When to use expert determination?
Expert determination is best suited for disputes concerning valuation or defined technical issues, where the relevant facts are not significantly contested and can be ascertained from documentary evidence. For example, expert determination may be used to value shares in a private company or to determine disputed items in completion accounts on the sale of a company.
Expert determination is unlikely to be appropriate for situations involving significant disputed facts and disputed legal issues. Experts usually do not have formal legal expertise (as opposed to technical expertise) and expert determination processes are generally not designed to deal with a significant amount of disputed evidence, hear witnesses, etc. Equally, expert determination mechanisms do not typically lend themselves to situations where the parties to a joint venture agreement disagree or are in deadlock over key commercial decisions to be taken by the joint venture company.
Reasons for electing to use expert determination
The potential reasons to choose expert determination include:
- Cost and speed. Expert determination involves more informal procedures than litigation or arbitration (e.g. no need to follow a set timetable or to conduct oral hearings). The role of the expert to deal with technical issues and to determine the dispute also obviates the need for parties to instruct expert witnesses. Consequently, expert determination is usually a cheaper and quicker process than arbitration or litigation.
- Expertise. An expert can apply specialist technical expertise directly relevant to the parties' disputes. Judges and arbitrators invariably require assistance from expert witnesses to determine technical issues.
- Flexibility. The parties are free to agree the expert's terms of reference and/or incorporate rules in order to suit their needs. It is common for the underlying agreement to set out the outline timetable that the expert must follow and the rules of valuation to be followed to determine the dispute. The expert does not have to follow the same approach to determining the dispute as a court or arbitral tribunal (e.g. in relation to how to approach the evidence and seeking submissions from the parties) and may take an inquisitorial approach.
- Relationship considerations. Expert determination tends to be less adversarial than litigation and arbitration, which are more formal dispute resolution processes. Expert determination is carried out in private and the expert's determination usually remains confidential (e.g. unless required to be made public or challenged by litigation).
- Finality. It is open to the parties to agree that the expert's decision is final and binding, without any right of further review or appeal. This should avoid the situation in litigation (and to an extent arbitration) where a party can appeal/challenge an award, thus extending proceedings and increasing costs without providing certainty as to the final decision. The scope of a court or arbitral tribunal to review an expert decision will depend on the wording of the expert determination clause. If the clause is silent, the scope is very limited (e.g. fraud, partiality).
Issues which expert determination may raise
The potential downsides to expert determination include:
- Choice and appointment of an expert. There is scope for disagreement / deadlock in both the process of choosing an expert and their appointment (i.e. the terms agreed between the parties and the chosen expert). This may lead to satellite disputes / litigation, particularly if one party is uncooperative and refuses to engage in the expert determination process.
- Due process and fairness. Litigation and arbitration are underpinned by rules, legal authorities and statutes, which inform the approach taken by the judge or arbitrators. This includes procedures to ensure the fairness/justness of the proceedings, such as affording parties many opportunities to make formal representations, the right to produce/request documents and to rely on witnesses (and cross-examine the other side's witnesses). As a less formal means of dispute resolution, expert determination generally does not involve these types of procedures. Depending on how the dispute unfolds, this can be problematic, particularly where one of the parties is determined to be uncooperative/obstruct the expert determination process.
- Enforcement. An expert's decision is not directly enforceable unlike a court judgment or arbitral award. Instead, if a party fails to comply with an expert decision, the other party must sue for breach of contract and obtain a judgment/arbitral award. Enforcement outside of the jurisdiction is less certain than litigation (where enforcement is often governed by local procedural rules and/or a treaty such as the Hague Convention) or arbitration (under the New York Convention). As a result, parties should carefully consider the extent that international enforcement of an expert decision may be required.
- Limited rights of challenge. Once parties have chosen expert determination as the form of dispute resolution governing the relevant issue(s), they will be bound by that agreement, even if they would prefer to have the dispute, or aspects of it, decided by a court. Unlike arbitration (through the Arbitration Act 1996), in England & Wales the courts do not have an inherent supervisory jurisdiction over expert determination. The scope to mount a court or arbitral challenge to an expert decision is very limited, unless the rules adopted by the parties expressly allow it. Whilst the parties may sometimes agree an exception to the binding nature of the expert's decision for 'manifest error' or fraud, these concepts are likely to be very narrow in their application. For example, manifest error has been held by the English courts in the context of expert determination to mean "oversights and blunders so obvious as to admit of no difference of opinion".
- Related to this, experts are generally not required to give detailed reasons (or sometimes any reasons) for their decisions.
- Costs. Unlike in the position in litigation or arbitration, an expert usually does not have the power to award costs in favour of the successful party (unless that power is expressly provided for by the agreement of the parties).
Drafting considerations
Each expert determination clause should be tailored to the specific type of agreement concerned. Key issues to consider include:
1. Scope of the issue for expert determination
- Expert determination clauses usually govern a specific category of dispute (e.g. share valuation) in the relevant agreement, with disputes involving significant contested factual/legal issues remaining subject to arbitration or litigation. However, inevitably the emergence of a dispute can have consequences not necessarily foreseen by the drafting, such as an issue falling to be determined by the expert which is of a more high value / high stakes nature than envisaged by the parties. Unambiguous drafting in order to identify the scope of disputes referred to expert determination (and therefore not subject to arbitration/litigation) is therefore very important.
2. Method for appointment of the expert
- The clearer the process for choosing and appointing the expert, the narrower the scope of future disagreement / deadlock. It is advisable to include fallback provisions to govern the position if the parties cannot agree the identity of an expert. This may include requiring the parties to jointly apply to an appointing authority. Note that appointing authorities may not accept instructions from a single party without a court order.
- Expert determination clauses also commonly contain provision about the expert's experience/qualifications. It is also possible to pre-agree the identity of the expert (or agree a shortlist of experts). However, the downside to this approach is lack of flexibility: the chosen expert(s) may be unwilling/unavailable to act, lack the required expertise, or be conflicted. It is also advisable to require the parties to adopt market standard engagement terms for the expert.
3. Procedure
- The conduct of an expert determination will depend on the expert's terms of reference (and any procedural rules which are incorporated). Expert determination is intended to be a flexible and efficient procedure, so highly detailed rules are not necessarily an advantage. However, it is sensible for the parties to adopt a clear framework for how the expert determination will be conducted for reasons of certainty (particularly given continued cooperation cannot be guaranteed in the event of a dispute).
4. Scope of grounds for challenge the expert's decision
- As explained above, in England & Wales, the parties have no inherent right (under statute or otherwise) to challenge expert decisions. The case law relating to challenging expert decisions is also less developed than in relation to arbitration. As a result, to avoid uncertainties, it is advisable for the parties to clearly specify the grounds on which a decision may be challenged and be mindful of the narrow scope of terminology such as 'manifest error'.
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.