Using Expert Determination to Resolve Building Disputes 3

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Thursday, November 12th, 2015
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One of the first major commercial contracts that I had to negotiate concerned a serviced apartment development at the top of Little Collins Street Melbourne.

We were acting for a property developer and the contractor was a household name in the building industry responsible for the construction of some very fine Melbourne tall towers.

The contract negotiations were very straightforward, as was the project. This is not surprising, for when you get two seasoned and sensible contracting parties that have done their due diligence on one another, things tend to bode well.

The dispute resolution clause, however, was very interesting and notwithstanding its inherent “intelligence” in terms of the way it was crafted, I have rarely since then sighted a similar provision. The dispute resolution provision was an expert determination clause.

Expert determination is a contractual provision that dictates that any dispute of any nature to do with the contract or the building works must be referred to expert determination. The contractual provision will provide that the decision once made is binding upon the parties.

The parties have the option of choosing the expert prior to signing the contract, in which case the expert will be someone well regarded by both. The expert is then contacted with the view to gaining his or consent to being appointed as the dispute circuit breaker.

An alternative is for the expert determination clause to provide that an expert can be nominated by a nominating body such as the Institute of Quantity Surveyors or the Bar. This method is fine but can delay things somewhat.

The provision will state that in circumstances where a dispute crystallises, either party can send a notice of the dispute to the expert, along with a copy of the notice to the other party to the contract. The contract will provide that the expert can then advise the parties in writing of a date and time to meet or provide written submissions on point. The expert will also have the power to ask for any other material germane to the dispute.

The contract will be phrased to give the expert more or less carte blanche in terms of the way by which he or she will wish to resolve the dispute, but ordinarily the provision will state that once the expert is provided with sufficient material, he or she will meet with and hear from the parties, deliberate and then hand down a written determination.

The provision will normally provide that the parties remunerate the expert on a 50/50 basis and that monies will be placed into a trust account in advance.

An expert determination clause is designed to fast track dispute resolution so there is an expectation that the expert will deliver a determination promptly. Another virtue of an expert determination clause is that the procedure can be invoked whilst the contract is still on foot, so the contract can progress and contractual relationships can remain intact. The clause can also provide that the determination can be binding, pending conclusion of the project whereupon it can be litigated or retried. Alternatively the clause can stipulate that the determination is binding, period.

By and large, expert determination is enforceable absent any evidence of the untoward. If a party were to try to overturn the determination in a court of law, the Court would be likely to find that the parties had entered into a contract in which they agreed that they would be bound by the expert’s determination, went in with eyes wide open and accordingly are bound to abide by the experts ruling.

The virtues

First and foremost, it’s fast.

It is contained and confidential, the parties can choose the circuit breaker – their own umpire as it were. So dirty linen, for want of better metaphor, is aired internally, dealt with and the parties then move on.

Commercial relationships can remain intact intact, and they may even be enhanced.

In the overall scheme of things, it’s cheap as the parties share the cost of expert deployment.

It comes as little surprise that the big end of town loves it, because the big end of town knows money, knows the value of relationship building and enhancement, knows the downtime that goes with third party judicialised dispute resolution, along with the deleterious effect it can have upon reputation and corporate brand.

The parties can design through their lawyers the expert determination clause. They can even consult with the proposed expert before entering into the contract and discuss the way he or she would like to see the dispute resolution procedure and the logistics of same work. The bespoke procedure can then be captured in the drafting of the provision.

It is also of the no-fault persuasion; even though one party may get a favourable determination and conversely the other an unfavourable ruling, it is not about the winning and the losing. Rather, it’s about the resolution of a misunderstanding in a professional and non-judgemental setting. The characterization of such an outcome in this way is a likely scenario because the parties choose the circuit breaker, so no doubt they trust and have faith in the expert’s capability; as us Kiwis say, they ensured that they choose an expert that had “mana.”

Expert determination for the sophisticated commercial concerns is a bit of a “no-brainer” for reasons that I have hopefully expounded and it is surprising that it hasn’t experienced greater uptake. Or maybe it has, but we haven’t heard about it because it’s been so successful and for the reasons mentioned above, it has stayed under the radar.

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3
  1. Les Williams

    This process needs to be introduced across the board by legislation. That there hasn't been greater uptake is probably because this process removes the ability for principals and construction companies to conjure disputes and defects in order to withhold money. What is important is fast,proper and secured payment processes. This process must be undertaken within a construction trust or escrow and is what forms the basis of the Subcontractors Alliances recommendations for faster and more secure payment for industry subcontractors.

  2. Mark Whitby

    Good to a point I agree Kim,

    But who determines the expert status of the virtually adjudicating (so-called) expert is the real problem as I see it.

    I've come across close to a dozen people acting in similar roles and found all but one of them sadly wanting in real expertise.

    It seems to me to have the potential to wrongly remove the rights of those concerned… and their own experts who may well be far more expert than the appointed one.

    I think that is why this system will not work… and why it is not popular,

  3. Branko Mladichek

    Excellent contribution Kim.

    Whilst I don't have big town experience I do have extensive experience with domestic contracts, hundreds of ordinary homeowners in building disputes. Frequently disputes escalate emotionally and financially to become toxic and to cripple both parties in a long and exhaustive journey.

    I think that your insight is a fresh approach as to how ADR could be applied to domestic contract disputes.

    Nevertheless, the quality of the experts is an obstacle and as you say "mana" is the key.

    I would take it a step further, to empower (either under the contract or by legislation) independent building stage inspectors to become referees during construction and as a prelude to acting in "expert determination" ruling.
    Having already carried out stage inspections during construction they would be familiar and best placed (in real time) to put a lid on developing problems/disputes by issuing binding directions and or determinations.

    I have lost count how many times I have seen builders neglect to install temporary downpipes during construction, allowing slab edge flooding to homes on reactive clay sites in breach of warranties. Neither owner or independent inspector has the power to compel builder and official complaints to CAV or VBA are just too difficult and too late and neither is keen to take builder on for infringement. It would be relatively simple for referee, to issue compliance direction or no progress payment.

    I have frequently written that domestic building industry is building houses without quality control (because builders won't spend money on implementing and maintaining QA system because it costs money). Surely that has to change for the protection of consumers.

    You are onto something Kim