The NSW Supreme Court clarified the role of experts appointed under expert determination clauses in Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd (‘Lainson Holdings’). The decision confirms that experts are not required to determine disputes ‘free of legal error’ in order for the decision to be binding, even where the contract required the determination to be ‘according to law’.
Lainson Holdings Pty Ltd (‘Lainson’) and Duffy Kennedy Pty Ltd (‘Duffy’) entered into a building contract supported by a deed whereby Duffy contracted to construct a building on land owned by Lainson.
A dispute arose initially regarding Duffy providing bank guarantees, and both parties, subsequently, made further claims and cross claims against each other relating a range of other things in relation to repudiation and termination of the contract, payment for work, loss of profit and damages relating to competency of work performance.
An expert was appointed under the parties agreed provision of the Deed which provided for Notice of disputes before then ‘any dispute or difference whatsoever arising out of or in connection with this contract shall be submitted to an expert…’ was agreed under the heading ‘Expert Determination’. The expert determination was to be conducted in accordance with specified rules before commencing arbitration or litigation. The rules required the expert to determine the dispute ‘according to law’.
Lainson presented two main arguments.
Lainson argued the expert made an error in law in determining that Lainson had an implied duty to act reasonably and in good faith and not for extraneous purpose in the issuing of two Notices.
His Honour rejected Lainson’s argument that the words ‘according to law’ require the correct application of only legally correct principles by the expert in determining in a manner free from legal error affecting the result. His Honour found that ‘The construction would burden the Expert with an obligation to try the Dispute as if he were acting as a court of law’ and provide a right of review wider than an arbitral award which was not intended by the parties on the construction of the contract and was unlikely to have been intended by the parties when entering the contract.
His Honour Hammerschlag J referred to the clear authorities that establish the following principles:
- the parties will be bound where the expert did what the contract requires.
- the parties will not be bound if the expert exceeds the contractual limits on the role of the expert.
- By contracting, theparties agree that the determination of disputes will stand as final and binding consensus between them and be enforceable as such.
- Contractually binding determinations will be enforceable by the Courts
- If an expert goes outside the ambit of what a contract requires, then the determination will not be binding because it will not reflect what is intended by the parties when entering the
His Honour identified the relevant question as: ‘What did the Contract require the expert to do in requiring him to determine the dispute ‘according to law?’ is a matter of construction of the contract to be determined objectively with consideration to the whole of the contractual instrument, i.e. by what a reasonable person would understand the contract to mean. Construction ought to support the congruent operation of the whole agreement and its various components and support commercial convenience.
His Honour found that:
‘In the context in which they appear here … the words ‘according to law’ mean in the manner which the law requires a person in the position of the Expert to go about the mandated task, so as to give it contractual efficacy; for example, honestly, without bias or collusion, and while not intoxicated. There is no suggestion that the Expert acted in any way not ‘according to law’ in this sense.’
Second, Lainson argued that the court may interfere to correct an error of law ‘on the face of ‘the record in an expert determination.
His Honour rejected the proposition that expert determination is a ‘record’ in the legal sense as are records of courts and tribunal, and arbitration awards.
His Honour referred to the principles here of:
- Expert determination is a private contractual mechanism to which parties agree to create binding contractual obligations.
- Binding contractual obligations does not involve the exercise of judicial power and is not a quasi-judicial process.
- Expert determination is not susceptible to the court’s intervention to correct a mistake of law if the expert acts within the ambit of the contract.
Lainson Holdings clarifies important principles about the nature of expert determination. Experts are required to determine the dispute within the ambit of the contract but not necessarily according to legally sound principles. It follows that determinations are not open to intervention by courts to correct mistakes of law.
Hammerschlag J’s reasoning aligns with existing jurisprudence on expert determination. It has been established that an expert is not required to observe the rules of natural justice nor hear evidence and determine a dispute judicially between the parties in the absence of an agreement to that effect. The decision firmly places expert determination in the pantheon of ADR, demarcating an expert’s role from the courts’ exercise of judicial power.
Incorporation of the Australian Disputes Centre’s Rules for Expert Determination (effective 1 March 2019) into dispute resolution provisions is an effective mechanism to ensure certainty as to the expert determination procedure to be applied should a dispute arise. The rules can be requested at https://www.disputescentre.com.au/adc-rules-for-expert-determination/.
 Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd  NSWSC 576.
This case note is provided for general interest only. It is not legal advice.