Expert determination: Hidden pitfalls

Expert determination is a process in which parties to a contract jointly instruct a third party to decide an issue between them. Its advantages are self-evident: quick, cheap, informal and contract-based, it has obvious attractions and can be found in many commercial contracts. In the words of Einstein J in the Australian case of The Heart Research Institute Ltd v Psiron [2002] NSWSC 646:

"on a practical level, [expert determination] has apparently been attractive, largely because it is less expensive and speedier, avoids the rigours of the application of the rules of evidence and procedure and offers a finality which avoids delays, potential re-hearings and appeals, which is particularly suitable especially where an expert knowledge of the subject is required or where the parties may have a continuing relationship" (at [86]).

When negotiating the terms of a contract, parties will often prescribe what procedure should be followed in the event of a dispute. In doing so, they will have to assess which, if either, of expert determination or arbitration is to provide the appropriate mechanism. In making that decision due regard is to be paid to the consequences of allowing for one form or the other on the right to appeal a decision. The circumstances in which a party may challenge a decision made by an arbitrator are set out in sections 68 and 69 of the Arbitration Act 1996. In short, if there is a "serious irregularity" or a "point of law" (both concepts are circumscribed by their relevant sections) an appeal might be allowed. However, appeals from expert decisions are fundamentally a matter of contract. Thus, as set out in Bernhard Schulte GMBH v Nile Holdings Ltd [2004] Lloyd’s Rep 352 a case concerning non-compliance with the terms of a sale and purchase agreement of a number of vessels, a decision will only be deemed invalid in the event that: (i) the terms of the contract allow for it; (ii) the expert lacked jurisdiction; (iii) the expert materially departed from his instructions or asked himself the wrong questions; or (iv) there is fraud, collusion or bias in evidence.

When laid alongside the comparatively expansive terms of sections 68 and 69 of the Arbitration Act 1996 the consequences for a party seeking to set aside a decision of electing for expert determination at the point of contracting are stark. Nowhere is this more evident than in the recent decision of Peter Smith J in Walton Homes Ltd v Staffordshire County Council [2013] EWHC 2554 (Ch).

The substantive argument in Walton Homes concerned the amount Walton was liable to pay Staffordshire CC pursuant to a sale and purchase agreement of freehold land in Birmingham. Under the agreement Walton was to pay Staffordshire CC a sum which was to be the difference between: (i) the value of the freehold site assuming no planning "permission" existed (value A) and (ii) the value of the property with the benefit of planning "permission" (value B). The word "permission" was defined in the agreement as meaning the notice granting planning permission. Thus, on the literal terms of the agreement value A could include those steps leading up to the issue of the notice such as the recommendation of the relevant officer to the planning committee or the resolution of the committee to allow the application; it is only the value given to the formal notice which need be discounted. The agreement also included a clause where, in the absence of an agreement as to what values A and B should be, a surveyor acting as an expert was to be nominated to determine them. His decision was to be final and binding upon the parties in the absence of manifest error.

The dispute which subsequently arose concerned the use of the term "permission" in value A. Walton argued that "permission" should mean solely the notice; thus value A was to include the value of all steps up to, but not including, the issue of the notice. Staffordshire CC argued that "permission" should be construed as to include the intermediary steps between receipt of the application on the part of the council and the final issue of the notice giving permission; thus value A was to include only the value ascribed to having made the application to the council and no more. As per the terms of the agreement, this issue was submitted to a surveyor for determination. The surveyor, recognising that the issue was fundamentally a matter of law, subsequently farmed the legal element of the dispute out to counsel who deemed that, notwithstanding that "permission" was defined in the agreement to mean solely the notice, in the context of value A it was to include all those steps on the part of the council leading up its issue on the grounds that to construe otherwise would be ‘commercially absurd’.

In light of this and the terms of the agreement, Walton sought to overturn the surveyor’s decision on the grounds that it was manifestly erroneous.

In the words of Lord Lindley: "all errors are manifest when discovered; but such clauses… are intended to be confined to oversights and blunders so obvious as to admit of no difference of opinion" (Lindley & Banks on Partnership, 18th edition (2002) at 10-73). This view was expanded upon by Simon Brown LJ in Veba Oil Supply & Trading GmbH v Petrotrade Inc [2002] 1 All ER 703 in which he suggested that the term manifest error should be further restricted such that a it encompasses only those "oversights and blunders so obvious and obviously capable of affecting the determination as to admit of no difference of opinion". In Conoco (UK) Ltd v Phillips Petroleum Co (UK) Ltd (Unreported, August 19th 1996) Morrison J said that a manifest error referred to "oversights and blunders so obvious as to admit no difference of opinion". Finally, in IIG Capital LLC v Van Der Merwe [2008] 1 All ER (Comm) 435, Lewison J held that a manifest error ‘is one that is obvious or easily demonstrable without extensive investigation’.

Walton issued proceedings seeking an order setting aside the determination of the Surveyor. At trial it argued that the conclusion arrived at by Counsel, namely that "permission" was to include those steps leading up to the issue of the notice, was manifestly erroneous on the grounds that: (i) the literal construction of "permission" (i.e. just the notice) would not lead to an outcome which was commercially absurd; Staffordshire CC would still receive sums in excess of £100,000; (ii) it is quite clear what a reasonable person would construe the agreement to mean particularly in light of the fact that ‘permission’ is defined in the agreement; (iii) the agreement does not create any ambiguity or difficulty which prohibits any assessment of the commercial common sense of the agreement. Peter Smith J had considerable sympathy with these submissions but held that:

"To my mind 'Walton’s submissions are classic examples of every mistake becoming ‘manifest’ when it is discovered. Manifest is a word which gives a very limited window of opportunity to challenge. The example given in the various authorities above show that it is something like an arithmetical error or a reference to a non-existent building and the like.  … there was merit and is merit in both sides’ arguments. The parties by the Agreement gave the Surveyor the power to determine the decision in law and fact. I do not see that his reasoning provided … is manifestly erroneous. It might be wrong if one were pressed to argue it but that as I have said is not sufficient".

Concluding remarks

Walton found itself at trial having to argue that a decision which was arguably wrong was manifestly erroneous. The reason why is clear, in the agreement it agreed to refer all disputes as to valuation to the Surveyor to give an expert determination. Had it considered at the point of contracting whether a point of law; namely the proper interpretation of the word "permission" within the valuation matrix, should be subject of a surveyor’s determination it might have been more cautious about the parameters of the expert’s remit or whether, in fact, arbitration was a more appropriate forum. This case acts a salutary reminder of the dangers of expert determination. Whilst the process is well understood the importance of two issues is often underappreciated, namely: (i) the parameters of what an expert has the right to determine and (ii) failing to take into account the obstacles facing a party seeking to set aside a determination.