Independent decisions

Lawyers sometimes hold debates on which is the best system of dispute resolution. Negotiation should always be considered first: if it is difficult to negotiate, try mediation: and, if all attempts at settlement fail, expert determination presents an attractive option for commercial disputes. The use of the word 'expert' often conjures up the image of expert witnesses, that dominant feature of modern dispute resolution. However in expert determination the expert is the tribunal, not a witness: and it is the expert who makes the decision, not a judge or arbitrator. Both arbitration and litigation differ fundamentally from expert determination, and not only in the identity of the tribunal: it is essentially a contractual exercise where the formal safeguards of due process need not be strictly followed.

Expert determination occupies a special place in the spectrum of dispute resolution in that it provides a final and binding decision but requires the minimum of formality. The law allows this because it is what the parties have agreed.

Expert determination is used in a wide range of commercial applications, particularly where some kind of expertise is involved. The use of expert determination in about half of all commercial rent reviews is by far the most numerically significant use of the system. Next most common is the adjustment, by accountants, of figures in completion accounts on the sale of businesses and the valuation of shares in private companies.

The procedure need not involve a hearing and is basically an investigation, by an informed independent professional, who then issues a final and binding decision. The investigation can simply be carried out simply by correspondence or a mixture of correspondence and meetings, as opposed to hearings. Depending on the scale of the dispute, the parties may be represented by lawyers as well as by the appropriate professional, say a surveyor or an accountant. Unless otherwise agreed, the expert may make his/her own investigations into the matter without discussing them with the parties before proceeding to a decision. This ceases to be such a surprise when one realises that expert determination developed from valuation.

As well as providing the solution to technical questions, expert determination is now being used more for general dispute resolution. This trend, combined with the greater reluctance of the court to intervene, makes expert determination a compelling choice for those who want a simpler, cheaper and quicker resolution of their dispute, provided they are prepared to accept that it may be very difficult to challenge a result that at least one of the parties is not going to like. Expert determination has an essential informality that marks it out from the other binding systems, litigation and arbitration, and expert determination has become much more robust, and the results much harder to challenge.

Key characteristics

First, informality. This has always been a feature, but its inherence has been confirmed for the first time in a judgment in the 2004 case Bernhard Schulte GmbH & Co KG v Nile Holdings Ltd. Specifically approving the wording already found in earlier editions of Expert Determination, the judge said that there was no requirement for the rules of natural justice or due process to be followed in an expert determination in order for that determination to be valid and binding between the parties. This means that expert determinations can follow informal procedures without objections on technical grounds, providing a general standard of fairness is maintained.

Next, robustness. Expert determination decisions have become much more difficult to challenge, as can be seen in recent judgments such as Doughty Hanson & Co Ltd v Roe [2007] EWHC 2212 (Ch). This is the most recent in a series of judgments following the major turning point in the 1989 Court of Appeal judgment in Jones v Sherwood [1992] 1 WLR 277. In that case, the claimants said that the expert accountants had reached the wrong decision because they had followed the wrong accounting policies. The Court of Appeal pointed out that three firms of accountants had already been involved in reaching the decision, and that the only way the question of accounting policies could be investigated was by involving 'yet further accountants'. The parties had agreed to abide by the decision of an expert accountant: the expert accountant had made the decision, and the parties should abide by it.

In the past 19 years this principle has been refined so that the test is now whether there has been a material departure from instructions. A material departure is one that is not de minimis, that is, insignificant (Veba Oil Supply & Trading GmbH v Petrotrade Inc [2001] EWCA Civ 1832). In Doughty Hanson, where the amount at stake was £90m, the claimant sought to challenge a share valuation on various grounds. The first basis was to look at what the valuation disclosed about how it was calculated. The judge decided that the valuation did not disclose what the expert had taken into account by way of fact and valuation reasoning, so it could not be challenged in that way. The judge went on say that it was an inherent, and desirable, part of the mechanism of expert determinations (as opposed to arbitrations) that the process of reasoning is kept 'behind a curtain'. The second basis of challenge was that the valuation was on a false hypothesis. The judge said that the hypothesis was, in his view, perfectly valid, and, even if it wasn't, it could not be challenged, as there had been no material departure from instructions. As a result, fewer expert determinations are now challenged in court. This has not, however, affected the right of the court, depending always on the wording of the contract, to intervene over the fundamental issue of the definition of the task assigned to the expert: this was confirmed by the Court of Appeal in January this year.

So, expert determination is informal and capable of delivering a final result in one round and the volume and significance of disputes resolved by expert determination is increasing. Commercial lawyers can offer this system to their clients as a real alternative, and well worth considering for its speed, simplicity and value for money.