Refusal to sign expert’s retainer agreement will not derail Expert Determination process

When an expert is appointed to prepare a determination or a mediator is appointed to mediate a dispute, a retainer agreement is issued to all parties which sets out, amongst other things, the procedure and rights and obligations of the respective parties. Negotiations occur and sometimes a party may attempt to stall or even derail the dispute resolution process by refusing to sign the agreement.

I draw your attention to a recent case of Watpac Construction NSW Pty Limited v Taylor Thompson Whitting (NSW) Pty Ltd [2015] NSWSC 780, in which Justice Ball delivered judgement on 19 June 2015.

On the facts a dispute arose between two parties and their principal agreement contained a dispute resolution clause (DRC) which provided for the appointment of an independent expert to issue a written determination with reasons. The nominated expert issued an Expert Determination Agreement (EDA) to the parties, however one of the parties refused to sign it. The aggrieved party approached the Supreme Court of NSW seeking an order obliging the other party to sign the EDA.

The take home points from this case are as follows:

• If a principal agreement contains a Dispute Resolution Clause which provides for the appointment of an independent expert, the Supreme Court will not allow the procedure to be defeated by a party’s refusal to meet and will order a party to sign the EDA as issued by the expert, where those terms are not unreasonable;

• If the principal agreement does not set out the procedure of the expert determination, it is a matter for the expert to determine what procedure to follow provided the procedure is reasonable. The rules of the various appointing authorities (e.g. Law Society of NSW, IAMA, LEADR) are persuasive as to what is reasonable;  and

• On the facts, it was reasonable for the expert to insert the following clauses in the EDA, in relation to his determination:
  • parties are jointly and severally liable for the expert’s fees;
  • parties are jointly and severally liable to indemnify the expert, except in fraud; and
  • parties are precluded from subpoenaing the expert to give evidence in subsequent proceedings.

The writer recommends to those involved in expert determination,  mediation and other ADR processes to review their retainer agreements to ascertain whether they are consistent with the rules of their appointing authority, and if not ensure the terms therein are not unreasonable.

Regards, Troy Peisley Lawyer and Chartered Accountant

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CASE SUMMARY

In Watpac Construction NSW Pty Limited v Taylor Thompson Whitting (NSW) Pty Ltd [2015] NSWSC 780 (19 June 2015), a dispute arose between the parties as a result of cracking in a concrete. Watpac assert the cracking was due to TTW’s faulty design work.  Watpac undertook the necessary repair work at a cost of $1.5M and served a demand on TTW. In accordance with the dispute resolution clause of the principal agreement (the DRC), the parties agreed to refer any dispute to independent expert determination if the dispute was not resolved within seven (7) working days.

Part of the DRC specified that the expert’s determination would, save for manifest error, be final and binding and not subject to review if neither party took any steps to enforce any right or remedy by instituting proceedings relating to the dispute within 28 days of the expert’s written decision.

An expert was appointed by the Institute of Arbitrators and Mediators, and a series of correspondences ensued between the defendant and the independent expert in relation to the terms of the Expert Determination Agreement (the EDA) between the expert and the parties.

The expert, inter alia, initially proposed a term in the EDA that neither party would challenge his determination in any legal proceedings. He also proposed a clause making the parties to be jointly and severally liable for his reasonable costs and expenses.

The defendant, TTW sought to include the following terms in the EDA:

• That the Determination  would not be binding on the parties if either party commences Court proceedings within 28 days of the expert issuing his determination; and
• The expert can direct a party to produce any documents requested by a party to the expert and the other party that are relevant to the dispute and/or to provide consent for the opposite party to obtain access to documents in the possession of a third party.

The plaintiff, Watpac objected to these proposed amendments by TTW and instead proposed a term that if either party commenced court proceedings pursuant to the DRC then the determination would not be binding on the parties. Watpac also objected to the inclusion of the joint and several liability clause in relation to the expert’s fees.

The expert accepted the term proposed by Watpac’s solicitors as to when the determination would not be binding . But he refused to include in the EDA the term proposed by TTW that would enable him to direct a party to produce documents. The expert said the DRC required him to rely on the submissions provided by the parties. The expert also stood firm on the inclusion of the joint and several liability clause.

The Expert issued a final EDA – Watpac signed it, but TTW refused to. That refusal caused Watpac to approach the Supreme Court of NSW to seek orders, inter alia, that TTW execute the final EDA within 7 days and pay 50% of the security deposit to the Security Holder.

TTW advanced a number of reasons as to why it should not be required to sign the EDA:

1. TTW submitted that the DRC required parties to meet once a dispute arose. On the facts the parties failed to meet. TTW asserted that that meeting was a necessary precondition to the expert determination procedure,  and as it did not take place the parties abandoned the dispute resolution procedure.

HH Ball J rejected this submission and held it made “commercial sense” that the parties would have held an objective intention not to allow the expert determination procedure to be defeated by a party’s refusal to meet.

2. TTW submitted that the terms of the DRC did not prevent the expert from requesting the parties to produce documents. TTW said the expert made a jurisdictional error when he refused to include the clause in the EDA.

HH Ball J applied the well-established principle of law, that, in the absence of express terms in the agreement, it is a matter for the expert to determine what procedure he should follow[1]. Consequently, HH held it was a matter for the expert to decide whether to require the parties to produce documents or give access to documents provided his request was reasonable. In that case, parties must use their best endeavours to comply with his request: [38]. HH said:

The fact the expert chose not to require the production of documents for a reason that involves an error concerning the interpretation of [the dispute resolution clause] does not make the error a jurisdictional one.

3. TTW submitted the following clauses of the EDA were inconsistent with the DRC:

• TTW submitted the EDA only allowed a party to challenge the expert’s determination within 28 days of the expert issuing his determination, whereas the DRC permitted a challenge at any time to the determination for manifest error.

HH Ball J applied the well-established principle of law, that, evidence of precontractual negotiations is admissible as evidence of relevant surrounding circumstances[2]. HH Ball observed that the term initially proposed by the expert was inconsistent with the DRC, however parties agreed to revise that term so that the terms of the EDA became consistent with the DRC.

HH Ball J held the EDA was no longer inconsistent with the DRC as parties agreed the expert determination would not be binding if court proceedings were commenced within 28 days or there was manifest error.

• TTW submitted pursuant to the terms of the EDA, parties would be jointly and severally liability for the expert’s reasonable costs, whereas the DRC provided parties were to equally bear the costs of the expert determination.

HH Ball J rejected this submission and held the joint and several liability clause was not inconsistent with the dispute resolution clause. He stated “It is reasonable in [the] circumstances that they be jointly and severally liable for the expert’s fees”.

4. TTW also submitted that the EDA contained clauses that went beyond what is reasonable to require parties to agree to. TTW said there was nothing in the DRC which required parties to agree to EDA terms precluding parties from subpoenaing the expert to give evidence or obliging parties to, jointly and severally, indemnify the expert, except in fraud, if a claim is made against him arising out of the determination, including claims by 3^rd parties.

Ball J rejected these submissions. HH observed that the terms in the EDA were taken from the expert determination rules of the Institute of Arbitrators and Mediators, and whilst not all rules published by appointing authorities contain similar rules, HH held at [62]:

An expert is entitled as a condition of his or her appointment to seek to protect himself or herself in relation to possible court proceedings arising out of his determination and a term preventing the parties from subpoenaing the expert is one means of doing that….. also, it seems to me that it is reasonable for the expert to protect himself against possible claims by third parties.

The expert was, pursuant to the terms of the principal agreement, required to give reasons for his decision. Ball J noted that if the expert made a manifest error, it would be apparent from the reasons given and HH found it difficult to see why it would be necessary to subpoena the expert in the unlikely event a party questioned whether his determination contained a manifest error. HH observed that TTW did not point to any practical circumstances where it could be said that the term precluding subpoenaing the expert would operate unreasonably.

In regards to the indemnity, HH found it not unreasonable for the expert to place the risk of any third party action arising from his determination on the parties who seek the determination. HH observed that TTW did not point to any practical circumstances where it could be said that the indemnity would operate unreasonably: “The true position is that the prospects of any third party claim are remote”.

The plaintiff, Watpac successfully obtained orders requiring the defendant, TTW, to execute the EDA within 7 days and pay 50% of the security deposit to the Security Holder.