Thinking | 28 May 2019
Expert determination: does ‘according to law’ mean free from legal error?
Lainson Holdings Pty Ltd (Lainson) has unsuccessfully challenged the outcome of an expert determination, on the grounds that the determination contained a legal error.1 The Court had to interpret a contractual provision requiring the expert to make a determination ‘according to law.’ Ultimately, the Court found that ‘according to law’ did not mean that an expert’s decision had to be free from legal error. The expert determination was binding and Lainson was ordered to pay $1,837,212.
Lainson entered a contract and deed with Duffy Kennedy Pty Ltd (Duffy) to carry out building work for $21.9 million. A dispute later arose between the parties. Lainson purported to terminate the contract by issuing a Notice to Show Cause and a Notice of Termination under clause 39 of the contract. Duffy alleged that Lainson had repudiated the contract and claimed damages for unpaid work.
Clause 9 of the deed stated that:
‘Any dispute or difference whatsoever arising out of or in connection with this contract shall be submitted to an expert in accordance with, and subject to, The Institute of Arbitrators & Mediators Australia Expert Determination Rules.’
Accordingly, the parties participated in an expert determination. At the expert determination, the expert found that Lainson’s termination of the contract was invalid. The expert found that there was an implied term in clause 39 of the contract, that the power to issue a Notice to Show Cause or Notice of Termination was subject to a duty to act reasonably and in good faith. The expert found that Lainson had breached the implied term and therefore Lainson’s Notice of Termination was a repudiation. The expert ordered Lainson to pay Duffy $1,837,212 and interest.
Lainson commenced proceedings in the Supreme Court of New South Wales challenging the validity of the expert determination. Lainson argued that the expert determination was not binding because the expert had made a mistake of law. Lainson argued that the expert was wrong in finding that there was an implied term in clause 39 of the contract.
Rule 5.1 of the relevant Expert Determination Rules provides that:
‘The Expert shall determine the Dispute as an expert in accordance with these Rules and according to law.’
Lainson argued that:
- ‘According to law’ in Rule 5.1 required the expert to not make any errors of law; and
- The Court can interfere where the expert has made a mistake of law.
Meaning of ‘according to law’
Justice Hammerschlag noted that parties will be bound if the expert did what the contract required him do. The question was: what did the contract require the expert to do in requiring him to determine the dispute ‘according to law’?
His Honour held that ‘according to law’ did not mean that the expert’s decision had to be free from legal error.
His Honour held that ‘according to law’ referred to the manner in which the law requires a person in the position of the expert to perform their mandated task, so as to give it contractual efficacy. His Honour observed that Rule 5.1 appeared in a part of the Rules headed ‘The Procedure.’ In this context, ‘according to law’ meant that the expert had to act honestly, without bias or collusion and while not intoxicated. His Honour found that there was no suggestion that the expert had not acted ‘according to law’ in this sense.
His Honour also observed that two of the main objectives of expert determination was to secure a swift and final resolution of the dispute. Lainson’s argument would conflict with these objectives and work commercial inconvenience.
Can the court intervene if an expert determination contains an error of law?
At trial, Lainson referred to several authorities where courts have intervened to address mistakes of law which occurred during arbitration.
Justice Hammerschlag drew a distinction between arbitral awards and expert determinations.
His Honour observed that there were cases where the court can intervene if there is an error on the face of the record. ‘Record’ refers to documents created or kept by the court as a memorial of the proceedings. An arbitral award has the same effect as a court judgment.
On the other hand, His Honour considered that an expert determination is no more than a private contractual mechanism which does no more than create binding contractual relationships. Therefore, the expert determination could not be challenged on the basis of a mistake of law.
His Honour ordered Lainson to pay Duffy the amount determined by the expert, $1,837,212 plus interest and the outstanding half of the expert’s fees.
This case shows that the outcome of an expert determination will be contractually binding between parties, even if it contains a legal error, in the absence of a contractual provision giving the parties the right to challenge the determination on that basis.
This article was written with the assistance of Winnie Chu, Lawyer.
Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd  NSWSC 576
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