Expert kept on a tight leash when determining dispute

The recent case of The State of South Australia v Goldstein [2016] SASC 202 (South Australia v Goldstein) provides a timely reminder that dispute resolution provisions and expert determination agreements need to be carefully drawn to ensure that the parties' intentions are reflected in those documents.

The case considers, amongst other things:

  • whether the expert was permitted to determine the dispute, with reference to extra-contractual rights and remedies the parties may have (such as the operation of an estoppel or the application of an implied term); and
  • the true construction of the phrase "the value of the determination is greater than $1 million" in the context of whether an expert determination is final and binding on the parties.

Background

The State of South Australia (the State) entered into a contract with SA Health Partnership Nominees Pty Ltd (SAHP) for the design, construction, financing, maintenance and non-clinical operation of the new Royal Adelaide Hospital (the RAH). SAHP subcontracted the construction of the RAH to the HYLC Joint Venture (HYLC), passing through the relevant provisions of the project deed.

The project deed and subcontract included provisions which referred certain disputes to an accelerated form of expert determination for resolution, including a dispute as to the existence, or rectification, of a defect. A dispute arose between the parties in relation to the existence and/or rectification of a number of defects which were referred to an expert who determined (or purported to determine) the dispute.

The State, dissatisfied with the expert's determination, referred the dispute to arbitration and separately commenced proceedings in the Supreme Court of South Australia seeking declarations (amongst other things) that the expert's determination was invalid (in part) and not binding on the parties on the basis that the expert did not have jurisdiction to determine that:

  1. there was no defect in the size of floor distribution rooms by reference to extra-contractual conduct of the State’s officers and employees, rather than the contractual specification (Room Size Defect Finding);
  2. the rectification of defects involving the loading dock height, clinical areas, ceiling exclusion zones and primary data room pipes is unreasonable (Unreasonable Rectification Finding);
  3. the State does not intend to rectify certain defects (Intention to Rectify Finding); and
  4. risk mitigation works carried out by HYLC were reasonable and sufficient to mitigate the defect involving the primary data room pipes (Risk Mitigation Finding).

SAHP and HYLC cross-claimed seeking a declaration that the State’s purported referral to arbitration was ineffective because the value of the determination was not greater than $1 million, being the contractual threshold for such a referral.

Did the expert's decision fall outside of the expert determination agreement?

The issue of the expert's jurisdiction turned on the proper construction of the head contract and the expert determination agreement. The expert determination agreement provided:

The parties have agreed to appoint [the expert]…to act as the Expert to (i) determine whether the Disputes fall within the scope of clause 40.3; and (ii) insofar as the Disputes fall within the scope of clause 40.3, determine the Disputes in accordance with, and subject to, the Accelerated Dispute Resolution Procedure.

Clause 40.3(a) provided that the parties' rights and liabilities with respect to defects were not limited by the provisions of clause 40. Clause 40.3(b) provided that:

Any dispute as to whether:

  1. something is a Defect…or related to the rectification of a Defect; or
  2. damage to the Facility that has been caused by a Defect,

will be referred by either party for resolution by an independent expert in accordance with the Accelerated Dispute Resolution Procedures.

Blue J determined that the expert agreement required the expert to determine the dispute within the four corners of the head contract. That is, the expert was required to consider whether there was a "Defect" as defined by the contract without considering any extra-contractual basis upon which SAHP may rely upon to avoid or limit its liability for the "Defect".

Specifically, Blue J held that:

  1. (Room Size Defect Finding): the expert was only permitted to consider the technical specification as amended in accordance with the Head Contract and the expert did not have jurisdiction determine the matter by reference to "elements of estoppel";
  2. (Unreasonable Rectification Finding): while the expert expressed his determination by stating “rectification of the Defect is not reasonable”, his reasons for reaching this conclusion demonstrated that in substance he determined that “the Defect is not capable of remedy”; which fell within the scope of his jurisdiction;
  3. (Intention to Rectify Finding): the expert did not have jurisdiction to find that the State did not intend to rectify certain defects as the issue of quantum of any damages did not arise under clause 40.3; and
  4. (Risk Mitigation Finding): the expert's finding that the works undertaken to mitigate the risks or consequences of damage occurring were reasonable and sufficient, which fell outside of the expert's jurisdiction as clause 40 dealt with the elimination of the defect; not the mitigation of the effect of a defect.

In so finding, Blue J applied a black letter approach to the scope of the expert's jurisdiction. In the context of the Intention to Rectify Finding, Blue J observed:

The mere fact that it might be said in a generalised sense that a dispute is related in some way, shape or form to rectification is not sufficient to bring the dispute within the scope of clause 40.3.1

In acknowledging the limited jurisdiction of the expert in this case, Blue J noted that his conclusion that the expert's jurisdiction was limited to determining strict contractual entitlements did not prevent SAHP from advancing contentions:

based on estoppel, breach of an implied term imposing a duty of cooperation, collateral contract or some other juridical basis in a different forum.2

Final and binding determinations

In considering SAHP and HYLC's contention that the referral of the dispute to arbitration was invalid, Blue J was required to construe clause 71(o)(i), which provided:

(Final and binding): To the extent permitted by Law, the determination of the Independent Expert will be final and binding on the parties, unless:

  1. the value of the determination is greater than $1 million…

Interestingly, clause 70(b) provided:

If the meeting requirement by paragraph (a):          

  1. does not occur; or           
  2. having occurred fails to resolve the Dispute or to agree that the Dispute be referred to an Independent Expert under Clause 71 or to arbitration under Clause 72, 

within 10 Business Days of the delivery of the Notice of Dispute, the Dispute shall be referred to arbitration under Clause 72 save where the dispute is in respect of a claim for payment of an amount which is equal to or less than $1 million (as set out in the Notice of Dispute) in which case, within 10 Business Days of the delivery of the Notice of Dispute, the Dispute shall be referred for a resolution by an Independent Expert under Clause 71. (Emphasis added)

The State submitted, and the Court accepted, that the "value of the determination" for the purposes of clause 71(o)(i) was to be assessed objectively by reference to the difference between the value to the "appellant" (the party "appealing" under clause 71(o)) if it had been successful at expert determination and the value under that expert determination.

His Honour interpreted clause 71(o)(i) with reference to the text, context and evident purpose and noted:

Unless a contrary intention is manifested, it should be construed to give a businesslike interpretation and produce a commercial result. If its language is ambiguous, a construction giving rise to capricious, unreasonable, inconvenient or unjust consequences is to be avoided.3

Blue J held that when clause 71(o)(i) used the word “value” in the phrase, the "value of the determination”, that word was deliberately chosen to have a broader connotation than the “amount” of the claim (referred to in clause 70(b)). Similarly, the reference to “the determination” as the object of the value had been chosen to have a broader connotation than “the claim” (referred to in clause 70(b)).

Significance

It is not unusual for an expert determination agreement to be imprecisely drawn. Often it is documented in circumstances where the parties are in dispute and agreement on something, as seemingly uncontentious as the scope of the dispute itself cannot be reached. South Australia v Goldstein highlights the risks to the parties (in particular the claimant) of defining the scope of a dispute by reference to the parties' rights and obligations under a particular contractual clause in circumstances where a party may (as is often the case) rely on extra-contractual principles or entitlements.

The case further illustrates that the use of the phrase "value of the determination" or its equivalents should be avoided given its obvious ambiguity in favour of referencing the amount claimed or the amount determined to be paid (directly or indirectly such as in the case of extension of time disputes).

The author is grateful for the assistance of Karmen Gallegos, Lawyer, in preparing this Insight.

At [257].
2 At [228].
At [337]. 
Alex Whiteside

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Alex Whiteside Partner

Alex specialises in providing advice to the construction, infrastructure and mining sector. Alex focusses on providing advice during the delivery, completion and disputes phases of projects.

Alex acts for construction contractors, equipment suppliers and government entities and has extensive experience in drafting and negotiating project documentation, ranging from the Australian Standard suite of contracts through to project specific and PPP documentation.

Alex has a particular focus on disputes, including expert determination, adjudications, arbitration and Court proceedings. Alex has acted for clients in a broad range of construction and mining disputes including scope and variation claims, design, defect and delay/prolongation claims, injunctions and security of payment adjudications and appeals. Alex has significant expertise in Supreme Court actions in the Technology and Construction List.

Alex has completed secondments in the legal teams of Lendlease, Transport Infrastructure & Services and Sydney Trains.

Alex commenced his career advising insurers in relation to professional indemnity insurance policy coverage and claims.

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