Most of us have observed over the past few years that, curiously for a public service, the Court Service and other responsible bodies discourage the settlement of disputes by litigation – a bit like the NHS declaring itself in favour of homeopathy rather than its own medicine.
This discouragement takes many forms. For example:
■ The proliferation of pre-action protocols – expensive to follow, with a constant front-loading of costs, and with sanctions for non-compliance;
■ The encouragement of ADR, with a costs penalty for failure unreasonably to entertain proposals for mediation by the other side;
■ The introduction on 1 January 2018 of a mandatory one-year pilot, whereby Landlord and Tenant Act 1954 unopposed renewals which are issued in the County Court at Central London will be automatically transferred to the First-tier Tribunal, to be determined by district judges, alongside a valuer (sitting as a legal assessor);
■ The introduction of an adjudication process for professional negligence disputes.
This judicial and other promotion of ADR is ironic, because even the most battle-hardened among us need little incentive to select almost any form of alternative dispute resolution over litigation. The reasons hardly need restating:
■ Cost: the increasingly bossy rules brought in over recent years have made litigation very expensive; other forms of dispute resolution are less bureaucratic, and likely therefore to be cheaper.
■ Delay: court procedures have to take into account not merely the desired timetable of the litigants in any one case, but also those of all other litigants. Not so with ADR: the parties decide between themselves and their dispute resolver when their case is to be heard, and they can be confident that their case will not be bumped on the day because there is another listed that takes precedence.
■ Tribunal choice: the exigencies of the listing system are such that there cannot possibly be an assurance that a claim will be heard by a judge who is familiar with the applicable law. In ADR, the parties are free to select a third party with the desired credentials.
■ Treatment: courts are overstretched, and it is not unknown for judges (who after all control the procedure) to behave irritably on occasion. A third party, who is being paid by the parties, would not dare.
■ Confidentiality: courts dispense justice in open court, whereas arbitrations and independent expert determinations take place in private, with all taking part bound by confidentiality not to reveal the nature or even name of the reference.
In sum, arbitration and other forms of ADR possess numerous advantages over litigation. Parties can pick the (expert) tribunal of their choice, rather than having an uncongenial or inexperienced judge foisted on them. They can control the date and pace of their proceedings. They will not be slapped down if they fail to file their costs budget seven days before a costs budget case management conference. Indeed, it is entirely unlikely that they would decide to indulge in such wasteful procedural hurdles in the first place; and even more unlikely that the third party would impose them.
ADR advantages
There are therefore reasons aplenty for parties to take their disputes to ADR rather than to litigate them. These points notwithstanding, and despite a number of recent launches by some chambers of their own bespoke arbitration services (and here it would be churlish not to mention Falcon Chambers Arbitration – www.falcon-chambersarbitration.com), parties seem reluctant to steer off the conventional path.
One possible reason for this is that when hostilities commence, the use of ADR is ironically less likely, because that would require the warring parties to put their heads together and reach an agreement. By contrast, where the parties are already bound by contract to refer any disputes to ADR, there is little or no opportunity for them to resile, no matter how bitter their dispute might have become.
ADR clauses in the property world are, for the most part, confined to rent review machinery in leases, and price determination mechanisms in agreements for sale. It is curious that ADR clauses are not more widely used in leases, where disputes as to whether a landlord is unreasonably holding consent to assignment/alterations/change of use would seem to be tailor-made for resolution by ADR rather than by the courts (and again, it would arguably be wholly wrong at this juncture to neglect to mention the work done in this regard by the authors of the Property Protocols – www.propertyprotocols.co.uk).
Be that as it may, this paper examines how ADR clauses in existing property agreements are designed to work, drawing attention to their limitations and advantages.
Arbitration and litigation
There is no system of adjudication for property agreements, in contrast to building contracts. Early neutral evaluation is rarely encountered either, while mediation is not an ADR tool that tends to be used by draftspersons. In practice, therefore, ADR clauses found in property agreements tend to provide for the appointment of either an arbitrator or an independent expert – and sometimes one or other, depending on the choice of the parties. At this stage, therefore, it seems appropriate to review briefly the differences between those two types of dispute resolver.
Arbitrators are constrained to conduct arbitrations in accordance with the provisions of the Arbitration Act 1996, save where the parties have agreed (or are allowed) to direct otherwise.
It is right to observe that the procedure adopted in the more complex arbitrations has come to resemble litigation, with directions for exchange of statements of case, disclosure of documents, exchange of witness and expert evidence, formal written submissions and hearings.
Rent review arbitrations, by contrast, are more often than not conducted by surveyor representatives, making written representations to a surveyor arbitrator, without a hearing.
In contrast to the function of a judge, however, if an arbitrator has been selected for expertise in a particular discipline, then he or she is entitled, and indeed bound, to use that expertise to evaluate the parties’ cases. A lawyer arbitrator, on the other hand, obviously has as little to bring to the party as a judge in court.
In litigation, where a party is dissatisfied with the judge’s decision, it may seek permission to appeal on a point of law, and will be granted such permission if it can show a reasonable prospect of success. In arbitration, by contrast, appeals on a point of law have to pass a much higher threshold, with the appellant having to show (and here I simplify) that the decision of the arbitrator was obviously wrong.
There are a few other respects in which an arbitrator is subject to a supervisory jurisdiction by the court. Other than these, however, the approach behind the 1996 Act is that parties are largely free to have their disputes arbitrated as they wish, without interference by the courts.
Whereas litigation and arbitration have come to resemble each other in some respects, this is anything but the case with independent expert determination. Here, the independent expert is, without more, unconstrained by any statute or body of rules, being left to his or her own devices (see the judgment of Cooke J in Bernhard Schulte GmbH & Co KG v Nile Holdings Ltd [2004] EWHC 977 (Comm); [2004] 2 Lloyd’s Rep. 352).
The ADR clause under which the independent expert is appointed may contain vestigial requirements as to submissions, but quite often will not. In such circumstances, the expert is just left to swim: he or she may not compel a party to disclose all relevant documents; has no power to compel the attendance of witnesses; cannot test, by cross-examination at an oral hearing, the evidence given by the opposing party; and has no submissions to entertain.
The extent to which an expert is exposed to any supervisory jurisdiction by the court has been the subject of a number of decisions of the courts in the last two or three decades (culminating currently in the judgment of Moore-Bick LJ in Premier Telecom Communications Group Ltd v Webb [2014] EWCA Civ 994).
It is now well settled that where parties have chosen to resolve an issue by the determination of an expert rather than by litigation or arbitration, the expert’s determination is final and binding unless it can be shown that he acted outside his remit.
A distinction is drawn between the expert who has misunderstood or misapplied his mandate, with the consequence that he has not embarked on the exercise which the parties agreed he should undertake (in which case his determination is not binding); and the expert who has embarked on the right exercise but has made errors in conducting that exercise and has come up with what is arguably the wrong answer (in which case, the determination is binding, although the expert may be vulnerable to a claim in negligence by either party).
This principle is easy to understand, but less easy to apply at the penumbra. An example brings out the point. Suppose that an expert valuer is appointed pursuant to a sale agreement to determine the price of land, on the basis of certain assumptions. The expert naturally has to take a view on what the assumptions mean in the process of carrying out his task.
He then produces a written determination in which he sets out his views as to the meaning of the assumptions before arriving at his determination of price. One of the parties considers that the expert has misconstrued one of the assumptions. Is it able to ask the court to express its own view on the matter?
The answer to this question (which seems to arise frequently) is that it all depends on what it was that the expert was asked to determine. Does it follow from the fact that the expert had to form a view as to the meaning of the assumption in order to carry out his task that he was the decision-maker in relation to the meaning of the assumption?
Two recent authorities have analysed this question in a property context: National Grid Company Plc v M25 Group Ltd [1998] EWCA Civ 1968; [1999] 1 EGLR 65, and Great Dunmow Estates Ltd v Crest Nicholson Operations Ltd [2018] EWHC 1460 (Ch). In each case, (a) an independent expert was appointed to determine a value on certain assumptions; (b) the expert took legal advice as to the proper interpretation of the assumptions; (c) one of the parties disagreed with the advice, and took proceedings seeking a determination; and accordingly (d) the court had to determine the extent to which the interpretation of the assumptions was a matter for the expert.
The decision of the court in each case was that the terms of the relevant contract did not confer on the independent expert the power to construe the contract, save in the trivial sense needed to carry out the valuation required.
In such a case, the party who is concerned that the third party may take a wrong course must ordinarily sit on its hands and wait for the course to emerge, at which point it can then mount its challenge. The few cases in which the court has interfered beforehand (of which both National Grid and Great Dunmow are good examples) arise where the party seeking the assistance of the court already knows what course the third party is going to adopt – usually because the independent expert has already received legal advice, which it was likely that he will adopt.
The principle under discussion – that if on its true construction the third party does not have jurisdiction to determine the meaning of an agreement in its substantive sense, and that the court will therefore intervene beforehand if it is plain that the third party considers otherwise – is reflected in the rather more numerous cases where the court has been invited to set aside the determination of an expert after it has been made, on the footing that the expert has gone outside his remit.
The example usually used to illustrate the boundaries of this principle is a share valuation. If the expert has valued the wrong shares, then his determination will be a nullity, because he has not done that which he was appointed to do. If, on the other hand, he values the right shares, but in a wrong way, his determination must stand. So far so good.
Suppose, however, that the expert valued the wrong number of the right shares: what then? And what if the expert valued the right number of shares on the wrong basis: what then? In each case, the expert has not done what he was appointed to do, and it may be said to be well arguable that his determination should be set aside.
That, at any rate, was the (obiter) conclusion of Lord Neuberger MR in Barclays Bank Plc v Nylon Capital LLP [2011] EWCA Civ 826; [2011] 2 Lloyd’s Rep 347. His fellow judges preferred not to express a concluded view; while in Premier Telecom, Moore-Bick LJ added his own reservations about the impact of this approach.
He observed that, while it was possible that the parties might by their agreement define the terms of the expert’s mandate in such a way that any error of law on his part rendered his decision invalid, in many cases to do so would risk undermining the whole purpose of the reference.
He agreed, however, that ultimately it all came down to the construction of the contract under which the expert was appointed to act. Only by construing the contract can one identify the matters that are referred for the expert’s decision, the meaning and effect of any special instructions and the extent to which his decisions on questions of law or mixed fact and law are intended to bind the parties.
In conclusion, if parties wish to limit their third party’s ability to decide the meaning of the agreement pursuant to which he is appointed, it would be prudent for them so say so expressly. Moreover, the parties should spend a little time considering the qualifications and discipline of their intended expert before entering into their dispute resolution clause. Many of the cases which seek to impugn an expert’s determination have as their origin a badly drafted ADR clause.
Guy Fetherstonhaugh QC is a barrister at Falcon Chambers
