Expert determination is an alternative form of dispute resolution which is being increasingly turned to in a variety of real estate disputes.
The popularity of the method lies largely in the fact that it allows contracted parties to resolve disputes, by way of an independent expert, in a relatively simple and cost-effective way.
However, recent cases such as Woodford Land Ltd v Persimmon Homes Ltd [2011] EWHC 3109 (Ch) have shown there can be difficulties and legal confusion surrounding the use of expert determinations, especially when the procedure interacts with other legal tools, for example, contract rectification claims.
These difficulties mean that developers and commercial landlords need to be very careful when they opt to employ the method in dispute resolution.
Expert background
Expert determination is often used when there is a requirement for technical expertise. Unlike other forms of dispute resolution, such as arbitration, the decision to choose the method usually occurs at the lease-drafting stage.
In the field of real estate it is common for the method to be written into contracts to decide on issues such as the determining of rents, the valuation of properties, disputes over the interpretation of contractual terms, planning issues and disputes in relation to dilapidations.
For developers, landlords and their counterparties, there are some clear advantages for including an expert determination clause in a contractual agreement. The resolution procedure can be a relatively quick and effective method to decide on technical matters, in comparison to court or arbitration proceedings.
As the method doesn’t involve the use of witness evidence or oral hearings, expert determinations, in the majority of cases, provide inexpensive solutions for disputes in a manner that is confidential and private.
There is also a great deal of finality to the decision, as there are few instances in which an expert’s judgement can be overturned.
Weighing up the pros and cons
However, there are some inherent disadvantages associated with the procedure, the main one being that a properly drafted expert determination clause will exclude the jurisdiction of the courts. In such cases, there are few grounds on which a decision can be challenged, and the only available appeal to the courts will usually be if the expert has made a manifest error.
Also, the finality of an expert’s decision can be particularly problematic if the expert has come to an incorrect verdict, which nevertheless is not substantial enough to be challenged as a manifest error. For example, this can occur if there is a fault in a contract which later gives rise to a dispute, and on which the expert comes to a questionable decision.
Legally, parties can appeal to the court for retrospective rectification of a written contract, if it can be proven that the contract between the parties was unreflective of the actual agreement that was reached.
However, Woodford Land Ltd has indicated that the decision of an expert, where there is an expert determination clause in the contract, can inhibit a court from upholding a rectification claim, even if the court is in favour of the party seeking a rectification.
In this case, Woodford applied to the court for rectification of a contract, on the basis that it did not reflect the original intentions of both parties. While the court was in Woodford’s favour, the rectification claim failed as the judge was bound by the expert’s previous decision to uphold the contract.
Making your mind up
It is important to consider at the outset whether an expert determination clause will be an appropriate method of dispute resolution for a particular development agreement or commercial lease.
If a developer or landlord believes that it is in their interests to have flexibility to appeal decisions should a dispute go against them, or if they feel that there may be issues in the contract that could require rectification or alteration, then it is potentially not the right avenue to take.
However, even if it is decided beneficial to include a clause for expert determination, developers and landlords also need to think carefully about how the clause is drafted. There are safeguards that can put in place to clarify the exact remit of an expert, and the contracting parties’ ability to challenge the expert’s decision, (see box).
Furthermore, to reduce the chance of incorrect determinations, it is also important to make sure the appropriate expert is appointed in the event of a dispute.
The type of expert required may vary from a legal counsel, to a surveyor or land valuer, depending upon the nature of the disagreement. Despite this, many commercial lease expert determination clauses refer only to the appointment of a surveyor – meaning that in many instances a binding decision will be made by someone who does not have a particular expertise in the exact field of the dispute.
A surveyor, for example, will not be well placed to pass judgement over a dispute regarding the legal interpretation of the lease.
So a clause should make reference to the range of experts that may be required, along with an outline of the different situation that they may be called in for.
Becoming an expert in dispute resolution
Expert determination can be an ideal solution for many disputes arising from real estate contracts, however, in many cases generic clauses are simply written into an agreement without any consideration as to the specifics of the situation in hand.
The benefits of expert determinations, such as quick and final resolutions, can quickly turn into sources of further dispute if thorough consideration is not given to the exact remit and definition of an expert at the contract-drafting stage.
However, by taking lessons from recent case law when drafting a clause for expert determination, developers and commercial landlords can make sure that the method works for them.
Drafting the expert determination clause
• Define the precise scope, procedure and terms of reference to an expert determination.
• Make an express exception for a manifest error by the expert, so that the decision can be challenged if the expert has made an error that is obvious.
• Define the scope of the expert’s remit; eg specify the issues an expert will be called in to determine and the type of disputes to be referred to other methods of resolution.
Graeme Dixon is director of real estate litigation at DWF LLP
