When are parties bound by an expert determination clause in a construction contract?

In Lipman Pty Limited v. Emergency Services Superannuation Board [2010] NSWSC 710, the New South Wales Supreme Court held that an expert determination made under a construction contract was binding on the parties.

The facts

Lipman, as principal, retained Emergency Services Superannuation Board to redevelop a shopping centre near Sydney.

The contract required the parties to refer disputes for expert determination. It also provided that the expert determination would be final and binding unless and until it was “reversed, overturned or otherwise changed” under a specific negotiation procedure provided for in the conract.

The contractual negotiation procedure enabled a party dissatisfied with the expert determination to issue a notice of appeal. This notice of appeal triggered a requirement for the executives of the parties to meet and undertake negotiations with a view to resolving the dispute (or trying to agree upon a process to resolve the dispute).

On 14 March 2005 the parties appointed experts under the provisions of the contract to resolve a disputed claim. The experts gave their written determination on 7 December 2005. Between February and June 2006 the parties held a number of meetings to try to resolve the dispute as contemplated by the contractual negotiation procedure. The negotiations were ultimately unsuccessful and the parties did not resolve the dispute or agree on a process to resolve it.

The court proceedings

On 11 December 2009 (some three and a half years later), Lipman issued proceedings in the New South Wales Supreme Court making a claim against Emergency Services for over $1 million. The proceedings related to the same subject matter as the expert determination.

Emergency Services argued that the parties were bound by the expert determination, which meant that the court proceedings could not be maintained.

Lipman contended that the expert determination was not binding and that it was free to pursue its claims in the court even though those claims were the subject of the expert determination. It alleged that, if the expert determination was binding, this would be an abrogation of the parties’ common law rights for which express words would be required.

The decision in Lipman

The court did not accept Lipman’s arguments, holding that the plain and unambiguous words of the clause required the expert determination to be binding unless it was reversed, overturned or otherwise changed under the procedure outlined in the clause.

The negotiation process the parties had participated in did not result in the determination being reversed, overturned or otherwise changed. It followed that the expert determination remained binding.

Implications for parties to construction contracts

These days, more and more construction contracts contain dispute resolution clauses that require parties to submit to mandatory expert determination or arbitration.

Parties to construction contracts do not always give proper attention to such clauses, wrongly believing that expert determinations or arbitrations are not binding or can be challenged in court proceedings. This is not always the case.

This case sounds a strong warning to parties involved in the construction industry about the need to ensure that they fully understand the terms of any dispute resolution clauses in their contracts. Depending on how the clauses are worded, parties may be bound by an independent expert determination and prevented from challenging the determination in a court if they are not happy with it.

The case also has implications for other types of commercial contracts that contain a dispute resolution clause.