Reference to expert determination meant what it said, not arbitration (High Court)

Practical Law UK Legal Update 4-508-0042 (Approx. 7 pages)

Reference to expert determination meant what it said, not arbitration (High Court)

by PLC Dispute Resolution

Background

In Barclays Bank PLC v Nylon Capital LLP [2011] EWCA Civ 826, the Court of Appeal considered whether the relevant expert determination clause (which required the person appointed to "act as an expert and not an arbitrator") had been triggered. The case provides guidance on determining whether an expert has jurisdiction and emphasises the difference in this regard between the principles for expert determination and those for arbitration. It consider matters including whether a court should:

Intervene to correct an expert determination.
Determine questions relevant to an expert determination in advance of that determination.

(See Legal update, Court is ultimate decision maker on expert's jurisdiction (Court of Appeal).)

The use of expert determination has been extended into areas previously reserved for more formal systems of dispute resolution. Expert determination is frequently used in disputes where:

A valuation is required.
An expert opinion is needed on a technical matter.

For a summary of the advantages and disadvantages of expert determination over arbitration and litigation, see Practice note, Expert determination: Why use it? In particular:

An expert cannot rule conclusively on his own jurisdiction. The court may decide the existence or scope of the expert's jurisdiction before the expert rules on it and any decision by the expert on his own jurisdiction could be challenged in the courts. By contrast, the principal method for determining issues of jurisdiction in arbitration is determination by the tribunal (though the tribunal's ruling on jurisdiction may be challenged in court) (section 30 of the Arbitration Act 1996 (AA 1996)). For more information about this topic, see Practice note, Jurisdiction: determination by tribunal.
Under section 9 of the AA 1996, the court must stay its proceedings where the claims are to be referred to arbitration under an arbitration agreement.

In Premium Nafta Products Ltd (20th Defendant) and others v Fili Shipping Company Ltd and others [2007] UKHL 40 (Fiona Trust), the House of Lords held that, when construing arbitration agreements, rather than a detailed consideration of the wording of particular clauses, the starting point was a strong presumption that:

Commercial parties intended all disputes to be determined in a single forum.
Disputes will fall outside the scope of an arbitration clause only if excluded expressly or by clear implication

(See Legal update, Fiona Trust: House of Lords uphold Court of Appeal.).

Facts

Wilky, a property investment and development company, and LSI, a consultancy company, had entered into a consultancy agreement. A dispute arose about what LSI was entitled to be paid under the consultancy agreement. The consultancy agreement contained the following dispute resolution clause (clause 22):

"If there is any difference or dispute as to the meaning or effect of the terms of this letter of appointment, or the calculation of the Profit Share to be paid thereunder, we agree and acknowledge that either you or we acting independently shall be at liberty to refer any such dispute to an independent expert to be appointed by either you or ourselves jointly, but in the event that you or ourselves can not agree upon such an expert, then either we or yourselves shall request the president of the Royal Institution of Chartered Surveyors to appoint an expert to determine the dispute, whose decision thereon, and the liability for the costs of the referral, shall be binding upon ourselves and yourselves."

The parties failed to agree on the sums payable to it, so LSI referred the matter to the Royal Institute of Chartered Surveyors (RICS). On the relevant referral form, when asked: "Please state whether you require the appointment of an arbitrator or independent expert", LSI answered: "Independent expert". Wilky contended, among other things, that a number of matters that LSI had referred for determination fell outside the scope of clause 22. Despite this, the RICS appointed a barrister (Mr Pye) who was both a fellow of the RICS and of the Chartered Institute of Arbitrators as an independent expert to determine the underlying dispute.

Wilky asserted that, although clause 22 referred to an expert determination being "binding", it did not say that it was final, so Wilky could challenge, in court, any determination that Mr Pye made. Wilky issued Part 8 proceedings for, among other matters, a declaration as to the "construction, meaning and effect" of the consultancy agreement. LSI then contended that its reference to Mr Pye had been a reference to arbitration. Mr Pye disagreed. LSI then applied for a stay of the Part 8 proceedings under section 9 of the AA 1996 and/or pursuant to the court's discretion under CPR 3.2(2)(f).

If clause 22 was an arbitration clause:

A stay of the Part 8 proceedings would be mandatory under section 9(4) of the AA 1996 (but if it was an expert determination clause then a stay of the Part 8 proceedings would be discretionary under CPR 3.1(2)(f)).
The court could apply the guidance provided by the House of Lords in Fiona Trust and interpret clause 22 widely to cover all disputes arising under the consultancy agreement.

The parties' contentions

The parties' main contentions were as follows:

LSI's arguments

LSI argued that clause 22 was an arbitration agreement. Accordingly:

LSI was entitled to a mandatory stay of the Part 8 proceedings under section 9(4) of the AA 1996.
Clause 22 ought to be interpreted widely, in accordance with the Fiona Trust guidance, so as to cover all disputes arising under the consultancy agreement.
It was for Mr Pye or, if his appointment was found to be invalid, whoever was appointed subsequently, to decide, under section 30 of the AA 1996, any issues concerning his own jurisdiction.

Alternatively, even if clause 22 was not an arbitration clause, it was still a valid contractual provision for disputes to be referred to an independent person. Accordingly, the court should exercise its discretion to stay the Part 8 claim to permit Mr Pye to determine the matters that had been referred to him.

Faced with the hurdle of the express wording in clause 22, LSI argued that the court should look at "the substance" of what the decision-maker was required to do under clause 22, in terms of:

The decision-maker's role generally. Here, the decision-maker's role was to settle disputes that had arisen, which was a distinguishing feature of an agreement for arbitration; whereas the appointment of an expert was designed to prevent differences arising (paragraphs 34-37, judgment).
The range of the matters entrusted to the decision-maker under clause 22. Clause 22 covered a wide variety of disputes relating to the consultancy agreement and it could not have been envisaged that such a broad range of disputes would be resolved in a binding way by an expert; a wider process of a judicial nature was required. For example, clause 22 envisaged that the decision-maker could resolve disputes about the interpretation of the consultancy agreement independently of disputes relating to the calculation of payments to LSI. It could not have been intended to give such wide powers to an expert.

Wilky's arguments

Wilky disputed that:

Clause 22 was an arbitration clause giving rise to a mandatory stay in favour of the Part 8 claim.
The court should exercise its discretion to stay the Part 8 claim in favour of any reference to Mr Pye. Clause 22 provided for certain limited issues to be referred for expert determination and LSI was seeking to refer matters that fell outside the scope of clause 22.

Wilky sought directions from the court in the Part 8 claim which would form the proper basis for any expert determination under clause 22.

Decision

Richard Snowden QC, sitting as a deputy judge of the High Court, held that the dispute resolution provision in clause 22 was an expert determination provision and not an arbitration clause. Accordingly, LSI was not entitled to a mandatory stay of Wilky's Part 8 claim under the AA 1996. He adjourned the question of whether to grant LSI a discretionary stay under CPR 3.1(2)(f). He made the following points in arriving at his decision:

Was clause 22 an arbitration agreement?

The judge stated that:

There was no definitive statement regarding what constitutes an arbitration, but there were a number of material considerations (paragraph 26, judgment).
The starting point was the agreement between the parties. The way in which the relevant dispute resolution mechanism has been described was not definitive, but might well provide an indication of what the parties intended.
Here, clause 22 contained three references to disputes being referred to an "expert" for his determination, and another clause described determination pursuant to clause 22, by way of cross-reference, as determination "by an independent expert". The consultancy agreement did not mention arbitration or the 1996 Act at all (paragraph 28, judgment).
On the ordinary and natural use of the words, there was a clear distinction between arbitration and expert determination. As a starting point, parties with a carefully drafted written agreement to refer disputes to an expert should not be taken to have intended a reference to arbitration.
Clause 22 did not state that the person appointed was to "act as an expert and not as an arbitrator". This wording (which had been considered in a number of authorities) would have put the matter beyond doubt. However, there was nothing to suggest that the absence of that wording was significant, and nothing to support a conclusion that the reference to an "independent expert" in clause 22 was intended to be a reference to an arbitrator.
There were cases in which the court had considered the extent to which an arbitrator, with expertise in a particular field, might apply his own expertise when acting as arbitrator. However these cases did not cast doubt on the distinction between the two processes (paragraph 32, judgment).
LSI's argument that a process that provided for the determination of a dispute that had already arisen was arbitration as opposed to expert determination, was rejected. The cases cited by LSI in support of this argument were not authority for a general proposition to that effect (paragraphs 39-45, judgment).
LSI's argument that the range of matters that might need to be resolved under clause 22 was so wide that the parties must have envisaged a judicial-type dispute resolution process to resolve any relevant disputes was rejected. The clause was not as wide as LSI had contended, and was limited to differences or disputes as to the interpretation of the consultancy agreement - it did not cover, for example, disputes about performance, breach, termination or claims for damages (paragraphs 46-52, judgment).
Although the matters to be resolved under clause 22 primarily involved computation or valuation, LSI's submissions that general questions about the meaning and interpretation of the agreement could also be resolved under that provision was accepted. It was less obvious that expert determination was an appropriate dispute resolution mechanism to resolve disputes about the meaning of an agreement in its commercial context. However, clause 22 permitted a lawyer to be appointed as expert. It was also important for parties to be held to their contractual choice of dispute resolution, even though the court might regard the choice as inappropriate. The wording of clause 22 was clear and was not displaced by any contra-indications from the consultancy agreement or the surrounding circumstances (paragraphs 53-64, judgment).

Should the court exercise its discretion to stay the Part 8 proceedings in any event?

The judge rejected Wilky's technical argument, based on CPR 11(4), that LSI was out of time for seeking a stay under CPR 3.1(2)(f). He adjourned the hearing of the question of whether he should stay the Part 8 proceedings as a matter of discretion. In doing so, he pointed the parties to the relevant authorities on whether the court should:

Intervene to correct an expert determination.
Determine questions relevant to an expert determination in advance of that determination.

He observed that the members of the Court of Appeal in Barclays Bank v Nylon Capital appeared to have accepted that the current law in this area had been correctly stated by Hoffmann LJ in his dissenting judgment in the Court of Appeal in Mercury Communications v The Director General of Telecommunications [1994] CLC 1,125 (CA):

"So in questions in which the parties have entrusted the power of decision to a valuer or other decision-maker, the courts will not interfere either before or after the decision. This is because the court's views about the right answer to the question are irrelevant. On the other hand the court will intervene if the decision-maker has gone outside the limits of his decision-making authority......

It does not follow, however, that because the court will intervene to correct a decision-maker who has gone outside his authority, it will declare in advance what the limits of that authority are. The reason for this reluctance is not one of substantive law but procedural convenience. It is because in advance of the decision, the true meaning of the principles upon which he has to decide is usually a hypothetical question. It is hypothetical because it will only become a live issue if one of the parties think that the decision-maker has got it wrong. It is always possible that he may get it right and therefore wasteful and premature to come to the court until he has made his decision. The practice of the courts is not to decide hypothetical questions: see Re Barnato [1949] Ch 258."

Although Mercury Communications had not been cited by either side in the present case, the judge stated that it appeared to be relevant (paragraphs 69-77, judgment).

Comment

Although the decision turned primarily on the express wording of clause 22, it is a good illustration of the factors that may be relevant in distinguishing between arbitration and expert determination provisions. The judgment also explores the practical consequences (in terms of determining issues of jurisdiction, approach to construction and availability of stays of court proceedings) that follow from classifying a dispute resolution provision as an arbitration or expert determination clause.

Case

Wilky Property Holdings Plc v London & Surrey Investments Ltd [2011] EWHC 2226 (Ch).

Reference to expert determination meant what it said, not arbitration (High Court) | Practical Law