Expert determination or arbitration? A dispute about how to resolve a dispute

RW Health Partnerships Pty Ltd v Lendlease Building Contractors Pty Ltd [2019] VSC 353

The meaning of a complex dispute resolution clause in a contract where some disputes were to be referred to arbitration and others to expert determination, has been considered by the Supreme Court of Victoria.

The scope of the dispute
In RW Health Partnerships Pty Ltd v Lendlease Building Contractors Pty Ltd [2019] VSC 353 the plaintiff (Project Co) gave notice under the dispute resolution clause of a design and construct contract, alleging the contractor's design and construction of a domestic water system at The Royal Women's Hospital was defective. The notice demanded that the contractor rectify the domestic water system.

The dispute resolution clause
The dispute resolution clause in the contract had a split regime. Disputes "in relation to Compensation" were to be referred to expert determination, and all other disputes were to be referred to arbitration. Compensation was defined as "Loss or damage suffered by a party as a result of a Default or other failure to perform by the party in accordance with this Contract".

Was this a dispute "in relation to Compensation"?
Project Co argued the dispute should be resolved by arbitration. It argued that "in relation to Compensation" should be interpreted narrowly to mean disputes about the amount of loss or damage, not the liability for that loss or damage. It also submitted that a broader construction would leave little room for the operation of the arbitration limb of the dispute resolution clause and that the informal and fast track summary procedure of expert determination was inappropriate for the resolution of disputes regarding defaults and breaches.

Justice Riordan disagreed. His Honour noted that dispute resolution clauses are to be construed using the same principles that apply to other commercial contracts, asking: "[w]hat would a reasonable business person have understood those terms to mean?".

He said "in relation to" has a wide meaning and on a plain reading of the words, a reasonable business person would understand a dispute "in relation to Compensation" to be a dispute as to whether a party was in breach of the contract, as well as the extent to which loss or damage was caused by that breach. For this reason, disputes "in relation to Compensation" should be read as including disputes with respect to liability (in this case to rectify a defect) and quantum. Justice Riordan considered an alternative interpretation would "appear to work a commercial nonsense" where questions of liability went to arbitration but the assessment of compensation was determined by expert determination.

Did the parties' correspondence constitute an agreement to arbitrate?
Before the dispute ended up in court, the parties had exchanged a series of letters about the identity of the arbitrator. Project Co submitted that this correspondence constituted an ad hoc agreement to arbitrate.

Justice Riordan found that no ad hoc agreement existed. The effect of the dispute resolution clause in this contract meant that the dispute was automatically referred to expert determination. He found that the correspondence between the parties did not demonstrate any intention to vary the contract and terminate the expert determination mechanism. Rather, the letters were simply evidence that the parties were preparing to put steps in place for arbitration under a misapprehension that arbitration was the appropriate mechanism provided for under the contract. Influencing his decision was the fact that the preparatory steps for arbitration were at an early stage, no arbitrator had been appointed and the terms for appointment had not been agreed.

The outcome of the case is that the dispute between the parties will have to be resolved by expert determination. Expert determination under the contract is only final and binding up to $250,000, so if the determination of the expert is more than this amount, either party has the right to refer the matter to court.

The key take away from this case is the importance of considering the nature of disputes likely to arise from a contract and agreeing to appropriate dispute resolutions forums based on that assessment. Use of nonspecific language in this case could have avoided an unwelcome dispute as to how the dispute resolution clause operates.

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Tags: Arbitration, Legal practice, Dispute handling administration