Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 576

The NSW Supreme Court recently clarified the role of experts appointed under expert determination clauses in Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd (‘Lainson Holdings’).[1] The decision confirms that experts are not required to determine disputes free of substantive legal error.

The Facts

Lainson Holdings Pty Ltd (‘Lainson’) and Duffy Kennedy Pty Ltd (‘Duffy’) entered into a building contract (supported by a deed), under which a dispute arose over the payment of bank guarantees as securities.

Lainson issued a Notice to Show Cause under clause 39 of the contract, requiring Duffy to justify failure to pay the mentioned securities. This was followed by a Notice of Termination. Duffy took Lainson’s conduct in issuing the Notices as repudiation of the agreement and claimed damages for unpaid work on that basis.

Clause 9 of the Deed mandated an expert determination to occur in accordance with specified rules before commencing arbitration or litigation. Under rule 5.1, the expert was required to determine the dispute ‘according to law’.

An expert determination took place. The expert found that in issuing the Notices, Lainson was subject to an implied condition to act reasonably and in good faith. He found that Lainson had breached this condition and repudiated the contract. Therefore, Lainson was liable to pay Duffy $1, 837, 212 plus interest.

‘According to law’

Lainson opened by arguing that the ‘according to law’ requirement in rule 5.1 meant that there should not be any mistakes of law in the expert’s determination. Although the implied condition of good faith is an unsettled area of contract law,[2] Lainson argued that the expert had erroneously upheld the duty in this case.

Second, Lainson argued that the court may interfere to correct an error of law ‘on the face of the record’ in an expert determination.

Hammerschlag J rejected both arguments.

His Honour established that the parties will be bound where the expert did what the contract required. They will not be so bound if the expert exceeded the contract’s limits. Against this background, ‘according to law’ was to be determined objectively using the ‘reasonable person’ test.

If ‘according to law’ was construed according to Lainson’s argument, the determination would be open to appeal on any question of law determined, or legal principle relied upon, by the expert. This would create a commercial inconvenience, offending established authorities.[3]

Instead, the term ‘according to law’ should be construed to require an expert to determine the dispute in a manner that gives it contractual efficacy and that the law requires of a person in such a position. The expert is to do so honestly, without bias, and while unintoxicated.

Considering Lainson’s second argument, His Honour rejected the proposition that expert determination is a ‘record’ in the legal sense (as are records of courts and tribunal, and arbitration awards).

Expert determination is no more than a contractual mechanism. While it creates binding contractual obligations, it doesn’t involve the exercise of judicial power. As such, determination is not susceptible to the court’s intervention to correct a mistake of law if the expert acts within the ambit of the contract.

Implications

Lainson Holdings clarifies the nature and purpose of expert determination. Experts do not determine the legal rights and obligations of the parties. Accordingly, they are required to determine the dispute within the ambit of the contract, but not according to legally sound principles. It follows that determinations are not open to intervention by courts to correct mistakes of law.

Hammerschlag J’s reasoning aligns with existing jurisprudence on expert determination. It has been established that an expert is not required to observe the rules of natural justice,[4] nor hear evidence and determine a dispute judicially between the parties (in the absence of an agreement to that effect).[5] The decision firmly places expert determination in the pantheon of ADR, demarcating an expert’s role outside the courts’ exercise of judicial power.

Incorporation of the Australian Disputes Centre’s Rules for Expert Determination (effective 1 March 2019) into dispute resolution provisions is an effective mechanism to ensure certainty as to the expert determination procedure that should be applied when a dispute arises. The rules can be requested at https://disputescentre.com.au/adc-rules-for-expert-determination/.

[1] Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 576.

[2] See Masters Home Improvement Pty Ltd v North East Solutions Pty Ltd [2017] VSCA 88, [19].

[3] See Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350–2.

[4] Zeke Services Pty Ltd v Traffic Technologies Ltd [2005] 2 Qd R 563.

[5] Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314, 336.