It is difficult for the drafter of alternative dispute resolution (ADR) clauses to foresee everything that might arise when the relationship sours.
Courts try to enforce ADR clauses in contracts in general, for two reasons: legally, it is what the parties agreed and, practically, it keeps disputes from clogging up the court system. They also (presumably) save the parties money.
What happens when a business relationship sours and the ADR clause in the contract does not cover everything? A classic example is an expert determination clause.
Expert determination enables someone with specific expertise to determine the outcome.
Like arbitration, expert determination is a type of ADR where an independent third party is appointed to decide the dispute.
However, unlike arbitration, there is no procedural code and the activities of an expert are subject to little control by the court. Some uncertainty will always surround expert determination.
The flipside of this is that expert determination can be short, sharp, and relatively cost-effective. This is an advantage not to be lightly discarded. It can be weakened if the expert decision is not binding, thus allowing further dispute.
Should you include a "CEO clause"?
The earlier the dispute is resolved, the cheaper it is for both parties in the long run. The alternative is legal fees and/or delay.
A "CEO clause" is a provision requiring nominated senior management of each party with authority to agree to meet to confer prior to referral to expert determination or other step.
Bringing in senior management will focus the minds of the parties on the bottom line, and allows senior decision makers who are not caught up in the underlying dispute to approach the situation taking commercial reality into account.
These provisions often require the meeting to occur within a relatively short period of time (measured in days) after the dispute has arisen. This enables the parties to address the situation while it is still fresh and, if nothing can be agreed, identify the issue(s) in dispute that must be referred to expert determination.
What happens if a party refuses to attend the CEO meeting?
A clause should be drafted so that the steps are all clear. An ADR clause in which successive steps cascade from previous steps runs the risk of one party failing to comply with a step and derailing the process.
If the dispute is not resolved within the required time frame, courts have held that the dispute can be referred to independent expert determination, regardless of whether there has been a CEO meeting prior to the referral.
If it were otherwise, either party could defeat the agreed ADR procedure by refusing to meet.
Who chooses the expert?
The parties should agree on the expert.
As this is another area ripe for dispute, ADR clauses generally contain a provision that if the parties cannot agree on an expert within the required time frame, the expert must be appointed by an authority such as the President of the Institute of Arbitrators and Mediators Australia or a similar body.
What are the rules of expert determination?
If the ADR clause does not provide for the procedure for the expert determination, the procedure is to be decided by the expert.
Even if the ADR clause sets out the terms of appointment, an expert is entitled to impose a reasonable term to protect him or herself in relation to possible court proceedings arising out of the determination (by an indemnity).
Are expert determinations binding?
Expert determinations are binding unless the contract clause states otherwise or it can be established that the determination is not in accordance with the requirements of the contract.
The High Court has held that expert determinations will be final and binding unless the expert has acted outside his or her contractual powers or the determination is otherwise tainted by illegality.
An ADR clause may, however, provide otherwise or for "appeal" steps from an expert determination, such as the ability to initiate court proceedings where a dispute exceeds a nominated sum of money.
Faith Laube and Toby Blyth are lawyers in the Sydney office of Colin Biggers & Paisley.