This article was first published in the Practical Law Construction Blog.
Stephen Furst QC’s judgment in ZVI Construction Co LLC v University of Notre Dame (USA) in England is a recent TCC case that highlights important issues arising from expert determination clauses.
We all know that many UK clients (and foreign-based clients with greater experience of civil law systems) try to find what they think will be cheaper and more efficient ways of dispute resolution than English court proceedings. The two conventional candidates are arbitration and expert determination. Although expert determination is of long-standing, there is little jurisprudence to guide parties as to what they should draft in an expert determination clause and how they should conduct the dispute when it arises. This relative paucity of guidance is driven by confidentiality and the fact that there is little scope for court oversight of the process, with no appeal from the expert’s decision.
The apparent advantages of expert determination are clear enough: it is confidential, (possibly) less adversarial, swift, inexpensive and final. If a client has a dispute, refers it to expert determination and obtains a favourable judgment in a few weeks or months at little cost, then that would be judged to have been a good piece of drafting. But the losing party will normally judge the last three of these characteristics a disaster if it has not been granted the time to prepare, is unable to obtain disclosure of documents that might have won the case, the expert was of poor quality or was perceived to be unfair, or has delivered a flawed but unappealable decision.
The agreements and the works
TJAC Waterloo LLC agreed to sell a property in London to the University of Notre Dame and, in 2010, the parties entered into a development agreement. Completion was conditional on building works being carried out and TJAC engaged ZVI Construction Co LLC to carry out the works under a JCT Design and Build Contract, Revision 2 2009.
In 2011, ZVI entered into a duty of care agreement with the University under which ZVI agreed a duty to the University to comply with the terms of the JCT contract and to carry out the works in a good and workmanlike manner. Crucially (as it turned out) ZVI was also made a party to the development agreement. The work was carried out and the sale was completed in late 2011.
In 2014, the University alleged against both TJAC and ZVI that the building works were defective, that both were liable under the development agreement and that it intended to use the development agreement’s expert determination provision to have the dispute determined.
The dispute resolution provisions were (at least on the face of the judgment) an uncoordinated mess. The duty of care agreement provided for the jurisdiction of the English court. The judgment does not record the dispute provisions of the JCT contract. The development agreement had a bifurcated provision in which:
- Any dispute between the parties “as to the meaning or construction of this agreement shall be referred to an independent solicitor or barrister” who shall act as arbitrator in accordance with the Arbitration Act 1996.
- Any dispute as to the parties’ “respective rights and obligations hereunder or as to any matter arising out of or in connection with the subject matter of this agreement (other than any with regard to the meaning and construction of this agreement) shall be determined by an independent duly experienced surveyor…”
What happened next?
To cut a long story short:
- ZVI responded to and denied the allegations on their merits.
- The University requested RICS to appoint an expert, who was duly appointed.
- The expert issued initial directions stating that he was not appointed to decide matters embraced by the arbitration clause; and the parties cross-served submissions on the merits of the building works allegations. No party raised any jurisdiction issues. The expert asked the parties whether they were content that he should determine matters falling within the arbitration clause: the University said yes; ZVI said no.
- The expert held hearings over three days and published a draft decision on liability. The parties commented and he issued a final decision that held ZVI/TJAC liable for many of the alleged defects. Both parties then cross-served their respective quantum submissions.
- At that point ZVI asked for a postponement due to client illness. The University was prepared to agree but only if the respondents undertook not to dispose of assets and to confirm that they were maintaining indemnity insurance. The respondents declined to so undertake and confirm.
- UND then applied to the court in the USA for a freezing order. In those proceedings, for the first time, ZVI asserted that the expert had no jurisdiction to issue an award. The basic reasons advanced were that on its face the dispute resolution clause was only designed to cover the University and TJAC because ZVI was only a nominal party to the development agreement and that any claim against ZVI should be under the duty of care agreement in the English court. ZVI then brought that argument to England and issued an application to the expert alleging that he had had no jurisdiction to make his determination and asking him to make a declaration to that effect.
- UND raised three key answers in England:
- the development agreement did cover ZVI;
- if that was wrong, it was too late to take the point; and
- in any event, that would be a matter of law to be determined under the arbitration clause not the expert clause. The expert purported to determine that he did have jurisdiction.
- ZVI issued a Part 8 application essentially to ask the court to determine the jurisdiction issue and seeking an injunction to prevent the University from taking steps to enforce any part of the expert’s determination.
Unsurprisingly (on the facts) ZVI lost. But Stephen Furst QC’s well-considered judgment contains a number of important legal issues and there are, as a consequence, a number of key messages and decisions in the judgment.
Firstly, the expert had no right to make a determination as to whether he had jurisdiction because that was a matter that fell under the arbitration clause, not the expert determination clause. In Barclays Bank plc v Nylon Capital LLP, the Court of Appeal had held that the question of jurisdiction of an expert determinator was always finally a matter for the court. In the development agreement, that issue was assigned by the contract to an arbitrator.
Secondly, there was an express clause in the development agreement providing that no modification, alteration or waiver of the development agreement’s provisions would be effective unless in writing and signed. The University had asserted that, on the facts, there had been such a modification, alteration or waiver. The judge rejected that contention and found that there had not.
Thirdly, ZVI had impliedly agreed that the expert would have jurisdiction under the expert determination clause to decide the points in dispute between the parties. This section appears under a heading entitled “Submission to Expert Jurisdiction” and the judge held (after referring to the Court of Appeal in Rhodia Chirex Ltd v Laker Vent Engineering Ltd) that there was no issue of principle that exempts expert determination clauses from a doctrine of submission to the jurisdiction. It was suggested that as expert determination is a matter of contract, it must follow that a so-called “submission to the jurisdiction” must also be a matter of contract (or possibly some kind of estoppel). The judge made clear in the words of his own decision that he was applying contractual principles:
“…this is a course of conduct from which it may be inferred that ZVI impliedly agreed that the expert would have jurisdiction under [the expert determination clause] to decide the points in dispute between the parties.”
In effect, therefore, the judge found the existence of the expert determination clause the equivalent to an ad hoc arbitration agreement. Such an ad hoc (new) agreement obviates any complications arising from the clause expressly limiting variation of the development agreement.
Fourthly, the judge also found that if there had not been an agreement to submit, there was an estoppel by convention preventing ZVI from asserting that the matters in dispute fell outside the scope of the original expert determination clause.
Fifthly, the judge found that the same facts that gave rise to the estoppel by convention gave rise to a waiver by ZVI of its right to object. This appears to be based on a subsidiary part of Akenhead J’s judgment in Aedifice Partnership Ltd v Shah dealing with adjudication. It is suggested that waiver is not really an appropriate concept: a lack of jurisdiction by the expert determinator does not provide a party with a right to object and the absence of objection does not somehow widen the expert determination clause. He either has jurisdiction from the original (or ad hoc) contract (and a party is estopped from denying otherwise by a convention) or he has no jurisdiction.
Finally, the University had tried to argue that the decision of the US court purporting to confirm the expert’s jurisdiction created an issue estoppel but that failed on the facts.
Thoughts for the construction industry
Plainly expert determination has a place and can be very usefully employed in certain areas where technical and expert matters require a swift decision, or where the parties want to take their chances on a process that will necessarily be less thorough than litigation or most arbitrations.
But the drafting of such clauses requires care and recommending such a clause to a client may benefit from being undertaken in consultation with dispute resolution lawyers. In particular, the distinction between legal issues and expert issues as well as the hiving-off of jurisdiction issues requires particular care.
Whether it is technically called an implied agreement, or an estoppel or a waiver, or generically referred to as submission to the jurisdiction, a party does not have the luxury of participating and then challenging jurisdiction later without an express reservation of its position at the outset. It may well be wise to re-iterate that reservation at important stages of the process. This all requires a clear analysis of the issues and the scope of the expert determination clause when the dispute arises.
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