It is important for contracting parties to identify and agree on the most appropriate way for resolving differences and disputes that may arise between them. Possible dispute resolution processes include negotiation, conciliation, mediation, arbitration, litigation and expert determination.
This article focusses on the choice between expert determination and arbitration.
Arbitration is a long established dispute resolution procedure available to commercial parties. It is regulated in South Africa by the Arbitration Act 42 of 1956 (“Arbitration Act”) and the International Arbitration Act 15 of 2017 (“International Arbitration Act”).
Expert determination however is not regulated by statute. It is entirely founded in and regulated by contract.
Various factors should be considered by parties entering into contractual negotiations when determining whether a dispute should be referred to expert determination or to arbitration, including the nature of the dispute, the procedure to be followed, evidence to be adduced, the right to challenge the award or decision, enforcement, cost and timing. These factors are explained below in more detail.
The nature of the dispute
Most contractual disputes which cannot be resolved through negotiation will be litigated or referred to conciliation, mediation and/or arbitration.
Parties will generally only refer specific valuation or technical issues to an expert for determination (including, in relation to the former, rent reviews, share valuations or price adjustments and, in relation to the latter, engineering, operational or accounting issues).
Parties who submit to arbitration can decide on the rules that are to regulate the proceedings or agree to submit to the rules of an arbitral institution such as the International Chamber of Commerce (ICC), the United Nations Commission on Trade Law (UNCITRAL), the Association of Arbitrators of South Africa or the Arbitration Foundation of South Africa (AFSA).
The procedure for expert determination is exclusively contractually regulated. Parties must, for example, determine the expert’s qualification(s) and experience, the method of his appointment, the procedure for submitting evidence and representations (oral or in writing), the procedure for issuing the decision (in writing, with or without reasons), provisions as to payment of the expert’s fees and appropriate deadlines.
For arbitrations held in South Africa all evidence must be adduced in accordance with the Arbitration Act or the International Arbitration Act (as applicable), and the rules of evidence governing the arbitration.
In expert determination the parties are obliged to submit their own evidence in accordance with the procedure laid out in the contract. The expert must reach his decision based on his own knowledge, independently or supplemented if he thinks fit by material (which need not conform to the rules of evidence) placed before him by either party. Although an expert may receive oral submissions, he is very rarely expected to conduct an oral hearing involving oral testimony and/or cross examinations. Furthermore, neither party is authorised to order the other party to disclose relevant documentation or to issue a witness summons compelling a witness to give evidence, as is the case with arbitration. However, where the contract places an obligation on a party to disclose documents or to provide information for purposes of the expert’s determination and he fails to do so he will be in breach of contract, and the aggrieved party will in such circumstances be able to avail himself of the remedies for breach of contract.
Final and binding nature of the award or decision
An arbitration award will be final and binding on the parties and will not be subject to appeal unless the parties agree otherwise. Apart from appeals, a party to arbitration proceedings may apply to have an award set aside in the limited circumstances set out by legislation or the rules governing the arbitration.
Expert determination on the other hand is not subject to an appeal and may only be set aside in the limited circumstances set out in the contract or under common law (such as where the expert’s determination was manifestly unjust, or where the expert materially departed from his mandate).
Arbitral awards are capable of enforcement in a similar way to a Court judgment within South Africa and are also capable of enforcement internationally in certain circumstances. South Africa is a contracting state to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 and an arbitral award issued in South Africa will be thus be enforceable in the jurisdiction of other contracting states, and vice versa.
Unless otherwise agreed, the expert’s determination will be contractually binding, and can be enforced in the same manner as any other contractual term (e.g. by a claim for specific performance, damages and/or termination).
In arbitration, unless the parties agree otherwise, the arbitrator will have jurisdiction to allocate the parties’ costs.
An expert, however, has no power to award costs unless his instructions or the terms of the contract provide for it. The contract may provide that the parties share the cost of the expert’s appointment, or that the expert will have the authority to make a determination as to costs. There is however no means for a court to tax the costs.
An important difference between arbitration and expert determination is the cost; arbitration will generally be far more expensive than expert determination.
The length of an arbitration depends on the issues in dispute and the scope and nature of the evidence being adduced. It is not uncommon for arbitrations to last between 12 and 24 months.
Expert determination is likely to provide a far quicker alternative to arbitration, and could be concluded within a matter of days, weeks or months, depending on the issues in dispute and the parties’ willingness to cooperate with the expert in providing needed information and/or documentation.
Where befitting, based on the nature of the dispute and the factors outlined above, expert determination can be a practical, informal and inexpensive way of resolving disputes.
However, it is not always prudent to refer a dispute to expert determination, especially where the dispute involves a dispute of facts or a complex set of facts, or where its resolution will require the submission of extensive evidence and/or oral testimony. Expert determination is also not appropriate for disputes relating to a breach of contract or differences in interpretation.
It is therefore common for contracting parties to refer only a limited number of issues to expert determination, and to refer all other commercial disputes arising under or in connection with the contract to another dispute resolution process (such as negotiation, mediation and arbitration).