The demand for renewable energy projects remains strong, driven by the push for large-scale, long-term projects as part of the energy transition. However, the same attributes that offer substantial rewards – large scale, long-term projects utilising emerging technologies – also introduce considerable risks. These risks have led to a rise in high-value disputes in the renewable energy sector.
Given these risks, it is crucial to ensure that dispute resolution procedures are carefully considered at the outset of the contract. Expert determination is a step that is sometimes selected by parties, typically as a non-binding step in the contractual dispute resolution process for the construction of renewable energy projects. This is unsurprising given the perceived advantages of such a process, including comparatively swift and cost-effective decision-making processes which leverage the expertise of individuals with critical technical and market knowledge.
The process does, however, have various disadvantages and limitations. It will not be appropriate for all parties in all contracts and should be carefully considered before being adopted.
In particular, as a ‘creature of contract’, there are several pitfalls that can arise if the expert determination clause is not properly drafted. This article explores key considerations to ensure that any expert determination process is appropriately tailored for your renewable energy project.
What are the benefits of expert determination?
Expert determination can be a useful dispute resolution tool in the renewable energy sector due to the highly technical nature of a large portion of the work being performed.
The process involves appointing an expert in the subject matter of the dispute, to issue an opinion or make a determination (whether binding or non-binding) with a view to resolving a dispute or difference. Given the often high-value nature of disputes in renewable energy contracts, we more commonly see expert determination clauses being non-binding.
Proponents of this dispute resolution process point to its potential benefits, including a relatively efficient method (both in terms of cost and time) to resolve disputes, with the benefit of insight from an industry expert. This can be valuable in renewables contracts where (in addition to the usual causes of construction disputes such as delays):
- performance guarantees require technical input to determine the cause of underperformance, sometimes years after construction is complete; and
- disputes regarding new technologies may benefit from a determination from an expert with a detailed understanding of how the technology operates.
Key considerations before utilising expert determination
Who is your expert and what is their expertise?
A threshold question when utilising an expert determination process is which expert will be appointed to determine the dispute. Contract drafting can import flexibility in the appointment of the expert, assisting the parties to ensure that an expert appropriate to the subject matter is appointed by giving the parties an opportunity to agree on the appropriate expert. However, determining an appropriate expert is often a difficult question, about which the parties in dispute may disagree.
It is therefore important to have an alternative mechanism for the appointment of the expert when the parties cannot agree. For example, this may include requiring an independent body to make the nomination. Before agreeing to such a mechanism, it is important to ensure that the independent body is willing to nominate an expert in the circumstances contemplated by the dispute resolution clause because if that is not the case, the expert determination procedure may be unenforceable.
Identifying the scope of the question to be determined
A common pitfall in expert determination arises from a lack of clarity regarding the scope of the dispute being referred to the expert. In some contracts, expert determination is intended to apply only to certain types of disputes which makes it all the more important to ensure that the appropriate dispute resolution forum is pursued.
Even when all disputes are to be referred to expert determination, clearly defining the scope of the dispute is necessary to ensure the right expert is appointed. For example, a dispute over the payment of performance liquidated damages could feasibly give rise to questions appropriately answered by a legal expert (for interpreting the terms of the performance guarantee) or engineering expert (for determining whether underperformance occurred and why).
If an expert makes a determination outside the scope of the contractual expert determination provision there is a risk that the determination, which may have been intended to be binding, could be set aside. To mitigate this risk, the contract should include clear drafting to assist the parties to identify the scope of a dispute that is intended to be referred to expert determination and the method for appointing the expert.
Additionally, safeguards can be built into the contract to address the risk of a decision being void due to the expert making determinations beyond its contractual ambit, such as acknowledging an ability for the expert to determine ancillary questions of fact or interpretation. However, there will always be a question as to how far this ability can extend.
Which procedural rules apply?
One of the potential benefits of expert determination is flexibility in the procedure to be followed to determine the outcome of the dispute, including how submissions will be received (whether written, oral or both), whether rules of evidence are required to be followed, and how costs will be allocated. This can be achieved either by setting out the procedural rules in the contract, or by referring to the rules adopted by an independent body (e.g. the Resolution Institute’s Expert Determination Rules). If referring to the rules of an independent body, the parties should ensure that they indicate which version of the rules will apply (e.g. the version as at the date of the contract, or any later version applying at the date of the dispute).
One of the potential benefits of expert determination is flexibility
It may be beneficial to confer flexibility on an expert as to the procedure they are required to follow, so that their expertise can be fully leveraged and to avoid some of the costs and additional time associated with strict procedural requirements. That being said, a lack of prescription in the procedure to be followed can undermine the expert determination process and the willingness of the parties to accept the result (particularly if the process is non-binding).
Will the expert’s decision be binding?
In this article, we have referred to a decision having the potential to be binding or non-binding, and note that it can also be binding subject to exceptions. The parties may agree which of these options is to apply to their disputes.
If the expert’s decision will be binding, it is all the more important for the parties to ensure that the relevant clause is prescriptive as to how the expert determination process will be carried out as there will be very limited circumstances where it can be set aside by a court (e.g. for fraud). Binding expert determination is less common in renewable energy contracts for several reasons, including:
- the preference of financiers in project financed projects to utilise a dispute resolution process with well defined parameters and procedural rules; and
- the risk of high value disputes, which parties are reluctant to finally resolve without the benefit of strict procedural rules.
If the decision is not intended to be binding, the parties should carefully consider the goal of the expert determination clause, given that it will require the parties to incur additional costs before any final resolution of the dispute. Typically, this is to give the parties a timely indication as to how the dispute may ultimately be decided so as to support commercial settlement discussions.
Another common pitfall in expert determination is in the drafting of any exceptions to an otherwise binding determination.
These exceptions specify the circumstances in which a party can challenge the expert’s otherwise binding decision. In renewable energy contracts, we often see a monetary threshold being applied to decisions of experts, to allow the appeal of high value disputes to a forum with more rigorous procedural requirements. However, careful drafting of these types of exceptions is important, to ensure it is clear whether the monetary value applies to the claimed or determined amount.
This is another example of an area where it is important to be clear in the drafting, given that ambiguity as to whether the decision can be appealed can lead to further disputes.
Case study: Aligned Services Group Pty Ltd v Citi-Con (Vic) Pty Ltd [2022] VSC 286
When a dispute arose between head contractor Citi-Con (Vic) Pty Ltd (Citi-Con) and subcontractor Aligned Services Group Pty Ltd (ASG) with respect to City-Con’s liquidated damages claim, the Supreme Court of Victoria was required to determine whether the expert determination procedure provided for in the contract was binding.
The clause provided that:
- if the parties agreed on an expert, the rules determined by the expert would apply; or
- if the parties could not agree on the expert within five business days, the Chair of the Resolution Institute would appoint an expert, and the Resolution Institute Determination Rules would apply.
Relevantly, the Resolution Institute Determination Rules provide that an expert’s determination will be binding unless agreed otherwise by the parties in writing.
In this case, the parties were unable to agree on the expert, so (b) above applied. However, the Supreme Court of Victoria found that the determination was nevertheless non-binding, as the plain meaning of the clause created a result that was not commercially sensible. Namely, it would allow a party to unilaterally ensure that the expert’s determination is binding by withholding consent to an expert under paragraph (a). Interpreting the decision as non-binding was also consistent with the short timeframes for determination, and with wording which indicated that compliance with the dispute resolution procedure in that clause was a condition precedent to issuing legal proceedings. This case is an example of a dispute arising with respect to the conduct of dispute resolution, further delaying a final resolution of the dispute. It also demonstrates the importance of ensuring that the drafting, including any procedural rules imported in the drafting, aligns with the parties’ intent.
So, what should we be thinking about when drafting a dispute resolution mechanism incorporating expert determination?
In short, expert determination can be an effective method of moving towards a final resolution, but it has substantive and procedural limitations that are potentially significant and can carry a higher risk that the parties will end up in a ‘dispute about a dispute’, potentially obstructing the commercial resolution of their differences.
As such, there are a number of issues that the parties should keep in mind when drafting an expert determination clause for a renewable energy contract, including ensuring that there are clear procedures in the contract which support the parties’ goals for the resolution of differences.
