Resolving Disputes by Expert Determination: What Happens When Parties Select Appraisers, Accountants, or Other Technical Experts to Decide Disputes.

• Author: Willis, Brian C.

Expert determination is a form of dispute resolution in which the parties use a subject-matter expert, rather than a judge, mediator, or arbitrator with legal training, to decide the dispute. (1)== It may be the least known form of alternative dispute resolution. In fact, it's been called the "secret alternative to arbitration." (2) While the term "expert" may call to mind the concept of an expert witness, expert determination actually has its roots in the English common law of "valuation" or "appraisement." (3) Perhaps because we do not generally use the word "expert" to describe the decisionmaker, the concept of a person without legal training acting as the ultimate decider of law and fact may be most familiar in the form of an agreement to resolve a dispute over value through an appraiser or panel of appraisers. (4)

Expert determination, however, has quietly grown far beyond its roots in appraisal and is now also used to resolve issues that require specific technical expertise and for more general dispute resolution. (5) Expert determination is used in some of the largest construction projects and in small disputes. (6) "[F]rom rent reviews to share valuations, from construction disputes to pension scheme transfers, and from computer disputes to oilfield exploration," parties may turn to expert determination whenever they are looking for dispute resolution that is "quick, cheap, and private." (7) Unlike almost every other form of dispute resolution, lawyers for parties drafting or invoking expert determination clauses cannot assume that the ultimate decisionmaker will have the same background knowledge of litigation, evidence, and civil procedure as a lawyer or judge. An accountant, engineer, or other nonlawyer professional may be unprepared and untrained in aspects of dispute resolution that lawyers find routine. They are also unlikely to share the same assumptions and common understanding of basic legal concepts, such as due process, that are a universal part of a legal education. In Florida, and in other states, the confusion and ambiguity over expert determination clauses have resulted in courts turning expert determination into a hybrid form of arbitration. While providing familiar ground for the parties and courts, treating expert determination as a form of arbitration also opens up pitfalls and may undermine the original intent of the parties.

Both the litigator and the transactional attorney need to be familiar with the benefits and risks of expert determinations as an alternative form of dispute resolution. This article looks at the laws of Florida, the hybrid arbitration scheme the state has developed for handling expert determination clauses, and the problems this has created. It also reviews the law of Delaware, which follows its own version of the hybrid arbitration approach. Delaware's law and experience is particularly relevant because Delaware's corporate law is frequently invoked in business contracts and because Delaware's experience further illustrates the problems with the hybrid arbitration treatment of expert determination. Finally, this article looks at the practical considerations of drafting and reviewing expert determination clauses and the role and responsibilities of the expert given the current state of the law.

What Is Expert Determination?

Expert determination is any dispute resolution mechanism whereby the parties rely on a technical expert, rather than a legal expert, to decide their dispute. (8) While the term "expert determination" may be unfamiliar, the law and practice of using technical experts and other professionals without legal training to resolve disputes is growing along with its alternative dispute resolution cousins--mediation and arbitration. Adoption and use of expert determination--like other forms of alternative dispute resolution--is driven by several overlapping goals and trends, including the demand for quick, reliable, private, and low-cost alternatives to traditional litigation.

The recent history of litigation over expert determination clauses demonstrates that the use of technical experts to resolve disputes can appear deceptively simple to the litigator, the transactional attorney, and the courts. (9) Expert determination has its own body of caselaw and procedures, and the treatment of expert determination can vary across jurisdictions. Many parties may not be familiar with the unique legal issues arising out of expert determination.

Perhaps because expert determination is less well known, courts and litigants have struggled to understand and apply agreements to use experts to resolve disputes. Often, expert determination is conflated with arbitration. As a result, courts and attorneys typically draw from the more familiar arbitration cases and statutes when handling expert determination and disputes arising out of the expert determination process. (10)

This confusion is holding back the more widespread adoption and use of expert determination. It is also adding unnecessary cost, time, and uncertainty for parties that find themselves in a dispute over the use or outcome of expert determination, which can defeat the original purpose of selecting an alternative dispute mechanism. These problems can only be solved by first recognizing that expert determination is distinct from arbitration.

* How Expert Determination Can Differ from Arbitration--Setting aside for the moment the technical question of whether expert determination may be governed by state or federal arbitration acts, expert determination can be distinct from arbitration in one or more ways:

* Arbitration usually follows some of the formalities of litigation, such as pleadings, open and closing statements, and an evidentiary hearing or taking of witness testimony, whereas an expert determination may have none of the formalities of litigation;

* An arbitrator generally has training in dispute resolution processes and is frequently a former judge or lawyer trained in the rules of procedure and evidence, whereas an expert may have no dispute resolution experience and no training in the rules of procedure or evidence;

* Arbitration is expressly governed by state and federal arbitration statutes and the procedures and bases for review by the court are well settled, whereas expert determination may be only partially covered by statute and may afford limited or no appeal rights;

* By statue, arbitration awards can be enforced by the courts, whereas the decision by an expert pursuant to an expert determination proceeding may have to be enforced by a suit for breach of contract; (11) and

* An arbitrator is statutorily immune from liability, whereas an expert may not be able to rely on the statutory immunity granted to arbitrators and may be sued for negligence. (12)

* Selecting Expert Determination--"Almost every expert determination arises out of a contract." (13) The words "as an expert and not as an arbitrator" may be used to indicate the role of the third-party decider but are not strictly necessary. (14) As a creature of contract, the usual requirements of contract law, such as offer and acceptance, consideration, and breach, govern. (15) As a contract, no writing is necessary except as may be required to comply with the statute of frauds. (16)

A contract may refer disputes arising out of the agreement to an arbitrator and carve out a separate set of disputes that go to an expert. In these cases, attention must be given to the description of the type of disputes delegated to each form of dispute resolution and, in the case of expert determination, whether disputes about the expert determination are subject to the arbitration clause. If the arbitration clause excludes disputes arising under the section of the agreement dealing with expert determination from arbitration, then the parties may be opening the door to the courtroom when the intent was to have disputes handled solely by alternative dispute resolution mechanisms. Alternatively, requiring disputes over expert determination to go to arbitration can create nested levels of alternative dispute resolution that may prevent a party from getting in front of a judge.

Expert Determination as Hybrid Arbitration

* Florida--"Florida courts have generally treated appraisal...