In Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 576, the Supreme Court of New South Wales considered the meaning of Rule 5.1 of the Resolution Institute Expert Determination Rules which requires an expert to make a determination “according to law”.

In June 2015 Lainson and Duffy Kennedy entered into a design and construct contract. Lainson and Duffy Kennedy agreed that any dispute or difference arising out of or in connection with the Contract would be submitted to an expert for determination under the Rules. Relevantly, the Rules require:

•   any such determination by the expert shall be final and binding between the parties; and
•   the expert shall determine the dispute as an expert in accordance with the Rules and according to law.

In October 2015, the parties fell into dispute in relation to a substantial breach by Duffy Kennedy. Pursuant to the agreement between the parties, the Dispute was submitted to an expert for determination.

The Expert determined that Lainson’s purported termination of the Contract was invalid, because in doing so it had breached an implied duty to exercise that power reasonably, in good faith and not for an extraneous purpose.

Lainson challenged the Determination in the New South Wales Supreme Court and argued that it was not bound by the Determination on the basis that (amongst other things):

•   the requirement that the Expert was to determine the dispute “according to law” required him not to make any mistakes of law which affect the result; and
•   the Expert was wrong, as a matter of law, in finding that the Implied Term applied.

In the context of the Contract, Hammerschlag J held that the words ‘according to law’ refer to the manner in which the law requires a person in the position of the Expert to determine the Dispute so as to give the Determination contractual efficacy. By way of example, the Court stated that the Expert should determine the Dispute “honestly, without bias or collusion, and while not intoxicated”. The Court held that the words “according to law” do not require that the Determination be made by the correct application of only legally correct principles, as Lainson argued, noting that this would create a “commercial inconvenience” and was contrary to the main commercial objects of the expert determination.

This decision clarifies that if parties agree that disputes will be submitted to an expert for final and binding determination “according to law”, this does not constitute agreement that the decision may be challenged for an error of law.

The full decision can be found here.