Rent Determination: Arbitration or Expert Determination

Author: Phillip Curnow

Background

There are “grey” areas around whether an action is an expert determination or maybe termed an arbitration under the Arbitration Act 1996 and Amendments (the Act). Appointees to an expert determination need to be aware of their responsibilities and their actions in undertaking the appointment. My following comments as both an arbitrator and registered valuer may also be of assistance to parties wishing to choose either expert determination or arbitration to resolve their rental dispute.

It is only when dispute matters go wrong and are subject to legal challenge do the differences between arbitration and expert determination come into focus. Simpler and smaller monetary sum rental disputes may be more cost-effective following a path of expert determination. Arbitration is generally the preferred dispute resolution process with large sums of money, longer lease terms, potentially several expert witnesses, confidentiality requirements of the outcome and a need seen for the comfort of the Act machinery of process and the court backing of arbitration.

A well written bespoke expert determination agreement can cover most necessary matters but is unlikely to be as robust under challenge as an agreement written in the shadow of the Act and legal precedence.

The Agreement

It is accepted that whether the process was an expert determination or an arbitration turns on the wording of the relevant provisions of the dispute resolution clause in the lease contract. The two cases following give context in this regard.

In Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 142, the Supreme Court noted (at [63]) “ If the language at issue, construed in the context of the contract is a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant“.

In Methanex Motunui Ltd v Spellman [2004] NZLR 95 (HC) at [46] per Fisher J, on considering whether the process was an expert determination or an arbitration, the Court held that where the parties had agreed to refer their disputes to arbitration, provided their agreement came within the definition of “arbitration agreement” in section 2 and the dispute was arbitrable under section 10, and it was agreed that there would be a hearing of evidence and submissions in accordance with the requirements of natural justice, then the process would be likely to be an arbitration and the decision of the arbitral tribunal enforceable under the 1996 Act.

In regard to the above where an expert is appointed because of his or her expertise, and is expected to use that expertise, and where the parties agree that the process is not an arbitration, then the process is likely to be an expert determination.

Alternatively where there is a dispute, and the dispute has been remitted to an independent third person or

persons for resolution by a process that involves a judicial function, and where the parties have the opportunity to give evidence and make submissions and have agreed to be bound by their decision, the process is more likely to be an arbitration.

Lease Options

Turning to the typical rent determination lease clause options , without modifications, in either the Auckland District Law Society (ADLS) lease or the renamed The Law Association of New Zealand (TLANZ) lease, the options to the parties are in the Second Schedule Rent Determination cl 2.2. These options are;

2.2(a) By one party giving written notice to the other requiring the new rent to be determined by arbitration; or

2.2(b) if the parties so agree by registered valuers acting as experts and not as arbitrators. This is referred to as the expert determination and has several steps set out in the lease agreement.

The Appointment

In my experience of expert determination, the expert can be appointed in a variety of ways. The most common being by agreement between the two registered valuers. Failing agreement here the separate parties to the rental or valuation dispute may agree on an expert, either with or without assistance from their respective legal advisors.

A further pathway may be based in the lease contract by the president of the New Zealand Institute of Valuers. Some contracts stipulate the president of the Arbitrators and Mediators Institute of New Zealand.

The greater the remoteness from the parties or the two valuers the appointment process is, the greater potential for difficulty in obtaining the appropriate expert. Nonetheless, the parties are contractually bound to proceed to some form of dispute resolution (under 2.2 (a) or (b)). The options to accept or otherwise the terms and conditions of a nominated expert is still in the hands of the parties, as is the appointment of an arbitrator (sole).

Clash of Choices

Three particular points, of several, arise that can clash between the use of expert determination or arbitration. They specifically impact on the valuers appointed as third expert as opposed to an appointment of arbitrator (sole).

The first is that each party and their expert valuer under 2.2(b) has the right to make written or oral representations to the third expert. The third expert must have regard to the representations but is not bound by them. To avoid any suggestion of a judicial process, it is suggested that separate meetings or collection of information from the parties or the valuers would achieve that aim.

With arbitration the parties and their valuer expert can be questioned on their representations by the arbitrator and if the parties are not legally represented, by the other parties expert valuer. This cross-examination process has the effect of narrowing down the most useful rental evidence and pertinent facts regarding the property and location. In my experience this process of expert examination is the most pivotal and useful in arriving at the current market rental. Separate discussions with the parties or the valuer experts is rarely as useful.

My second point is that a valuer third expert will require some indemnity from liability for negligence. Both parties have to agree to this, which may or may not be forthcoming. If it doesn’t occur the expert determination may not proceed. Under arbitration, the Act has section 13 Liability of Arbitrators. This is not an opt in or opt out situation and most expert determination appointments will require the equivalent indemnity.

The third point is that dealing with costs of parties or their experts, in a third expert determination, is not as clear as under arbitration law and precedent. A third expert may determine unequal costs are payable between parties in a rental determination. Should the parties agree before hand on costs, this may remove the opportunity for unequal costs allocation. That doesn’t however address the real potential that unequal share of costs is appropriate, based on the third expert determination of the current market rental. That is, that success in the rental decision may be inequitable in the share of the dispute costs between the parties. In most arbitrations the share of costs is not agreed beforehand and becomes a matter for the arbitrator to address in their decision.

Conclusion on Appointment

The reliance on the parties representations by the third expert will vary widely. A third expert familiar with the local market may place limited weight on the representations. Should the third expert be unfamiliar with the local market they may make all their own local inquiries or a hybrid approach of own enquires and reliance on parties representations. The time factor for the third expert to make relevant enquires as to rental information and other such matters as necessary, will be a cost for the parties to carry. In a practical sense this cost may not be dissimilar to adopting normal arbitration procedure.

Under the expert determination the decision is contractually agreed to be binding on the parties. Under arbitration, governed by the Act, the options to challenge the outcome have a greater level of detail and legal precedent.

My conclusion is that expert determination has a better chance of a successful outcome if the third expert has good familiarity with the local market. Where this is not the case, I consider that the machinery of the arbitration process has the greater potential for a successful and cost effective conclusion to the rental determination.

My experience is that registered valuers prefer an appointment as arbitrator (sole) versus the appointment to carry out an expert determination. The usability of the Act for the process driven timetabling and party involvement along with the ability to test the evidence advanced by the parties and their experts, the indemnity ( for negligence in respect of anything done or omitted to be done in the capacity of arbitrator) provided by section 13 of the Act combined, are just some of the factors that makes appointment as an arbitrator (sole) more attractive to that of the third expert.