Arbitration and Expert Determination Compared

A contract frequently provides that some question shall be decided by a named professional: a valuer fixes the price, an engineer certifies the quality of work, an auditor settles the accounts. Such a clause may or may not be an arbitration agreement, and the answer decides everything that follows. If it is arbitration, the Arbitration and Conciliation Act, 1996 applies, the person must hear both sides, and his decision is an award enforceable under Section 36 and challengeable under Section 34. If it is expert determination, none of that is true: the decision binds as a matter of contract, and a party dissatisfied with it must sue.

The four questions that decide which process a clause has created

1. The Test

📖 K.K. Modi v. K.N. Modi, (1998) 3 SCC 573

Held: The attributes which must be present for an agreement to be an arbitration agreement include these: the agreement must be in writing; the parties must have agreed that the decision of the tribunal will be binding on them; the jurisdiction of the tribunal must derive from the consent of the parties or from an order of the court or a statute, the terms of which make it clear that the process is to be arbitration; the agreement must contemplate that substantive rights of the parties will be determined by the tribunal; the tribunal must be required to determine those rights in an impartial and judicial manner, with the parties given a fair opportunity to present their case; and the agreement of the parties to refer must be intended to be enforceable in law.

Significance: This is the standard Indian authority on the distinction. The presence or absence of a judicial function, and of a duty to hear both sides, is what separates the two.

Two further indicators are useful in practice. The first is timing: an arbitration presupposes a dispute that has arisen, while a valuation or certification clause operates during performance and is designed to prevent a dispute rather than to resolve one. The second is the source of the decision: an arbitrator decides on the material the parties place before him, whereas an expert may act on his own knowledge, inspection and skill, and is chosen precisely because he can.

2. The Comparison

Basis	Arbitration	Expert determination
Nature of the function	Judicial; the rights of the parties are determined	Ministerial or professional; the expert applies his own skill to a defined question
Duty to hear	Mandatory under Section 18; a breach is a ground under Section 34(2)(a)(iii)	None, unless the contract provides for it; the expert may act on his own inspection
Governing statute	The Arbitration and Conciliation Act, 1996	None; the clause takes effect as a term of the contract
Reasons	Required by Section 31(3) unless dispensed with	Not required unless the contract says so
The decision	An arbitral award	A determination, binding by contract
Enforcement	As a decree under Section 36	By suit for breach of contract, or by relying on it as a term
Challenge	Setting aside under Section 34 on the stated grounds	Only on contractual grounds: fraud, collusion, a departure from the instructions, or a decision outside the question referred
Interim relief	Sections 9 and 17 are available	Neither is available; an application to the court lies only on the general law
Court assistance	Section 27 for evidence	None

3. When a Determination May Be Attacked

Because an expert determination is a creature of contract, it is examined by contractual standards. A party dissatisfied with the figure cannot ask a court to substitute its own, any more than it could ask a court to rewrite any other term. The recognised grounds of attack are narrow.

Fraud or collusion, which vitiates the determination as it vitiates any contractual act.
A departure from the instructions. Where the expert has answered a different question from the one referred, or has applied a method the contract excluded, the determination is outside his mandate and does not bind.
Manifest error, where the contract itself provides that the determination shall be final and binding save for manifest error, which many valuation clauses do.
Want of capacity or disqualification, where the person appointed was not qualified in the manner the clause required.

⚠ What is not available

There is no application to set aside an expert determination, because Section 34 applies only to an arbitral award. There is no appeal on the merits. There is no complaint that the expert failed to hear a party, unless the contract required him to. And the determination cannot be enforced as a decree; a party who must recover on it sues on the contract. A clause intended to produce a quickly enforceable outcome should therefore be drafted as an arbitration clause, not as an expert determination clause.

4. Drafting: Which to Choose

Use expert determination for a narrow technical or valuation question that can be answered by a professional applying his own skill: the price of shares, the quantity of work done, the quality of goods against a specification, the computation of an escalation.
Use arbitration where the question involves the construction of the contract, competing versions of fact, allegations of breach, or a claim for damages, all of which require both sides to be heard and rights to be determined.
Say which you mean. State whether the person is to act as an expert and not as an arbitrator, or as an arbitrator, because the label is not decisive but it is evidence of intention. Where a clause says the engineer's decision shall be final on questions of quality, and says nothing about hearing the parties, it is likely to be read as expert determination.
Define the question and the method in an expert clause, and provide what is to happen if the expert declines or is unable to act.
Provide for the residue. A contract may use both: expert determination for defined technical questions, and arbitration for everything else, with the expert's determination treated as binding in the arbitration except on the stated grounds.

5. Related Provisions and Ideas

Two provisions of the Act bear on the boundary. Section 2(6) provides that where the parties are free to determine a certain issue, that freedom includes the right to authorise any person, including an institution, to determine it, which is the statutory recognition of delegation short of arbitration. And Section 26 permits the arbitral tribunal itself to appoint an expert to report on specific issues, in which case the expert assists the tribunal and does not decide; the tribunal must apply its own mind, and an award which simply adopts the expert's conclusion is open to challenge.

6. Related Topics and Provisions

Topic or provision	Connection
Arbitration: Meaning, Nature and Essentials	The attributes that define the process
Form and Validity of the Arbitration Agreement	Certainty of intention and the construction of clauses
Multi-Tier and Pathological Arbitration Clauses	Drafting defects and how the courts approach them
Sections 2(6), 18, 26, 31 and 34, A&C Act, 1996	Delegation, fairness, tribunal-appointed experts, the award and challenge
Types of ADR Mechanisms	Expert determination among the other processes