Challenging expert determinations
Expert determination is a popular form of dispute resolution. It is well used in construction and real estate projects, especially internationally. Its advantage lies in offering a quick and inexpensive decision from someone with technical expertise. However, this can be outweighed by the advantages of other forms of dispute resolution such as adjudication or arbitration. A recent Court of Appeal decision is of interest as one of the few reported cases upholding a challenge to an expert determination. It serves as a reminder of the limited grounds on which an expert determination can be challenged and set aside.
Begum v Hossain
Two parties set up a business operating an Indian Restaurant near Maidstone, Kent. They formed a limited company in 2007. A couple of years later they fell out and one party claimed unfair prejudice under the Companies Act 2006. They agreed, ("very sensibly" as the Court put it), to settle matters. The settlement agreement said that one party would purchase the other’s shares in the company. The "fair value" of those shares was to be determined by way of expert determination by an independent valuer. However, one party was unhappy with the value the expert determined and went to court to get that valuation set aside.
The Court looked at what the expert was asked to do in the settlement agreement. That specified that the valuation of the shares was to be calculated as at a particular date, to reflect the price a willing buyer and a willing seller would pay. In doing that the expert was to "have access to" all of the books, records and documents the company had, including hand written takings. Each party was allowed to make written submissions to the expert and a response to what each other said, before the expert gave a written valuation.
The expert went ahead and based his valuation entirely on the company’s profit and loss accounts. He did not consider the handwritten takings. He said it was not his role to decide on any discrepancy between the company’s trading accounts and the handwritten takings and that this was something that would need to be addressed by a jointly appointed forensic accountant. (This was despite the settlement agreement giving the expert sole discretion to seek assistance of other professionals.)
This led to one party saying that the expert had disregarded his mandate as set out in the settlement agreement. He was required to take account of documentation including the handwritten takings. By ignoring these he was undervaluing the shares. The other party argued expert determination is designed to be a quick and inexpensive means of dispute resolution and one which the parties had agreed to be final and binding. The expert had a broad discretion as to how he went about carrying out that valuation.
The Court recalled the key case law on expert determination. It highlighted the distinction between an expert making a mistake, which the parties are bound by and an expert departing from his or her instructions, which the parties are not bound by.
In this case the Court looked carefully at the expert’s mandate under the settlement agreement. Viewing the mandate objectively, the Court held that the reference to the expert having access to the handwritten takings meant that the valuation process had to take account of those takings, including what they stated. The expert’s conclusion could not be challenged on the basis of that conclusion or the calculations he made (after all the method of valuation was very much within the expert’s discretion). However, by not taking account of the handwritten takings and what they stated, he had misinterpreted his mandate and acted outside of it. The valuation must therefore be set aside.
This case is a helpful reminder to think carefully about what is the most appropriate form of dispute resolution for your contract. Remember that:
- Expert determination can be well suited to disputes of a technical nature which require a quick turnaround. A significant feature (which has its pros and cons) is that there are very limited grounds of challenge. This case is one of the few successful examples.
- Although sharing some characteristics with arbitration, the reality of expert determination is very different. There is no legislative equivalent to the Arbitration Act behind it. This means less scope for interference by a court during and after the process (which again has its pros and cons).
- Similar to adjudication, an expert can make mistakes and get the answer wrong but still make an enforceable decision. Departing from his or her mandate is another matter.
- You should take time to consider an expert’s mandate. It should be set very carefully and viewed objectively.
This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, click here.