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Expert determination – how to get a simple process wrong

Barrister James Bowling considers the case of Begum v Hossain [2015] EWCA Civ 717.

The Claimant and Defendant set up a restaurant business and formed a limited company in 2007. Upon falling out, they agreed, ("very sensibly" as the Court put it), to a Settlement Agreement whereby one party would purchase the other's shares for a "fair value." The "fair value" of those shares was agreed to be determined by a binding expert determination.

The terms of reference for the expert determination were set out in the Settlement Agreement. The Settlement Agreement required the expert determinator to value the shares on a "willing buyer, willing seller" basis. He was to be permitted access to all of the books, records and documents the company had, including the hand written takings records. Each party was allowed to make written submissions to the expert and to give a response to what each other said, before the expert was to give his valuation.

The expert produced his valuation of the shares, together with his reasons. Inevitably, one party was disappointed by it, and went to court to get that valuation set aside. The essential complaint was:

  • The expert had based his valuation solely on the company's profit and loss accounts. In valuing the shares, he thus did not consider the handwritten takings records.
  • Those handwritten records were left out of account because the expert said it was not his role to decide on any discrepancy between the accounts and the handwritten takings; that was something that would need to be addressed by a forensic accountant, whose evidence was not available to him.
  • The settlement agreement gave the expert determiner the power to seek the assistance of other professionals retained for the purpose, and so if he had questions about the veracity or impact of the handwritten takings records then he could have retained a forensic accountant to report to him on them, and considered for himself whether and to what extent that report impacted on his valuation as otherwise derived from the filed accounts.

The appellant contended that in approaching the valuation in this way the expert has failed to exhaust his jurisdiction and/or failed to take into account relevant material that the parties agreed should be considered by him. As such, his decision was simply not an answer to the questions that the parties had posed, and it was therefore not an expert determination which should bind them.

The Court of Appeal allowed the appeal. They held the expert had disregarded his mandate as per the Settlement Agreement. He was required to take account of documentation to which he had access, which plainly included the handwritten takings records (which the expert referred to in his decision when excluding them). Accordingly, although the respondent argued that the Expert could not ignore documents which the parties agreed he was obliged to have regard to.

Discussion

Binding expert determination is often inserted into contracts and it can be a quick and effective way of resolving disputes, but this case demonstrates it has its dangers, both for the parties and for the expert determiner appointed. In particular:

  • There are powerful attractions of "baking in" mandatory expert determination in exclusion of litigation or arbitration when the contract is drafted- e.g. speed, lack of expense, and certainty. But those things may not appear so advantageous when a complex dispute arises, and the parties have agreed a "one size fits all" expert determination clause. Is a mandatory "blanket" final and binding clause always going to be appropriate;
  • Expert determiners must consider their mandate carefully and make sure they answer the questions put. This contains two challenges; first, not to exceed their jurisdiction and secondly to take care to exhaust it (ie to answer the questions they receive).

Often the distinction between making a jurisdictional error invalidating the decision and simply a "permissible mistake" within jurisdiction can be a fine one. In this case the expert determiner made it quite clear that he had not carried out any review of the handwritten records of takings; he had effectively ignored them, despite the parties referring the dispute to him requiring him to take those records into account. As a result his decision was set aside. It is sometimes said that an expert determiner can give the wrong answer to the right question; but what he cannot do is fail to answer the question that has been put.

One notable feature of this case is that the Settlement Agreement provided that the expert was required not to give his reasons, but nevertheless he did so. The Court of Appeal obviously then used the reasons to unravel the expert's decision. In other words, although the Settlement Agreement specifically provided that the expert was to give an "unreasoned" decision, the Court worked on the basis that it was a reasoned decision. This seems right; the respondent to the appeal was trying to uphold the decision; he obviously therefore had to take the decision as he found it, unfortunate reasoning and all.

© The Academy of Experts 2015. First published in their journal “The Expert and Dispute Resolver”, summer 2015.

James Bowling, Barrister, 4 Pump Court
Forensic and Expert Witness Group, November 2015