Expert valuations: make your bed and lie in it

There are many situations in which parties who are at odds agree to leave the contentious point to the decision of an independent expert. It is often referred to as a quick and dirty process, compared to going to court. Most often the expert is deciding the value of shares or other assets as part of a process laid down in articles of association or a shareholders’ agreement long before the dispute arose. But can a party fall back on the court route if the expert’s decision is a nasty surprise?

In a recent case, the Court of Appeal confirmed that, where an expert had acted within its mandate, its valuation was binding and could not be set aside by the court even if the expert had made mistakes – and even if the mistakes involved questions of law.

The case

In Premier Telecom Communications Group Ltd and Ridge v Webb, a company and a leaving shareholder-director agreed that the leaver’s shares would be bought at fair value by the company and the remaining shareholder. The parties appointed a firm of accountants to decide the fair value on the basis of an agreed set of instructions. But the buyers thought the valuation was far too high and applied to the court to have it set aside.

The starting place for the court was the basic principle that an expert’s determination will be binding – so the court will not be able to intervene even if the expert has made mistakes – so long as the expert acted within its mandate. The buyers claimed that the expert had made mistakes that involved questions of law and must therefore have exceeded its mandate, so the valuation was not binding. But the court said that the extent to which the expert’s decisions on questions of law or mixed fact and law were intended to bind the parties depended entirely on the meaning of the mandate – the contract under which the expert was appointed. It was not clear from the express terms of the mandate but, since questions of law pervade many of the issues that are likely to arise on a share valuation, it was unlikely that the parties had intended that none of the expert’s determinations as to law would be binding. If the expert was not allowed to determine any questions of law, it would defeat the usual reason for choosing expert resolution: that it’s a relatively quick and inexpensive way to resolve the dispute.

When the court reviewed the alleged mistakes it found in most cases that they concerned just the kind of questions you would expect the parties to leave to an expert valuer (unless a contrary intention had been made quite clear in the expert’s terms of reference) even if they could be said to involve questions of law.

The court can intervene, however, where it is a question of what the expert’s mandate is, as opposed to the way the expert has acted within the mandate. One of the alleged mistakes related to the interpretation of an assumption in the appointment letter, and the court agreed that this was a matter for the court because it was central to defining the scope of the expert’s task – but in fact the court agreed with the expert’s interpretation of the assumption.

The key principles

The case illustrates a number of the key principles relevant to whether an expert determination may be set aside by the court:

• Where parties agree to appoint an expert, the expert’s determination is binding unless the expert acts outside its mandate. If the expert has acted outside its mandate, the determination can be set aside because it is not a determination of the kind that the parties have contractually agreed should be binding.
• If an expert acts within its mandate, but makes mistakes in doing so, the determination is still binding but the expert may be open to a negligence claim.
• A mandate may appoint the expert to make decisions on questions of law or mixed law and fact and, where it has, such decisions are binding even if the expert makes a mistake.
• Where an expert makes a mistake on a point of law that is not within its mandate to decide, the determination can be set aside.
• If the mandate includes a procedure that the expert is to follow, interpreting what the procedure requires is a matter of interpreting the mandate and is therefore for the court.

Comment

The case highlights the importance of taking care when drawing up the mandate. The broader the terms of appointment, the more discretion the expert is likely to have, whether in relation to matters of fact or law. If there are items that are not to be left to the expert to determine in a binding way, this should be clearly set out in the mandate. It may be appropriate for the mandate to provide that the expert must itself take specialist advice on specified aspects of the matter in reaching its decision.

In an earlier Court of Appeal case one of the judges suggested that, in cases of share valuations, the court should lean towards assuming that the parties intended recourse to the court on legal questions unless the terms of the mandate said otherwise. It is interesting that in this latest case the Court of Appeal has leant the other way, finding that it was more likely that the parties expected the expert’s decision to be the end of the road. Nevertheless, parties should still consider making it clear in the terms of appointment whether or not the expert’s determination is to be binding notwithstanding any disagreement as to whether the expert has interpreted the law correctly.

Normally parties submitting to an expert determination agree to be bound by the expert’s decision unless there is a manifest error in the decision. Although this does provide some basis for a dissatisfied party to dispute the expert’s decision on a matter that is within the mandate, it is rarely invoked successfully. The courts have construed “manifest error” very narrowly, as the sort of mistake that “may easily be seen by the eye or perceived by the mind”. In most cases the points in issue are far too complicated for that.

The case is also a reminder that parties should be careful whom they choose as expert – because even if the expert’s mandate is narrow, there will still be scope for the expert to make mistakes on matters that cannot be reopened by the court.