Expert determination is uncommon but can be a good way for parties to settle certain types of dispute. It is relatively cheap and quick, it allows for the appointment of a specialist who can adopt an investigative approach and it facilitates confidentiality. It can be provided for by contract or agreed ad hoc and is often used for specialist valuation, measurement or narrow technical disputes.
However, expert determination also has drawbacks. In particular, the law surrounding an expert's role is poorly developed by comparison to other dispute resolution methods. It can also be very difficult to challenge or appeal an expert's decision because unless expressly provided not to be, the expert's decision will be final and binding notwithstanding errors in facts or law. Unless the contract provides otherwise, an expert's decision may only be challenged if the expert:
- acts fraudulently or colludes with a party;
- does not act impartially;
- materially departs from his instructions; or
- fails to state the reasons for his decision (in which case the appropriate remedy may be to require the expert to substantiate the decision).
In asset sales it is common for the valuing party to provide a certificate that accompanies an audit opinion. Such certificates must be certain in their conclusions or they may be challenged.
The recent Court of Appeal decision in Begum v Hossain provides useful guidance on the importance of experts acting in accordance with their instructions.
Begum v Hossain
Ms Begum and Ms Hossain set up an Indian restaurant in Maidstone, Kent. For this purpose they established a company, Sunam Tandoori Limited. They later fell out and court proceedings began. The parties entered into a settlement, contained in a Tomlin Order (an order submitted to court to cease proceedings). In this, Ms Hossain agreed to purchase Ms Begum's shares in the company and it was agreed that the shares would be valued by an expert, Neil Oxford, who was "entitled to seek the assistance of other professionals at his sole discretion". The settlement further provided that when valuing the shares, Mr Oxford would "have access to all of the books, records and documents in the possession or control of the Company. Crucially, it was agreed that "books and records of the Company includes for the avoidance of doubt any handwritten takings".
Whilst Mr Oxford was conducting the valuation, Ms Begum submitted handwritten books and records detailing the company's takings. It became clear that the amounts shown in these handwritten accounts exceeded the amounts recorded in the accounts used for official tax purposes. Mr Oxford disregarded the handwritten accounts, stating that it was not his role to decide whether the official accounts were accurate and truthful.
Unsurprisingly Ms Begum contested this, arguing that having regard to the written accounts was clearly in the expert's remit and Mr Oxford had therefore deviated from his instructions when he opted to disregard them.
The law requires that when challenging an expert's decision on the grounds of material departure from instructions, the following process must be applied:
- Assess the expert's remit as agreed between the parties. This will be a matter of contract.
- Assess whether the expert departed from the parties' remit.
- If the expert did depart from the parties' remit, assess whether such departure was material.
If it can be shown that an expert materially deviated from his remit, a court may overrule his findings.
The Court of Appeal unanimously overturned the decision at first instance and held that the expert had materially deviated from his remit by disregarding the handwritten accounts. As a matter of simple contractual interpretation, Mr Oxford was required to value the shares, having regard to all the records of the company, not some of them. The decision to ignore the handwritten records was therefore a material deviation from the remit. In reaching this decision, the court also drew attention to the provision allowing Mr Oxford to seek the assistance of professionals at his discretion. This would have enabled him to appoint an accountant to determine the accuracy of the different sets of accounts if he felt this was necessary.
Although this decision creates no new law it is a useful reminder of the need for experts to act in accordance with the specific scope of their instructions. If they fail to do so a party may be able to challenge the decisions they make. It also highlights the importance of agreeing a precise remit for the experts and ensuring that the relevant contract clauses (if pre-agreed) or the referral to the expert (if agreed ad hoc) are clearly drafted.