ED should save the parties involved in a dispute a considerable amount of time, stress and fees. It should result in quicker resolution than the standard litigation process. Our experience is there are some common hurdles that can hinder this.
Most of my relevant experience is in acting as expert determiner or expert adviser in connection to expert determination clauses in Share Purchase Agreements (“SPA”), so that informs the opinions in this article. In my experience, when parties’ relationships have completely broken down, there are three common hurdles that can cause the ED process to stall.
Hurdle 1 - the Expert selection process
Most SPAs contain a dispute resolution section, including a protocol for the selection of an expert determiner. Without a defined mechanism, if one party does not want to engage in the ED process they can potentially cause the process to stop by continually disagreeing with selection of the expert. Where the outcome is likely to be one party paying money to another, there sometime seems to be no hurry for them to assist the process.
For accountant experts, the default position in the event of non-agreement is often to apply to the ICAEW President’s Appointment Scheme. The fees for applying for an appointment are now £5,000 plus VAT. For a very large dispute, that might be considered insignificant but it is important to remember the expert’s fees are in addition.
If an identified expert could be agreed in advance of a dispute arising, this will save time and costs in the process. Whilst this would still require agreement of the parties, the selection process may well be less contentious whilst both parties are working towards completing the original contract. Most expert determiners would be happy to confirm independence in advance of any potential appointment, and back-up provisions could be included if the nominated expert later was unavailable for health or other reasons.
Hurdle 2 – the Instructions to the Expert
The hurdle of agreeing the expert can usually be overcome, if ultimately by using the default of agreement provisions such as applying to the ICAEW President’s Appointment Scheme. The next hurdle is agreeing the instructions of what is to be determined.
In our experience, this should be uncontroversial because the expert determination clauses are usually quite clear as to what the expert’s role and jurisdiction is. Taking something like a completion account dispute as an example, a typical simple process may be that the buyer issues draft completion accounts to the seller, the seller then raises any points of dispute. Some of those disputed points may be agreed and the rest go for determination.
The problem comes where the buyer then wants a “second go” at the completion accounts because of disputes raised. In this simplified example, the expert determination process is clear – it is only to determine the unresolved points in dispute, ie. those raised by the seller. Parties should resist the widening of the dispute beyond the process set out in the SPA.
The drafting of the expert determination clause should make this clear – the process of each party getting “one go” and then the expert determining those points of dispute raised in accordance with the process and nothing more.
As well as including an identified expert in the contractual document, why not include an agreed proforma letter of instruction to the expert that mirrors the terms of the expert determination clause, so no-one is in doubt?
Hurdle 3 - Speaking vs Non-Speaking
A non-speaking determination means the parties get nothing more than an answer, eg. “the value of the net assets at 30 June xx was £x.xmillion”. The expert will not give any details of how they arrived at that number.
A speaking determination means the expert gives a full and reasoned explanation of their decision as they would in an expert witness report to a Court.
Whilst it is natural to want to understand the reasons behind the determination, it has the scope to cause further dispute. Most determinations are binding save for manifest error. A speaking determination gives more scope for spurious (or genuine) challenges to the determination. Unwarranted challenges to the expert determination renders the whole process redundant by increasing the costs and time of resolution rather than shortening it.
It is perhaps for this reason that the ICAEW standard rules for expert determination provide for non-speaking determination – and is the approach preferred by most expert determiners.
So again, we would recommend setting out in the determination clause that the determination be non-speaking (and some of the contracts we see do specify this). Again, this is probably easier to agree before there is a dispute and the parties’ conflict becomes entrenched.
Summary
The expert determination process provides a very positive contractual resolution option where the parties want to save time and cost. As with many things in life, getting agreement is easier before there is any conflict. Whilst both parties are working towards the common aim of completing the original contract, why not agree:
- the identity of the proposed expert determiner (with a back-up plan)
- the proforma instructions to the expert, reflecting the determination clause provisions, and
- that the determination will be non-speaking?
The parties can always mutually agree later to vary these terms, but having them agreed up front can make it much harder for one party to frustrate the process that was intended to save time and costs.
This article constitutes general advice and should not be acted upon without taking specific advice. Neither the authors nor KR8 Advisory Limited accept responsibility for any actions based upon this general advice.
