01 Apr 2021

When is an error a manifest error?

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In last month’s decision in Flowgroup plc v Co-operative Energy Ltd1, Adrian Beltrami QC sitting as a Judge of the High Court in the Commercial Court, dismissed a seller’s claim to set aside an expert's determination made in the context of a dispute regarding completion accounts on the basis that the expert had made "manifest errors".

The decision provides some clarification as to the meaning of ‘manifest error’ in particular, in the context of expert determination clauses, and demonstrates the high bar for establishing that such an error has arisen. It is therefore recommended reading for those considering including provisions for expert determination in their contracts, which are particularly prevalent in price adjustment mechanisms, such as completion accounts clauses and SPAs in corporate transactions. 

The facts

The dispute arose out of the sale of the share capital of Flowgroup’s subsidiary, Flow Energy Ltd, pursuant to an acquisition agreement (the "Agreement") which stated that the purchase price was subject to a working capital adjustment. As the parties were unable to agree on the amount of the working capital adjustment, the matter was referred to expert determination which was delivered by way of a report by a partner from Ernst & Young LLP in accordance with the relevant provisions of the Agreement, which specified that (emphasis added):

"[t]he Expert will determine any dispute arising in connection [with] the provisions of paragraph 32, his jurisdiction to determine the matters and issues referred to him or his terms of reference. The Expert's written decision on the matters referred to him will be final and binding in the absence of manifest error…"

Having received written submissions from the parties, the expert provided her report, which was largely favourable to the buyer. The seller challenged the expert’s findings on the ground that the report contained several manifest errors. 

The question for the Court’s determination therefore was whether or not the report contained any "manifest errors".

The decision on manifest error

The parties' dispute regarding the application of the ‘manifest error’ exception in the expert determination clause engaged consideration of both:

  • the meaning of the manifest error exception in general terms; and
  • the application of this exception where the expert’s determination itself involves a question of contractual interpretation.

The meaning of the manifest error exception in general terms

The judge agreed with counsel for the buyer that a manifest error must be more than just a wrong answer, it must be a “howler”.  Reference was made to the case of Veba Oil Supply & Trading Gmbh v Petrotrade Inc3 where (in obiter observations) manifest error was defined as “oversights and blunders so obvious and obviously capable of affecting the determination as to admit of no difference of opinion.”

The judge also relied upon the approach taken in Ivensys plc v Automotive Sealing Systems Ltdwhere (again obiter) it was said that, when considering the application of a manifest error clause, “it is not enough for the purchasers to show that their interpretation of the agreement is right; they have to show that the expert’s interpretation of the agreement was obviously wrong.” 

Further, the judge noted that Courts have in the past emphasised that the circumstances in which an expert’s determination can be challenged are tightly circumscribed5, the reason being that where parties have agreed to subject their dispute to an expert determination, that is what they are entitled to. A manifest error exception allows recourse to the Court but only in necessarily confined circumstances, by contrast to the lower threshold which the seller was proposing, namely, that the error only need be "obvious or easily demonstrable without extensive investigation" (i.e. if it could be shown when set against the correct answer). The judge considered that if he had accepted the seller's interpretation, it would lead to the Court becoming an alternative forum to resolve disputes where parties were aggrieved with expert's determinations, with no real filter6.

Approach to be taken when the expert’s determination may be characterised as a decision on a matter of contractual interpretation

The seller argued that since there is only one correct interpretation of a contract, where an expert misconstrues the contract and makes a determination founded upon such a mistake, there must by definition have been a manifest error. 

The Court disagreed holding that the correct approach will necessarily turn on the scope of the expert's engagement. If, pursuant to the contract, the expert is asked to make determinations on matters of contractual interpretation, then there is no reason why a challenge should not have to circumvent the manifest error test. 

Turning to the Agreement, the judge held that it was clear that the engagement of the expert was of a broad and expansive nature and that it required the expert, where necessary, to determine issues of contractual interpretation to resolve the dispute between the parties7.

Was there a manifest error on the facts?

As to the alleged manifest errors in the report, the judge concluded that, on the facts, none of these amounted to a ‘manifest error’ and dismissed the seller’s claim8.

Comment

This decision provides some useful guidance as to what constitutes a ‘manifest error’ in the context of expert determination clauses. The threshold in this context is high; a mere incorrect answer would not amount to a ‘manifest error’. An error needs to be, as was said “a howler”, in other words an obvious blunder.  

Accordingly, the circumstances in which an expert’s determination (when the parties have agreed in the contract that an expert’s determination is required to resolve a dispute) can be challenged are tightly circumscribed.

Parties considering the use of a reference to expert determination in their contracts should therefore bear in mind the limited scope for recourse which they will have in the event that they are dissatisfied with the expert's decision, and, if necessary, adapt the wording of relevant provision accordingly. For example, in the context of expert determination clauses included in completion accounts, this might include, setting out detailed and unambiguous terms prescribing the basis upon which price adjustment accounts are to be prepared, which admit only the interpretation that the parties intend (i.e. leaving no scope for the expert to engage in contractual interpretation as in the instant case).

 

1 [2021] EWHC 344 (Comm)

2 As described at paragraph 33 of the judgment: "[a] dispute under paragraph 3 is a dispute in respect of the draft Completion Statement. The basis on which the Completion Statement is to be drawn is set out in paragraph 2.2". Paragraph 2.2 set out:

"2.2 The Completion Statement will be drawn up in accordance with the bases that appear and in the order shown below:

(a) the specific accounting policies set out in part C (Specific Accounting Policies) of this schedule;

(b) to the extent not covered by paragraph 2.2(a), on a basis consistent with and using the same accounting principles, policies, practices, evaluation rules and procedures, categorisations, methods and bases adopted by [Target] in the preparation of the Accounts including in relation to the exercise of accounting discretion and judgement; and

(c) to the extent not covered by paragraphs 2.2(a) and/or 2.2(b), in accordance with UK GAAP."

3 [2001] EWCA Civ 1832

4 [2002] 1 All ER (Comm) 222

5 Walton Homes Ltd v Staffordshire County Council [2013] EWHC 2554 (Ch) para 7

6 At paragraph 21, the judge noted: "[a] "visibility" test, along the lines suggested by Seller, might well restrict the potential for challenges to mere certificates but, at least where the subject matter is an expert determination which may be expected to carry reasons, would provide little content to the word "manifest" and in practice no real filter to the scope of any challenge, with the danger that the Courts would simply become an alternative forum for the party dissatisfied with the expert's conclusions."

7 At paragraph 33, the judge noted: "[p]aragraph 4.1 of Part A of Schedule 9 provides that the Expert is a person appointed in accordance with that paragraph to resolve a dispute arising under paragraph 3, and paragraph 4.13 accords to the expert the mandate to determine "any dispute arising in connection" [with] the provisions of paragraph 3. A dispute under paragraph 3 is a dispute in respect of the draft Completion Statement. The basis on which the Completion Statement is to be drawn is set out in paragraph 2.2. In the event, at least part, and arguably a large part, of the difference between the parties was a dispute over the meaning of paragraph 2.2 and it is apparent from the written submissions that both parties did in fact seek the resolution by the Expert of central matters of interpretation in their favour. Nor is it a surprising conclusion that this is what the Agreement provides for. In this respect, at least, there are similarities to Invensys. As in that case, it is entirely understandable that the parties should wish for an expert accountant to resolve necessary issues of contractual interpretation in an accounting context."

8 Paragraphs 35 – 70 of the judgment,

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