Drafting expert determination clauses – what should lawyers think about?
In this article, Gavin Pearson, Managing Director and Head of our Forensic Accounting & Investigations team, sets out a number of areas that may assist lawyers in the drafting of expert determination clauses.
There will be contrasting views as to how effective Expert Determination is as a form of dispute resolution, with some favouring the relatively focused and rapid outcome it can provide to parties, and others disliking the nature of the process as well as the hard to challenge (and sometimes unexplained) outcome that results. However, the significant number of agreements and contracts which include clauses referring matters to be determined by expert determination, as well as an increasing number of matters where parties voluntarily agree to be bound by an expert determination process (for example, under an O’Neill and Philips offer), means that expert determination will remain a constant, if not dominant, form of dispute resolution for the foreseeable future.
As forensic accountants, we are regularly instructed in the determination process, both as expert determiner, as well as to assist parties in drafting submissions to the determiner, which give us different insights. The matters in dispute that we are instructed to determine or assist in primarily arise either from a need to value shareholdings in accordance with clauses in shareholder agreements or from aspects of sale and purchase (or asset purchase) agreements where we are addressing matters in completion accounts or in connection with earn-outs. During our involvement in determinations, we often have insights into the process, including identifying areas where there might have been more clarity or better wording in the original agreement (or instructions). The aim of this article is to set out a small amount of those areas to hopefully assist lawyers in the drafting process. Whilst they are biased towards accountancy determinations, a number will be relevant regardless of the area of expertise.
Selecting the Expert
Where an accountant is to be instructed as determiner, agreements often refer to an appointment being made by the President of the Institute of Chartered Accountants in England and Wales (ICAEW). However, the ICAEW no longer offers an expert appointment scheme, instead operating an expert nomination scheme where they ‘can nominate an independent expert to deal with a dispute when given authority to do so’. This means that the ICAEW will generally only provide a nomination when both parties are in agreement that the conditions for an expert to be instructed have been met, whereas previously they would nominate someone irrespective. Furthermore, the ICAEW will charge £10,000 plus VAT for identifying and naming an appropriate expert, for which all the parties will receive is the name of an expert – who may or may not be considered acceptable and/or appropriately qualified for the matter by the parties.
We increasingly see parties seeking to agree the appointment of an expert between them, often by way of suggesting potential experts to each other until one is found who is acceptable to each. Whilst there is definitely merit to this process, it may be sensible to define the parameters of that search within the agreement – for example, to state that the individual should be a member of the ICAEW (or another appropriate regulatory body), with X years’ experience in, for example, valuing company shareholdings. In some instances, it might be relevant to state that they should have specific industry expertise or in particular that they are experienced in acting as determiner. We have come across instances where individuals instructed as determiner have not had a clear understanding of the role, confusing it for the very different role of single joint expert.
Whilst the above will differ between areas of expertise, the same general principles will apply.
Realistic timescales and process
It is amazing how many expert determination clauses refer to the expert issuing their determination within 10 days of appointment. In every instance where I have been instructed as determiner and there has been a clause of this nature, the parties have readily agreed to a significantly longer timescale. 10 days would rarely be feasible for an expert accountant to obtain information and form a view. It certainly doesn’t allow for the exchange of submissions from each party, the expert to request and receive information and responses and then for them to consider the information and draft their determination. Indeed, the fastest that I have undertaken a determination is around one month from instruction, where both parties agreed to an accelerated timetable and simultaneous exchange of submissions. In my experience a one-month timetable is significantly faster than most.
Clearly there may be some areas of expertise where speed is both desirable and feasible, but it makes sense for the parties to properly consider upfront what might be a realistic timescale.
Similarly, it makes sense for the parties to consider whether they have any preference as to the process to be adopted and to agree it upfront. Whilst relatively unusual, where an expert determination process has been set out in the agreement, it makes the process of appointing an expert much smoother as there’s no need for the expert to go through the task of reaching agreement between the parties at the outset of their instructions. Saying this, there may be occasions where the parties want to retain an element of flexibility, in particular giving the expert the opportunity to amend the process if they think there is a good reason.
Speaking or non-speaking
In our experience, one of the most contested issues between the parties following appointment of an expert determiner can be whether a determination should be speaking or non-speaking (i.e. whether reasons should be provided or not) where it is not explicitly stated in the agreement. Experts and some parties generally prefer determinations to be silent because it means they are harder to challenge (and in many cases even work out how the expert has reached their conclusions), whereas parties may wish for them to be speaking for exactly the opposite reasons. Setting out in the agreement whether the determination should be speaking or non-speaking is therefore sensible. Indeed, I have increasingly seen determinations where parties wish to receive a brief summary as to how the expert has reached their opinion, but not a fully reasoned determination, which is another option to consider.
What’s within scope?
One of the most prominent issues arising in determination (assuming the parties have actually agreed the terms for appointment of an expert have been met at all which can be another regularly recurring issue) is the extent to which matters fall to be determined by the expert. I have been instructed in several matters recently where it was necessary for me to attempt to reach agreement between the parties as to whether certain items or issues fell within the scope. Failing that absence, it will be necessary for an expert to interpret the agreement, which might require them instructing (at additional cost) someone to provide legal advice as to their jurisdiction. Indeed, this may go beyond merely the drafting of the specific expert clauses. In one recent matter I was involved in, there were contradictions in definitions and an absence of definitions for certain key terms which meant that a significant number of matters ended up falling outside the scope of the determination.
Clearly, these kinds of issues (and those identified above) could be resolved by lawyers being highly diligent during the drafting process. However, in reality, the importance of certain items may not be readily identifiable from a legal perspective (particularly in relation to technical matters – for example, accounting concepts are highly relevant in completion account expert determinations) and we would suggest that it would often be sensible to engage someone with suitable expertise to undertake a review of the agreement prior to it being signed. In our experience, the costs of such an exercise are relatively low, but the resulting changes and clarifications to an agreement can have a highly material impact in the event of a future dispute and the subsequent instruction of an expert.
This article constitutes general advice and should not be acted upon without taking specific advice. Neither the authors nor Quantuma Advisory Limited accept responsibility for any actions based upon this general advice.
