Prohibitive costs that can spiral during court processes mean that Alternative Dispute Resolution (ADR) methods are regularly used as a means to settle disputes. ADR is the term for various processes other than formal litigation, and includes mediation, arbitration, and expert determination.
In this short article, we consider expert determination from the point of view of a forensic accountant, with particular reference to UK commercial and transactional disputes. We are regularly involved in expert determinations relating to completion accounts, valuation disputes, earn-outs and shareholder matters, acting as expert determiners or in an advisory capacity.
What is Expert Determination?
Expert determination is a contractual mechanism whereby parties agree to ask a subject matter expert (the “expert determiner”, sometimes referred to in UK contracts as an “independent expert”) to give a legally binding decision on a technical matter. The technical matter could encompass a broad range of issues, from non accounting matters such as determining whether a piece of machinery meets technical performance thresholds, to accounting matters such as: the valuation of shares in a company; or resolving accounting issues in completion accounts or earn-out calculations in order to agree the purchase price according to a pre-set contractual mechanism.
An expert determination is usually a written process and does not typically require a hearing or face-to-face meeting, unless specified by the parties. The parties can make written representations that the expert determiner considers alongside their own research and relevant knowledge and expertise. The expert determiner then issues a written determination to the parties. This can include reasons for the decision and may include a determination of which party or parties should incur the costs of the process.
Unlike consensual ADR processes such as mediation, the decision is final and legally binding on the parties, save in limited circumstances, including where the determination contains fraud or manifest error, or where the expert determiner departs from their contractual instructions. In an accounting context, manifest error may include obvious miscalculation, the misapplication of agreed accounting policies, or a failure to follow the definitions or mechanics set out in the SPA or other governing agreement. Manifest error is considered in more detail here.
Key advantages
Expert determinations are usually faster, cheaper and less adversarial than litigation or arbitration. The process is also confidential, allowing disputes to be resolved without damaging reputations or inviting unwelcome public scrutiny, a factor that is often particularly important in UK transactional and shareholder disputes.
As expert determination is a contractual mechanism, the parties must agree at the contract drafting stage that they will use expert determination if a dispute arises. The contract should clearly set out:
- the scope of disputes to be determined,
- the process to be followed (or that they will allow the expert to set it), and
- how the expert is to be selected and appointed.
This helps to avoid a scenario in which one or both parties are able to obstruct the process by withholding agreement. It is generally not advisable to name a specific individual in advance, in case that expert is unable or unwilling to act at the relevant time.
Parties often agree to resolve disputes via expert determination where they consider that, if a dispute arises, it would be more efficient to proceed directly to a technical expert rather than a judge or arbitrator who may, in any event, require expert evidence on complex accounting or valuation issues. This is particularly common in UK SPAs where disputes relate to completion accounts, working capital adjustments or valuation mechanics.
Key limitations
A potential downside is the risk of appointing an inappropriate expert. It is critical to ensure that the expert has sufficient and relevant forensic accounting experience, including experience of the determination process and working on disputed matters with incomplete records and adversarial submissions.
The expert determiner acts as an expert, not as an arbitrator, meaning they are entitled to reach their own independent view, rather than choosing between the parties’ competing positions. This distinction is important in the UK context, as expert determination is not governed by the Arbitration Act 1996, and the expert is therefore not subject to the statutory procedural safeguards or appeal mechanisms that apply in arbitration.
Expert determination also has no standalone legislative framework. As a result, an expert determiner cannot compel witnesses to participate, require the production of documents, or administer oaths, and issues such as perjury do not arise. From a forensic accounting and valuation perspective, this places greater emphasis on analysing the quality and completeness of the available financial information, particularly where one party may be uncooperative or where management information is disputed. This contrasts with litigation and arbitration, which are governed by statutory and procedural rules.
How we can help
We have extensive experience in expert determinations, including acting as expert determiners across a breadth of industries and sectors, particularly in accounting, valuation and post-transaction disputes. Recent or recurring issues include:
- Company valuations for shareholder buy-outs under the articles of association
- Whether accounting policies and standards have been applied correctly and/or according to the prescribed order of precedence
- The recognition of revenue in completion or earn-out accounts
- Calculation of royalties under a prescribed order
Providing party-appointed assistance in an advisory capacity, including:
- Advising on appropriate ADR processes from a forensic accounting perspective
- Recommending appropriate expert determiners where independence and sector expertise are critical
- Reviewing financial information and preparing written submissions on behalf of a party
- Reviewing written submissions prepared by counterparties
- Reviewing expert determinations for manifest error or departure from contractual instructions
Author: Gary King
