Expert determination of completion accounts and "manifest error"

The courts narrowly interpret what is a "manifest error" in the context of expert determination of completion accounts.

This narrow interpretation by the courts has been emphasised again in the recent case of  Flowgroup plc v Co-operative Energy Limited. 

Facts 

In May 2018, Flowgroup plc (Seller) sold to Co-operative Energy Limited (Buyer) the entire issued share capital of Flow Energy Limited. The share purchase agreement (SPA) set out a completion accounts adjustment of the purchase price. The parties were unable to agree on the amount of the adjustment and referred the matter to an accounting expert in accordance with the terms of the SPA. The expert's report was favourable to the Buyer. The SPA also set out that the expert's decision on matters referred to her "will be final and binding in the absence of manifest error." The Seller challenged the expert's report in the High Court on the basis of manifest error. 

Manifest error

The Seller's position was that an error was "manifest" when it could be shown to be wrong when compared with the correct answer. The Buyer's position was that a manifest error had to be something more than simply providing a wrong answer, the error must be what can only be described as a "howler". 

The court preferred the reasoning of the Buyer. The courts emphasised that it is a well-established principle that the circumstances where an expert's determination can be challenged are tightly defined. A manifest error exception therefore only allows recourse to the court in limited circumstances. The Seller's proposed approach of simply presenting an error provided no real filter to the scope of any challenge. The risk would be that the courts would simply become an alternative forum for the party dissatisfied with the expert's conclusions.

The Seller also argued that since there is only one interpretation of a contract, where an expert misinterprets the contract and proceeds to make a determination which is founded upon that misinterpretation, there must, by definition, automatically be a manifest error. The court also rejected this argument. 

The court found the correct approach would depend on the scope of the expert's engagement. If, pursuant to the terms of the SPA, the expert is engaged to make a determination based on contractual interpretation, the outcome of the determination itself would still need to be shown to be manifestly erroneous i.e. more than just simply providing a wrong answer. 

In Flowgroup, the engagement of the expert accountant was broad and expansive and included, where necessary, the ability to determine issues of contractual interpretation if necessary to resolve the matters in dispute. It was not the role of the court to second-guess the expert's accounting judgement, unless it was very clear that the accountant's judgement was affected by a material mistake. In Flowgroup, no such error had been made.   

Comment

When negotiating completion accounts clauses, it is advisable the SPA sets out in very clear terms how the parties intend the price adjustment should be calculated. A suggestion would be to attach a worked example as a schedule or appendix to the SPA. This will help the parties understand how the accounting hierarchy and principles will be applied to the final purchase price, prior to signing the agreement. 

While the parties may agree to resolve any disputes through negotiation or referral to an expert for final determination, the parties are likely to have very limited recourse in the event of an unfavourable expert determination (even if the SPA makes an exception for manifest error) as the courts view manifest error in very narrow terms.