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Expert Determination: Challenging the Decision

  • United Kingdom
  • Real estate
  • Real estate litigation
  • Real estate sector
  • Retail

10-04-2014

Expert determination as a form of alternative dispute resolution has grown in popularity in recent years especially in relation to real estate disputes. Its popularity stems from the fact that it is a relatively simple and quick method of resolving disputes, often with limited/no witness evidence or oral hearings. It is seen by many as an efficient and cost-effective way of resolving a dispute. The role of the expert, his power and jurisdiction are all governed by the terms of the contract between the parties and his determination will usually be final and binding. The grounds upon which parties are able to challenge an expert determination are very restrictive. The recent case of Walton Homes Ltd v Staffordshire County Council [2013] EWHC 2554 (Ch) brought the spotlight back onto the difficulties a party will face when seeking to challenge an expert determination.

In February 2000, Walton Homes agreed to buy a former playing field from Staffordshire County Council for £107,000 excl VAT.  The sale and purchase agreement between the parties contained an overage clause which provided that Walton Homes was to pay “Additional Consideration” to the Council within one month of planning permission being granted.  The “Additional Consideration” was stated to be the difference between “(i) (whichever is the greater) the open market value of the Property....assuming that the Permission does not exist, or £107,000 ... and (ii) the open market value of the Property with the benefit of the Permission”.

Walton Homes contracted to sell the land to Bellway Homes on 11 July 2011 conditional upon Bellway Homes procuring planning consent for residential development.  The planning permission was granted on 8 March 2012.  The open market value of the Property was £1,242,874.  The amount in issue was the difference between this value and the open market value of the Property assuming that “the Permission” did not exist.  The Council was entitled to 50% of the difference.

In the event the parties failed to agree the Additional Consideration, the sale and purchase agreement provided that the dispute was to be determined by an independent Chartered Surveyor agreed between the parties or nominated by the President of the Royal Institution of Chartered Surveyors.  The surveyor was stated to act as an expert not an arbitrator. Most importantly, his determination was, in the absence of manifest error, stated to be final and binding upon the parties, provided it was reasoned. 

The inclusion of the words “in the absence of manifest error” is common in modern contracts due to the development of the law of mistake in expert determinations. The dispute in this case concerned the interpretation of the words “the Planning Permission does not exist”. Walton Homes argued that the surveyor should ignore the existence of the Planning Permission itself but not ignore other matters relating to the Planning Permission in particular the recommendation of the Planning Officer that planning permission should be granted.  This would mean that the difference between the two values would be “commensurately small” resulting in a low payment to the Council.

The parties had agreed for all matters of fact and law in dispute relating to the calculation of the Additional Consideration to be determined by the expert surveyor. The expert surveyor retained Counsel to advise him as to the meaning of the words - “the Planning Permission does not exist”.  Counsel reached the conclusion that the argument put forward by Walton Homes was incorrect. In his opinion, by applying the general principles of contractual interpretation, it was to be assumed for the purposes of the valuation that the Planning Permission, the recommendation from the Planning Officer and the resolution of the Planning Committee were not in existence. 

In his determination, the expert surveyor relied upon the opinion of Counsel in relation to the question of interpretation and unsurprisingly reached the same conclusion. The issue which came before the High Court was whether the expert surveyor had made a “manifest error” in making that determination.

In his judgment Peter Smith J referred to Lindley & Banks on Partnership (paragraphs 10-73) which states that manifest error “applies only to errors in figures and obvious blunders not to errors in judgment e.g. in treating as good debts which ultimately turn our to be bad or in omitting losses not known to have occurred.  All errors are manifest when discovered; but such clauses as those referred to here are intended to be confined to oversights and blunders so obvious as to admit no difference of opinion” and Simon Brown L J’s judgment in Veba Oil Supply & trading GmbH v Petrotrade Inc [2002] 1 All E.R. 703.

He concluded that it was impossible to say that the determination of the expert surveyor in light of Counsel’s opinion was manifestly erroneous. He stated:

“Manifest is a word which gives a very limited window of opportunity to challenge.  The examples given in the various authorities show that it is something like an arithmetical error, or a reference to a non existent building and the like.  There is nothing “manifestly wrong” about the decision of [Counsel].”

This case once again flags the difficulties with challenging expert determinations. As Lord Denning said in Campbell v Edwards [1976] 1 All ER 785:

“It is simply the law of contract. If two persons agree that the price of property should be fixed by a valuer on whom they agree, and he gives that valuation honestly and in good faith, they are bound by it. Even if he has made a mistake  they are still bound by it.  The reason is because they have agreed to be bound by it. If there were fraud or collusion, of course, it would be different. Fraud or collusion unravels everything.”

Lord Denning’s judgment in Campbell confirmed a non-interventionist trend with the courts showing less and less willingness to intervene in the contractual machinery agreed between the parties. Indeed, the primacy of the law of mistake in expert determinations was repeatedly re-affirmed by the courts in a number of subsequent cases.  In an often quoted passage in Jones v Sherwood Computer Services [1992] 2 All ER 170 Dillon LJ expressed the  approach as follows:

"On principle, the first step must be to see what the parties have agreed to remit to the expert, this being, as Lord Denning MR said in Campbell v Edwards, a matter of contract. The next step must be to see what the nature of the mistake was, if there is evidence to show that. If the mistake made was that the expert departed from his instructions in a material respect, eg if he valued the wrong number of shares, or valued shares in the wrong company, or if ... the expert had valued machinery himself whereas his instructions were to employ an expert valuer of his choice to do that, either party would be able to say that the certificate was not binding because the expert had not done what he was appointed to do."

Dillon LJ sought in this passage to express the difference between a mistake and a material departure from instructions, which has been defined by the courts as one of the few grounds upon which a party can challenge an expert determination. His decision was followed by Knox J in Nikko Hotels (UK) Ltd v MEPC plc [1991] 2 EGLR 103 where he provided: “If [the expert] has answered the right question in the wrong way his decision will be binding.  If he has answered the wrong question, his decision will be a nullity”.

The distinction provided by Knox J does seem at first glance rather simple. However, it has not always been easy for the courts to apply. In a more recent case, Barclays Bank plc v Nylon Capital LLP [2011] EWCA Civ 826, Lord Neuberger expressed the following concern after making reference to the analysis of Dillon LJ in Jones: “If the expert valued the wrong number of shares, it is scarcely controversial to suggest that his decision could not stand if it was challenged in court...But what if the expert had valued the right number of shares on the wrong basis, for example, because of his misinterpretation of the company’s articles of association...?”  This highlights the difficulty courts have faced with the extent to which an expert is able to interpret or construe the contract under which he is appointed to reach his determination and whether he has departed from his instructions in a material respect in doing so.

In a property context, contracts often provide for expert determinations by surveyors. One example is the determination of rent reviews, where issues over the construction of the lease are common.  In rent review, the expert surveyor is instructed to value a hypothetical lease making the specified assumptions and disregards. The expert has to attribute meaning to the terms of the contract under which he is appointed. If the parties disagree as to the meaning of a particular clause in the hypothetical lease, then the question often arises as to whether it is within the expert’s jurisdiction to determine that question or not.

Each case will turn on its own specific facts, but what is clear from the authorities is that if the lease provides for the expert to determine all questions of law and fact, with no exception for manifest error, then the parties are stuck with his decision even if he makes a mistake.  But if it is not within his jurisdiction under the contract and he determines a question of law, then he will have materially departed from his instructions, if his valuation does not accord with the correct interpretation.

As was seen in Walton Homes, the expert surveyor was given authority to determine all questions of fact and law save for manifest error.  It was clearly within the expert’s jurisdiction to determine the interpretation of “the Planning Permission” under the contract.  This was not in dispute. The challenge was whether he had made a manifest error and Peter Smith J concluded that he had not.

In conclusion, if the parties wish to agree to dispute resolution by an independent expert, but wish to able to challenge the decision where the expert makes a obvious mistake, the words “save for the case of manifest error” should be included within the expert determination clause and the expert should be required to give reasons. In addition, if the parties wish to avoid the expert having to determine questions of interpretation which arise during the course of his instruction, the parties should make it clear in the contract that he is not to determine questions of law.

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