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Role of the Court potentially widened in expert determination

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Louise Fisher

Senior Associate

London

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12 September 2011

This important new Court of Appeal decision in Barclays Bank plc v Nylon Capital LLP on expert determination is likely to feature prominently in any arguments by a party seeking to challenge either the jurisdiction or the decision of an expert.

Especially if the aforementioned expert, as is often the case, is not legally qualified.

Although an expert determination clause may provide that an expert may determine his own jurisdiction in a way that is final and binding, the Court of Appeal has found that notwithstanding such a provision the court can intervene and make that decision first if it is in the interests of justice and convenience to do so. The Court of Appeal also suggested that once an expert's jurisdiction is established, there may be scope for a court to intervene if it is clear that the expert has made a mistake of law and gone outside his decision-making authority. The decision has been considered in Wilky Property Holdings PLC v London & Surrey Investments [2011] EWHC 2226 (Ch) (also referred to below).

Background

Barclays Bank plc (Barclays) was a partner in Nylon Capital LLP (Nylon) under a Limited Liability Partnership Agreement (the LLP Agreement). Barclays had also invested in a fund (the Fund) managed by Nylon. The underlying dispute related to the interpretation of clause 9 of the LLP Agreement, in particular whether Barclays was obliged to bring the entirety of its profit on its capital investment in the Fund into account for the purposes of allocation of the profits of Nylon among its members. Barclays asked the court for a declaration that it was under no obligation to do so.

High Court proceedings

Nylon sought a stay of Barclays' claim pending resolution of the dispute under the expert determination clause in the LLP Agreement. Under this clause, the accountancy expert was charged with determining any dispute regarding the amount of any profit or loss allocations due to a member of Nylon pursuant to clause 9. He was to determine all matters in dispute, including disputes concerning the interpretation of any provisions of the LLP Agreement and his jurisdiction. His decision was to be final and binding.

At first instance, the Chancellor of the High Court held that the dispute did not fall within the expert determination clause because the issue between the parties concerned the making of the allocation, whereas the expert determination clause only applied to disputes once an allocation had been made (which it had not). The stay was refused.

Court of Appeal proceedings

On Nylon's appeal, the primary question was whether the court is able to determine an expert's jurisdiction before the expert makes such determination himself. Although the case ultimately settled before judgment was handed down (see further below) the Court of Appeal proceeded to give judgment anyway. First, it made three preliminary points:

Court as the final decision-maker: Where a dispute arises as to the jurisdiction of an expert, the court will always be the final decision-maker regardless of whether the clause purports to confer jurisdiction on the expert in a manner that is final and binding.

No presumption as to jurisdiction of expert: The wide and generous approach to jurisdiction that is taken in arbitration, based on the presumption that the parties are likely to have intended any dispute arising out of their relationship to be decided by the same body, does not apply to expert determination.

While arbitration is an alternative forum to the courts for the resolution of all disputes, expert determination is an alternative forum for certain kinds of dispute. This optionality leaves no room for presumptions.

Parties must be held to their choice of process: A court cannot deprive the parties of the process they have agreed to, even if that process is not, on an objective basis, suitable for the dispute which has arisen. Parties must be held to the process they have chosen and perceived procedural unfairness will rarely give rise to grounds for challenge.

The entitlement of the expert to determine the issue of jurisdiction first

Nylon contended that because the expert determination clause provided for the expert to determine his own jurisdiction, the court should allow him to do so and should not intervene first out of procedural convenience. Nylon relied on Mercury Communications Ltd v The Director General of Telecommunications [1996] 1 WLR (HL) and [1994] CLC 1125 (CA) to argue that:

(a) it was possible that the expert may get the decision right;

(b) it would be wasteful and premature to involve the court until that decision had been made;

(c) the court does not normally give rulings as to the meaning of words to be applied by another, before that other has had a chance to express his own views; and

(d) the courts will not answer questions which are hypothetical.

Nylon also referred to British Shipbuilders v VSEL Consortium plc [1997] 1 Lloyds Rep 106, in which the circumstances where the court could intervene were described as "exceptional".

The Court of Appeal agreed with the approach taken in Mercury Communications, but considered the "exceptional circumstances test" referred to in British Shipbuilders to be unhelpful. It preferred a two-stage test:

- Is there a real, not hypothetical, dispute?

- Is it in the interests of justice and convenience for the court to determine the matter in issue, rather than allowing the expert to determine it first?

Regarding the second limb of the test, the Court of Appeal re-emphasised that an expert's decision on jurisdiction could always be challenged by the court, and stressed that nothing could be more wasteful than if an expert who determined he had jurisdiction went on to determine the substance of the dispute, when in fact the court held that he had no jurisdiction to do so.

In this case, the Court of Appeal held that it was in the interests of justice and convenience for the court to act first because: (i) the jurisdiction of the expert had already been debated before the court and accordingly there would be no sense in deferring the decision; and (ii) determination of the dispute on the interpretation of clause 9 governed the issue of whether the expert had jurisdiction. The Court of Appeal went on to uphold the first instance decision, holding that the proceedings should not be stayed as the dispute between the parties did not fall within the expert determination clause. 

Court's ability to intervene once the expert's jurisdiction is established (obiter)

Nylon submitted that once an expert's jurisdiction is established the court will only interfere with the determination of an expert in "narrowly circumscribed circumstances" relating to matters of contractual interpretation, ie a matter concerning what the contract says the expert must do, for example if the expert has departed from his instructions in a material respect or if he has not performed the task assigned to him.  Nylon had advanced this argument in support of its contention that the court should not intervene before an expert's determination in circumstances where the court would not intervene after the expert has made his decision.

The Court of Appeal questioned this view and Neuberger LJ cited, with approval, Hoffmann LJ's dissenting judgment in Mercury Communications as an indicator that the courts might intervene where there is a dispute solely of law relating to the scope of the expert's mandate. For example, where the expert has to determine an issue in accordance with certain principles set out in the contract, the question of what those principles mean is not necessarily a matter within the expert's decision-making authority, such that, "if the decision-maker has acted upon what in the court's view was the wrong meaning, he has gone outside his decision-making authority", and the court may intervene. This appears to be wider than the oft-cited Nikko Hotels (UK) Ltd v MEPC plc, where Knox J stated that if parties agree to refer to the final and conclusive judgment of an expert an issue which either consists of a question of construction or necessarily involves the solution of a question of construction (eg interpreting what certain principles contained in the contract mean), the expert's decision will be final and conclusive and, therefore, not open to review by the courts. The Court of Appeal expressly disagreed with Knox J in this case.

While Lord Neuberger MR in particular believed there was a powerful argument for challenging the decision of an expert made on the basis of a mistake of law (including, for example, a mistake as to the interpretation of principles on which the expert was meant to make his decision), the Court of Appeal acknowledged that the point remains to be decided and felt it was inappropriate to consider it any further in this case. It is to be noted that the clause in question was a wide clause that allowed issues of interpretation to be left to the expert. As a result, no concluded view was expressed.

Comment: Expert determination is commonly used in accounting, pensions and fee disputes. This case serves as an important reminder from the Court of Appeal that the court is always the final decision-maker when it comes to issues of jurisdiction in respect of an expert determination clause and that any attempt to contract out of this will be ineffective. It makes clear that the court can override an expert's ability to determine his own jurisdiction, and will make that determination for him if it is in the interests of justice and convenience to do so. The court will not wait for "exceptional circumstances" before it exercises that power. 

Unfortunately, the case has done little to clarify the murky waters surrounding the court's ability to intervene once the expert's jurisdiction is established. Although the Court of Appeal showed a clear leaning towards a broader remit of intervention, such that parties might now be considered to have a better prospect than previously of challenging an expert who answered the right question in the wrong way (either as a matter of contractual interpretation or of law), it was unable to make a thorough review of the law or to draw firm conclusions.

In many ways, this case highlights one of the key differences between arbitration and expert determination. As Neuberger LJ highlights, in arbitration the Arbitration Act 1996 applies to give parties certain rights of appeal on points of law. The Act “gives the parties much greater ability in law and in practice to make representations and involve lawyers than parties enjoy in connection with the great majority of contractual expert determinations”. Experts, like some arbitrators, tend to be accountants, surveyors or other professionals without legal qualifications. Matters of contractual interpretation (eg of principles upon which they have to make their decision) or indeed any points of law, are therefore not within their expertise. Neuberger LJ's judgments suggests that he would perhaps prefer to give parties to an expert determination the same ability as those in an arbitration to make representations to the court, and the same rights of appeal for errors of law. 

This Court of Appeal judgment was considered in Wilky Property Holdings PLC v London & Surrey Investments Ltd [2011] EWHC 2226 (Ch) by Richard Snowden QC, sitting as Deputy Judge of the High Court. The Judge reminded the parties of the context in which the Court of Appeal had considered the issue, namely that a non-legally qualified expert (an accountant) potentially had to decide certain questions of legal interpretation, and supposed this might have led the Court of Appeal to take a broader view of the court's power of intervention. The Court of Appeal was not dealing with a clause under which a lawyer could be appointed, nor did it suggest that expert determination was always inappropriate for the resolution of general questions of interpretation.

It is, perhaps worth considering the following practical tips from Lord Neuberger MR:

- an expert who has received and followed full and clear directions in reaching his determination is less likely to be challenged by the court;

- an expert who has not expressed a view on the issue of law because he was not asked to, or who has not made it clear how he determined that issue, is less likely to have his determination challenged for error of law because there would be no basis for doing so;

- where the parties are open to court intervention, the expert should provide reasons for his decision. This will help the disappointed party decide whether it is worth making the challenge, and could assist both parties in settlement negotiations; and

- parties may wish to consider referring points of pure law to the court for determination, rather than asking a non-legally qualified expert to determine them and running the risk of that determination being challenged in court later.

We would also suggest that if a party wants the expert to be able to decide questions of law (especially those which could be described as issues of "pure" law), the expert determination clause should be drafted expressly to provide for this. 

Note: The Court of Appeal also addressed whether a judgment should be handed down once the court has been informed that the parties have settled the matter. It held that once the case has been fully argued, the court retains the right to decide whether to give judgment and would generally decide to do so if the case raised a point that is legitimately in the public interest, for example a point of law of general interest, a differing opinion in the appellate court from the court below, or a wrongdoing to be exposed. The state of preparation of the judgment would also be taken into account, as would any legitimate concerns of the parties. In this case, judgment was handed down because a number of the issues were felt to be of general significance, the judgment of the court below was being upheld on a different basis such that the law needed to be clarified, and the parties had not advanced any good reasons otherwise.

Allen & Overy LLP acted for Barclays.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legisation in commerical dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.