Court Of Appeal Confirms The Applicable Test For A 'Manifest Error' In An Expert Determination

The recent case of WH Holding Limited (WHH) v London Stadium LLP (LS) has provided helpful guidance from the Court of Appeal on the applicable test for manifest error in an expert determination. The decision confirms the high threshold that must be met in order for a successful challenge to be made.

Our commercial disputes lawyers take a look at the decision and set out below what you need to know.

What happened in WH Holding Ltd v London Stadium LLP?

The case concerned a dispute between WH Holding Limited (WHH), the owner of West Ham United Football Club, and London Stadium LLP (LS - formerly E20 Stadium LLP), the head leaseholder of the London Stadium (the Stadium). Under a Concession Agreement dated 22 March 2013 (the Agreement), LS granted WHH a 99-year concession to hold football matches at the Stadium.

The Agreement contained an "overage" or "anti-embarrassment" provision, designed to ensure LS could share in the proceeds from any qualifying share disposition by Relevant Shareholders (identified as West Ham's principal owners and their family) – defined as a Qualified Transaction. A Stadium Premium Amount would be payable to LS whenever a Qualified Transaction gave rise to an adjusted 'Consideration' which met the 'Threshold Amount' in the Agreement.

The dispute arose from a transaction in November 2021 which involved the acquisition by 1890 Holdings AS (1890) of a 27% shareholding in WHH (the Share Purchase). The transaction also included a Call Option for 1890 to purchase a further 1022 shares, in exchange for an £18 million premium (the Call Option Premium). The Call Option was not actually exercised but the Call Option Premium was paid.

The parties agreed that using the calculation set out in the Agreement the Share Purchase alone would give rise to a Stadium Premium Amount of just over £2.5 million. However, the parties disagreed on whether the £18 million Call Option Premium should be included in the calculation - if it was included that would result in an additional £3.6 million being due to LS. LS argued that the Call Option Premium should be included, WHH argued that it should not and that no further payment was due.

The Agreement provided for any dispute to be referred to an Expert, whose determination (subject to the absence of "manifest error") would be final and binding. The Expert determined that the Call Option Premium should be included in the Stadium Premium Amount calculation and WHH must pay the additional £3.6 million sought by LS as a result. WHH sought to challenge the decision.

First Instance Decision

WHH issued a Part 8 claim seeking a declaration that the Expert's determination was invalid. WHH argued that the Expert had made 'manifest errors'.

In the first instance the Expert had used two different sub-clauses of the Consideration definition to come up with a blended calculation – the sub clauses were expressed in the alternative and provided for a percentage of the Share Purchase price or a percentage of the Call Option Premium to be used in the Stadium Premium Amount calculation. The Expert allowed the calculation to be based on a percentage of the Share Purchase price and a percentage of the Call Option Premium blended together. Secondly the Expert had characterised the Share Purchase and the Call Option as a single Qualifying Transaction.

The Deputy District Judge agreed with WHH, finding that the Expert had made manifest errors. The sub-clauses in the definition of Consideration provided alternative methods of calculation - and there was no contractual basis for both the Share Purchase and the Call Option calculations to be used and the results blended together.

In addition, the Agreement did not provide for the Share Purchase and the Call Option to be treated as a single Qualifying Transaction for the valuation formula. On the question of whether the errors were "manifest", the Judge held that the errors were obvious and obviously capable of affecting the determination. The errors involved "applying the words of the Agreement and doing the mathematics, not exercising fine judgment in relation to a difficult argument regarding construction".

Court of Appeal Decision

LS appealed, arguing that the Judge had adopted an incorrect approach and was wrong to find that the Expert's determination contained manifest errors.

Lord Justice Phillips, delivering the lead judgment (with which Lady Justice Falk and Lord Justice Zacaroli agreed) allowed the appeal and declared that the Expert's determination was valid and binding.

The Court of Appeal confirmed the legal principles applicable to an expert determination.

• Where parties had agreed to be bound by an expert determination, they could not challenge the outcome - as long as the expert had not departed from their instructions in any material respect - even if the expert makes a mistake in reaching the determination.
• Parties who wish to contract on the basis that they will not be held to mistakes made by the Expert need to include an exception for a determination affected by 'manifest error'.
• Unless contractual terms provide differently, an error will be a manifest one if, after a limited investigation (in time and extent), it is so obvious and so obviously capable of affecting the determination as to admit of no difference of opinion. An arguable error will not suffice, however well founded the allegation of error may ultimately prove to be.

WHH submitted that where parties had agreed a mathematical formula, they would expect an Expert to correctly apply that formula. If the Expert incorrectly applied the formula and reached an incorrect result that result should not be binding – being reached as a result of manifest error.

The Court of Appeal held that the Expert was instructed to determine the dispute between the parties without making a manifest error. To succeed in a challenge, it would be necessary to show that the Expert had not only reached the wrong interpretation but that his interpretation was so obviously wrong that it would admit of no difference (i.e. the mistake was unarguable). The Court of Appeal accepted that the calculation for the Stadium Premium Amount involved applying the mathematical formula set out in the Agreement. The calculation might be straight-forward if it involved a single sale of shares or multiple tranches at the same price – however, the calculation would be less straight-forward if it involved multiple sales at different prices or if it involved a share option. The same rules of interpretation applied to contractual provisions containing a mathematical formula as they did to any other contractual provisions.

The Expert's approach was based on an arguable finding that the Share Purchase and the Call Option amounted to a single Qualifying Transaction. The Court of Appeal accepted that the Expert's approach involved a different starting point from that which WHH and the Judge preferred, but his interpretation was not so obviously wrong as to admit of no difference of opinion. The rest of his determination followed on from that starting point in a manner which was also 'not obviously wrong'.

The Court of Appeal allowed the appeal and declared the Expert's determination valid and binding on the parties.

Why this decision matters

This decision confirms that the threshold for establishing manifest error in an expert determination is very high (as has long been considered the case). Where an expert is instructed to determine a dispute involving contractual interpretation, a party challenging the determination must not only show that the expert was wrong, but that the error was so obvious it could not be disputed. An arguable interpretation, even if ultimately found to be incorrect, will not constitute a manifest error.

The courts will be very reluctant to step into the shoes of the expert to re-evaluate their decision. This can be a blessing or a curse (often determined by which side of the outcome a party finds itself on). There are real advantages in certain types of dispute being determined by an expert, including where a determination by an industry professional would be best suited to the resolution of a dispute. However, in circumstances where an expert's findings will only be overturned if the expert has made a mistake so obvious as to be unarguable, there is a substantial risk of unappealable "rough justice".

Parties should therefore be aware that a right to appeal an expert's determination will only arise in exceptional circumstances and agree that only suitable disputes be referred to expert determination (and be prepared to live with the consequences). The "one shot" approach also means that parties would be advised to take suitable professional advice in pursuing any expert determination.

In circumstances where parties are drafting an expert determination clause for only some categories of dispute arising under a contract, care also needs to be taken to make sure that the whole dispute resolution scheme of the contract dovetails and works together.

Read the original article on GowlingWLG.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.