‘Manifest errors’ in dispute resolution
Flowgroup v Cooperative Energy (High Court) [2021]
An important part of a contract is the clause which determines how disputes are to be resolved. Typically, jurisdiction over disputes is given either to the courts, to an arbitrator or an independent expert. In the latter case, a typical clause will provide that the expert’s decision is ‘final and binding except in cases of ‘manifest error’’ but what exactly does that phrase mean?
Facts:
The dispute arose out of the sale of the share capital of Flow Energy Ltd. The acquisition agreement (the "Agreement") stated that the purchase price was subject to a working capital adjustment. The parties were unable to agree on the amount of the adjustment, so the matter was referred to an independent expert for determination. The Agreement specified that:
"The Expert's decision will be final and binding in the absence of manifest error…"
The question for the court was whether the report contained any "manifest errors"? In order to decide that, the court first had to determine what a ‘manifest error’ is.
Decision:
The judge agreed that a manifest error must be more than just a wrong answer. The judge quoted a previous case where a manifest error was defined as “oversights and blunders so obvious and obviously capable of affecting the determination as to admit of no difference of opinion.”
The judge also quoted another case in which it was said that “it is not enough for the purchasers to show that their interpretation of the Agreement is right; they have to show that the expert’s interpretation of the Agreement was obviously wrong.”
The judge concluded that, on the facts, there were no ‘manifest’ errors in the expert’s report and the seller’s claim was dismissed.
Points to Note:
- A manifest error exception allows what is effectively an appeal to the courts but only in very limited circumstances. The key word here is probably ‘obvious’. If the mistake is obvious then it may be possible to get a court to order a fresh expert determination. Short of such an extreme situation, as the court said “Where parties have agreed to subject their dispute to an expert determination, that is what they are entitled to. The seller's interpretation would lead to the court becoming an alternative forum to resolve disputes where parties were aggrieved with experts’ determinations, with no real filter”.
- ‘Manifest’ error wording such as this is pretty standard wording where expert determination is included as a dispute resolution mechanism within a contract. Contracting parties need to understand that by electing for the expert determination of disputes, they are accepting that most disputes will be resolved at this first tier. This may have speed and cost advantages, but it does mean that ‘second chances’ are very limited.
- The court analysed situations where the expert is not simply engaged in a mathematical application of an agreed contractual formula but is also appointed to potentially decide matters of contractual interpretation. The court said that where the appointment is sufficiently broad to encompass decisions on contract interpretation, any challenge to the decision must still circumvent the manifest error test as described above. However, where the expert’s appointment is more limited in scope, the courts may be prepared to intervene if the expert has proceeded on the basis of an incorrect interpretation because the expert will have been acting outside the scope of his/her authority to adjudicate. In this particular case, the appointment was a very wide one “The Expert will determine any dispute arising in connection [with] the provisions of paragraph 3”. The judge held that it was clear that the engagement of the expert was of a broad and expansive nature and that it required the expert, where necessary, to determine issues of contractual interpretation in order to resolve the dispute between the parties.