Steven Blane

Lord Lake’s opinion demonstrates that the court will uphold clauses which delegate decision making power under contracts, and promote the discretion of the decision makers to exercise their own judgment when choosing the process for arriving at their decision.

David Maguire and three others were shareholders in restaurant reservations specialist 5 PM Limited. The relationship broke down and the four agreed that Mr Maguire’s shares would be cancelled and he would be reimbursed by payment of a sum equal to the value of the cancelled shares.

The agreement stated that the value of the shares was to be determined by an “independent chartered accountant acting as [an] expert”. The parties could nominate an agreed accountant, failing which they could ask the president of the Institute of Chartered Accountants of Scotland (ICAS) to nominate an accountant.

No agreement was reached and ICAS-nominated Stewart MacDonald issued a letter of engagement to the shareholders for his valuation services. The terms included that his findings would be “final and binding”. Mr Maguire initially refused to sign the letter of engagement until he was ordered to do so by the Court of Session in separate proceedings.

Mr MacDonald gave his decision that the shares had no value and Mr Maguire sought to challenge that decision in court. The key issue was whether proceeding to determine the value of the shares without sight of audited accounts for 5 PM Limited meant that the valuation was invalid.

Lord Lake summarised the law by quoting Lord Pentland in an earlier case: “even if the expert has made a mistake the parties are still bound by his decision unless there has been fraud or manifest error. Of course, if it can be shown that the expert departed from his instructions in some material way, he has not done what the parties agreed that he was appointed to do, then his decision is open to challenge.”

The court considered that, while Mr MacDonald had indicated in his letter of engagement that he expected the information provided to him to include audited accounts, this statement was only an indication of “information he may seek” rather than a final list of documentation which must be assessed.

The letter of engagement was clear that Mr MacDonald was instructed to value Mr Maguire’s shares and that he was not limited in the methodology which he may use.

The court therefore dismissed the challenge to Mr MacDonald’s assessment of the value of the shares.

The judgment shows that ADR – including arbitration, mediation and expert determination – is here to stay and also indicates that how the terms of dispute resolution clauses in contracts are drafted can have a major impact on how the courts will interpret and enforce them.

This case shows the importance of considering the terms of dispute resolution clauses in contracts when they are being drafted, as courts will hold parties to those terms should a dispute arise.

Steven Blane is a senior associate at Pinsent Masons