• If the expert has not acted in accordance with the instructions to a material extent, the conclusions are set aside;
• In the case of manifest error (such as valuing the wrong asset) the conclusions are set aside;
• In any other circumstance, including less fundamental errors, the conclusions are likely to stand but the clients may have a cause of action against the expert.

The touchstone is whether or not the parties have agreed to be bound: in the third bullet point above, they have agreed to be bound by the determination; in the circumstances of the first two bullet points above, the parties have not agreed to be bound by the work of the expert.

This article looks at the first of these circumstances through the prism of two recent cases: in the first it was claimed that the valuer had not considered all of the relevant information; in the second it was maintained that a procedural defect had been sufficient to strike at the valuer’s determination. The cases provide object lessons to us all.

Valuation Evidence

In the Court of Appeal case of Begum and Hossain (EWCA Civ 717) [2015] an expert determination of the value of a restaurant business was challenged. The parties had set up a business operating as an Indian restaurant and takeaway, Sunam Tandoori Limited but had fallen out.

An expert valuer was appointed and his instructions were specific: in undertaking his work he was to consider the accounting records of the company. These books and records were stated to include handwritten details of takings. The valuer was entitled to seek the assistance of other professionals at his sole discretion.

Ms Begum’s solicitors provided an accountant’s report to the valuer which stated that the takings recorded in the financial statements understated the actual takings of the company.

Through a Glass Darkly

The valuer had made it very clear in his report that he had not had regard to the manual records of takings:

'It is my view that it is not the role of the valuer to decide whether or not the trading accounts provided are truthful and on the basis that they have, to date, been relied upon for VAT purposes, I have no alternative than to assume that they are reliable.'

'It is my view that it is not the role of a valuer to carry out the role of a forensic accountant and this is beyond the scope of my instruction in this matter.'

The Decision of the Court

The Court of Appeal appeared to find little difficulty in reaching its decision: it found that the valuer was to arrive at a fair value of the shares, having regard to the books and records of the Company which included the handwritten takings. The expert did not follow that mandate and the valuation was therefore set aside.

The Court of Appeal made the point that the valuer could have instructed a forensic accountant to examine the records of takings as he considered that this was outside his field of expertise.

A Question of Procedure

The second case is David Maguire and 5pm Limited (Scots SC 40) [2015]. This was also an appeal from the decision of a lower Court. In that case the parties agreed that Mr Maguire would sell his shares in the Company to two other shareholders at valuation, with that valuation to be determined by an appropriate expert.

The Rules of Engagement

The experts’ letter of engagement stated the following:

'During the course of the engagement we may show drafts of our report(s) to you.  In any event, prior to our final determination, we will exhibit to parties a final draft.  This is done on the basis that they (sic) are subject to revision and alteration and no reliance should be placed on any draft document without our prior written consent.  You will bring to our attention any issue in the draft report(s) that you wish to have clarified prior to the report(s) being finalised.  A document remains ‘draft’ for these purposes until it has been manually signed by a …. partner.'

On 16 July 2013, the expert produced a report in which she determined the valuation price of Mr Maguire’s shareholding to be £266,875 (the first valuation).  Mr Maguire objected to that report on the grounds that it had not been issued in the first instance as a final draft.  He gave notice that he considered the expert to have been in material breach of the terms of the letter of engagement and that he was rescinding the contract.

Repairing the Breach?

On 9 August 2013, the expert directed the parties to treat her original report as a draft and invited comments. On 22 August 2013 (the second valuation), the expert wrote to the parties informing them that her determination remained as stated in her report of 16 July 2013.

Not a Remedy

The lower Court concluded that the first valuation report was neither valid nor binding and that prior to the issue of the second valuation Mr Maguire had validly rescinded the contract created by the letter of engagement. 

The higher court agreed with the sheriff’s conclusion that, where the first valuation was invalid, and where prior to the issue of the second valuation Mr Maguire had validly rescinded the contract, it followed that the second report could not be binding on the parties.

Andrew Strickland
Valuation Community, April 2018