Energy: When is an expert's error a 'manifest error'?

In Flowgroup plc v Co-operative Energy Ltd [2021] EWHC 344 (Comm), the Commercial Court dismissed a challenge to an expert determination on an alleged ‘manifest error’. As expert determination clauses are widely used in the energy sector and often limit challenge to a ‘manifest error’ (and there is frequently a debate about what that means), the decision of the Commercial Court provides useful guidance on what constitutes manifest error in the context of expert determinations.

Background

Flowgroup plc (“Flowgroup”), the claimant, was the seller of the entire allotted and issued share capital of its wholly owned subsidiary, Flow Energy Limited (the “Target”) pursuant to an Acquisition Agreement dated 10 April 2018 (the “Agreement”). The Target was a supplier of gas and electricity. Co-operative Energy Ltd (“CEL”), the defendant, was the buyer of the Target.

By clause 3 of the Agreement, the purchase price was subject to a working capital adjustment, to be determined in accordance with detailed provisions contained in Schedule 9. The parties were unable to agree on the amount of the working capital adjustment and the matter was referred to expert determination, pursuant to Part A of Schedule 9. That determination was delivered in the form of a report (the “Report”) dated 8 March 2019 by a partner at Ernst & Young LLP (the “Expert”). The Report was largely favourable to the buyer, and the seller duly challenged the Expert’s findings.

The Agreement provided that the Expert’s written decision on the matters referred to her will be final and binding in the absence of ‘manifest error’ or fraud. The issue before the Commercial Court was whether there was such ‘manifest error’ in the Report.

Decision

The meaning of ‘manifest error’

The parties agreed that one aspect of the test for ‘manifest error’ was “an error which is obvious or easily demonstrable without extensive investigation” (Amey Birmingham Highways Ltd v Birmingham City Council [2018] EWCA Civ 264), but disagreed over its application. Flowgroup argued in favour of what it termed a “visibility” test in the sense that the error must be capable of being demonstrated from the face of the record. CEL relied on observations made by Simon Brown LJ in Veba Oil Supply & Trading Gmbh v Petrograde Inc [2001] EWCA Civ 1832 to the effect that ‘manifest errors’ were “oversights and blunders so obvious and obviously capable of affecting determination so as to admit no difference of opinion”.

The Commercial Court considered that the Veba Oil test was not inconsistent with the test arising out of Amey Birmingham Highways Ltd and that it identified “an important and necessary component of the ‘manifest error’ exception”. The Commercial Court cited three reasons: (i) it was shown no case in which the Veba Oil test had been disapproved; (ii) it had been applied in other first instance decisions; and (iii) it was consistent with the textbooks, including Lewison on the Interpretation of Contracts. Reverting to what the Commercial Court termed “a more general point of principle”, it went on to observe that the circumstances in which an expert’s determination can be challenged are tightly circumscribed: “The reason for this is that where parties have agreed to subject their dispute to an expert determination, that is what they are entitled to. A manifest error exception allows recourse to the Court but in necessarily confined circumstances”.

As for the “visibility” test advocated by Flowgroup, the Commercial Court dismissed this concluding that it “would provide little content to the word "manifest" and in practice no real filter to the scope of any challenge, with the danger that the Courts would simply become an alternative forum for the party dissatisfied with the expert’s conclusions”.

Manifest error and mistakes in law

Flowgroup also argued that where the expert’s decision was on a matter of contractual interpretation, there was only one correct interpretation. Therefore, if the expert got it wrong, this amounted to a manifest error. In effect, the ‘manifest’ qualification was ignored or automatically satisfied.

In this respect, the Commercial Court considered that the issue was one of jurisdiction. It distinguished between two scenarios:

1. First, if an expert was engaged to determine a matter of contractual interpretation, the Commercial Court saw no reason why a challenge should not have to circumvent the ‘manifest error’ test.
2. Second, that is to be distinguished from the situation where the role of the expert is more circumscribed and where different considerations might therefore arise. The court will intervene if “the decision-maker has gone outside the limits of his decision making authority”.

Therefore, the correct approach turned on the scope of the expert’s engagement.

The Agreement was clear that the engagement of the Expert was of a broad and expansive nature and that it included, where necessary, the mandate to determine issues of contractual interpretation, insofar as they were necessary to resolve the matters in dispute between the parties. The dispute was ultimately one of accounting, in the sense that the product of the Expert's engagement was to be a determination for the purpose of a revised Completion Statement with the correct figure for Completion Working Capital. In the event, at least part, and arguably a large part, of the difference between the parties was a dispute over the meaning of the relevant Agreement provision. It is apparent from the written submissions that both parties did in fact seek the resolution by the Expert of central matters of interpretation in their favour. Nor was it a surprising conclusion that this is what the Agreement provided for. It was entirely understandable that the parties should wish for an expert accountant to resolve necessary issues of contractual interpretation in an accounting context.

The Commercial Court duly found in favour of the CEL/the buyer and dismissed the claim.

Comment

The decision of the Commercial Court raises two interesting issues (i) the scope of the expert’s jurisdiction and whether it extends to findings of law and (ii) the content of ‘manifest error’ in an expert determination clause.

Jurisdiction

In relation to jurisdiction, Kendall on Expert Determination, 5th Ed., explains that an analysis of the question whether an issue of law is within the exclusive jurisdiction of the expert is complicated by the fact that an erroneous decision on an issue of law may be characterised in two different ways:

• A decision on a point which the parties agreed should be decided by the expert and which is accordingly a decision falling within the expert’s jurisdiction; and
• A failure to carry out the task which the expert was appointed to carry out, and therefore a decision made in excess of jurisdiction or a material departure from instructions.

The law suggests that parties can, by the use of appropriate wording in their contract, confer on the expert exclusive jurisdiction to decide questions of interpretation of the contract. As a result, a decision based on an erroneous interpretation of the contract “will not invariably be treated by the courts as being a material departure from instructions or being made in excess of jurisdiction”. However, much will turn on the words used by the parties in conferring jurisdiction upon the expert.

Manifest error

As expert determination clauses in the energy sector often provide recourse to challenge the determination only in the event of a ‘manifest error’, and there is frequently a debate about what that means, the judgment provides useful guidance on what constitutes manifest error in the context of expert determinations. The Commercial Court has reiterated that the circumstances in which an expert’s determination can be challenged are tightly circumscribed. In relation to provisions allowing challenge for a ‘manifest error’, anything short of “oversights and blunders so obvious and obviously capable of affecting determination so as to admit no difference of opinion” may well not satisfy the test for ‘manifest error’.