Scottish court confirms power of ADR decision makers

Lord Lake’s opinion (9-page / 501KB PDF) 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. It is a significant case, according to legal experts, especially given that ADR mechanisms are an ever-increasing trend in the litigation landscape.

David Maguire and three other individuals were all shareholders in 5 PM Limited, a company which specialises in restaurant reservations. The relationship between the shareholders broke down, and they agreed that Maguire’s shares would be cancelled 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”. Under the agreement, the parties could either nominate an agreed accountant, failing which they could write to the president of the Institute of Chartered Accountants of Scotland (ICAS). No agreement was reached, so the president of ICAS was asked to nominate the accountant.

ICAS nominated Stewart MacDonald, who issued a letter of engagement to the shareholders for the provision of his valuation. The terms of the engagement included that MacDonald’s findings would be “final and binding”. Maguire initially refused to sign the letter of engagement until he was ultimately ordered to do so by the Court of Session in separate proceedings.

On 14 February 2022, MacDonald gave his decision that the shares had no value. Maguire sought to challenge that decision in court. The key issue before the court was whether proceeding to determine the value of the shares without sight of audited accounts for 5 PM Limited meant that MacDonald’s valuation was invalid.

In his opinion, Lord Lake summarised the law in this area 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 MacDonald had indicated that he expected the information provided to him to include audited accounts for the company in his letter of engagement, 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 MacDonald was instructed to value Maguire’s shares and that he was not limited in the methodology which he may use.

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

Dispute resolution expert Steven Blane of Pinsent Masons said that the judgment “shows that courts will enforce any ADR provisions which are written into contracts between parties, and that they will uphold the power and discretion of the decision makers in those processes”.

“ADR - including arbitration, mediation and expert determination, as in this case - is here to stay,” he said.

The judgement 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 the courts will hold parties to those terms should a dispute arise,” said Brian Grierson, also of Pinsent Masons. “While parties may not consider it important to think about what happens should a contract go wrong before it has even been signed - although that ought to have been a high priority in this case – it can have significant consequences for parties down the line.”