Notes from a leader
Expert determinations can be useful in resolving family, shareholder, and postacquisition disputes, says Obaid Kazmi, director of risk consulting at KPMG Lower Gulf
Expert determinations explained
MOST PEOPLE UNDERSTAND how litigation, mediation, and arbitration can assist in resolving complex disputes, but there is another alternative that is perhaps lesser known: expert determinations.
During this dispute resolution process, an independent expert is appointed by the concerned parties to provide an opinion or determination on a specific issue. This person is considered to be an expert in the relevant field based on his or her education and work experience.
To better understand how expert determinations work, let us consider the following example.
Mouse Inc. purchases the Cheese Company’s Gouda department on January 1, 2018 for Dhs100m ($27.2m). The agreement between both companies stipulated that 30 per cent (equivalent to Dhs30m) was to be paid up front and the remaining 70 per cent would be paid over five years (approximately Dhs14m per year) provided that certain profitability criteria are met.
On January 15, 2019, Jasmeen Jaban and Pilar Paneer (the owners and sole shareholders of the Cheese Company) requested Mouse Inc. to pay Dhs14m of the purchase price. Rafeal Ratón, CFO of Mouse Inc., believed that the Gouda department did not achieve the profitability metrics dictated by the agreement and therefore refused to pay the amount requested.
After much discussion, it was evident that the key difference in both parties’ calculation of profitability rested on one
Typically an expert determination is used to answer specific and carefully worded questions such ' what i s t h e right value of the investments under dispute?'
core issue: the manner in which the Mouse Deterrence device, which uses a wide array of stuffed animals and fighter jets to mitigate the risk of mice misappropriating cheese, was being depreciated.
Such cases are often referred to as ‘post acquisition disputes’. Here, the purchase agreement stipulated that the parties engage an independent accounting expert to resolve any disputes relating to the underlying profitability calculation. The appointed independent expert would review submissions provided by both parties and provide a determination on which depreciation method should be used.
This determination would then be used to determine if the profitability criteria were met and whether a payment was required. The time and cost of engaging an independent expert in such cases are considerably lower than in arbitration or initiating formal legal proceedings.
Often parties enter arbitration, mediation, or settlement discussions and ultimately come to an impasse on a specific, usually technical, issue. This issue can be referred to an independent and experienced professional who can in turn provide an expert determination or opinion on a specific issue.
For example, the parties may consider using an accounting expert to answer questions related to the amount of damages incurred during an alleged breach of contract or how certain transactions should have been recorded in accordance with the applicable accounting standards.
To better understand this point, let us consider the following:
Two high net worth investors decided to build a hotel in southern Turkey. The initial agreement between them was to share all project costs equally. However, once the project was completed, one investor claimed that she had invested significantly more than the other.
Both investors mutually agreed to abide by the decision made by an independent accounting firm. This firm was engaged to review the financial injections made by both parties to determine how much each investor had actually contributed to the project.
While there were complications and nuances to the payments made by each investor, the accounting firm was able to arrive at a determination that rested on the evidence and documents provided by both investors.
Typically, an expert determination is used to answer specific and carefully worded questions, such as ‘what is the right value of the investments under dispute?’ This can then be used by the parties, their legal counsel, arbitrators or mediators to resolve the dispute.
Expert determinations do, however, have certain limitations that each party should carefully consider when deciding if this route is the most appropriate to resolve their dispute.
This form of dispute resolution relies solely on the information provided by the disputing parties. This means that the designated expert is not in a position to compel witnesses or disclose evidence. In some cases, the arbitrators may be able to assist in obtaining certain information on behalf of the expert.
Expert determinations are not inherently binding on both parties. Sometimes, the underlying contract between the parties will include a clause indicating such a determination is binding (or not).
Furthermore, there may be complications or difficulties in enforcing expert determination decisions in different jurisdictions. This is different from a court or arbitration decision that can (although not always) be ratified in different jurisdictions.
It is important to understand that an expert determination is not an investigation, meaning that the experts can only rely on the information provided, their academic qualifications and experience to arrive at an opinion or determination. Typically, an expert may ask questions to fully grasp the context and issues at play but each party has the responsibility to ensure that the expert possesses the necessary information to arrive at a fair conclusion.
Expert determinations can be used in practically every field and are sometimes very specific, as is demonstrated in the following real life example:
A specialised independent expert was engaged to calculate the difference between the amount of fuel a Latin American power plant would consume if it had been built to run on bunker fuel (as originally intended) versus the amount of fuel consumed by the same plant when it was ( improperly) re-configured to run on diesel fuel. This very specific independent expert determination was performed by a renowned engineering expert and the exercise played an instrumental part when seeking claims for damages.
Accounting expert determinations can be also be useful in resolving family, shareholder, and post-acquisition disputes. These determinations can add value to the dispute process by calculating the amount of damages due; providing ‘what-if ’ scenarios that quantify revenues, expenses, or profits under different circumstances; or providing an opinion on whether or not the appropriate accounting treatment was used.
As organisations conduct business they should consider implement an ‘independent expert’ clause into their contracts and agreements.