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

Gulf Business - - CONTENTS -

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.

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