(iv) Expert-determination clauses
When to use experts? The appropriateness of expert determination is often overlooked. Typical examples of matters that can be subjected to expert determination are:
- the determination of the final purchase price (and purchase price-related elements) under a share or business purchase agreement;
- the question of whether or not the delivered products or services meet the agreed product specifications;
- the determination of the amount of damages;
- the determination of a root cause of certain damages (g. whether a defect in a delivered product was caused by a hidden defect in the product itself or by external circumstances);
- the valuation of important assets or of a business or legal entity in the event of an exit procedure (g. if a party terminated a joint venture or if a partnership share needs to be bought out);
- a situation where it is undesirable that a party obtains access to confidential information regarding the other party (g. determinative sales or turnover figures in connection with a royalty audit).
What to ask from an expert? The questions for the expert must be rather straightforward and should not involve assessments that may trigger elaborate discussions between the parties or a judgement as to what is ‘reasonable’ or ‘appropriate’ under the circumstances. This does not mean, of course, that an expert should not be reasonable or should disregard all circumstances. It also does not mean that an expert’s opinion may not contain any speculative elements. Furthermore, a careful expert is likely to give each party an opportunity to explain the case (and respond to explanations from the other party) before reaching a final determination.
Content of an ‘experts clause’. What is important in expert-determination clauses is that:
- the expert’s involvement is triggered on the basis of clear (objective) criteria;
- the expert’s independence from both parties is properly secured, although the expert engaged for an audit of the other party’s books and records would only need to be reasonably acceptable;
- the expert’s appointment should take place expeditiously, implying that the contract should provide for clear deadlines to object or agree on a proposed appointment and, failing consensus, on (the chairman or president of) a named authoritative expert institute that will make the appointment in case of disagreement;
- high-level expert-determination principles, the failure of which may give rise to disputes between the parties, are clarified beforehand (and ideally in the contract itself);
- the expert should have adequate access rights to the information needed for the determination, subject to such information being kept confidential (including, in some instances, vis-à-vis the other party). Such information or access should be given promptly;
- it may be desirable to provide for an allocation of the related costs, depending on the outcome of the expert’s determination. In case of a royalty audit, it would be appropriate to allow for a threshold for any excusable misstatements or relief.