Shafi v Rutherford

Where contractual completion accounts are to be prepared by reference to accounting policies, principles, practices and procedures adopted in earlier accounts, the clause ordinarily refers to the correct accounting framework stated to have been adopted, not to an erroneous treatment repeated in those accounts. The parties are not presumed to have intended a mistake in earlier accounts to govern the final adjustment of consideration. An expert exceeds the scope of the mandate where the expert treats the agreement as preventing application of the correct accounting policy. The court may intervene on that basis without deciding whether the error is best characterised as a misinterpretation of jurisdiction or a manifest error.

The parties jointly owned and operated a dental practice. Under an agreement for the sale of one party’s shares and interest in the premises, the final consideration was to be adjusted by reference to completion liabilities. Disputes were to be referred to an independent accountant acting as an expert.

The expert concluded that equipment leases were finance leases, but considered that the agreement required him to carry forward their erroneous treatment as operating leases in the company’s earlier accounts. He therefore excluded the lease liability from his calculation. The deputy High Court judge held that the determination was invalid and unenforceable and directed a fresh determination. The central issue on appeal was the proper construction of the accounting provision and the consequent scope of the expert’s mandate.

1. Appeal dismissed. The order directing a fresh determination on the correct principles remained in place.
2. The reference in paragraph 1.4 of Part II of Schedule 4 to accounting policies, principles, practices and procedures adopted in preparing the earlier accounts referred to the accounting framework which the company stated it was adopting, rather than to the way in which that framework had in fact been applied if the application was erroneous. The word “practice” could refer to accounting rules and did not displace the priority structure in the clause. The word “adopted” was neutral on whether the reference was to purported or actual adoption.
3. The completion accounts were intended to provide the final adjustment of the sale consideration. In that commercial context, the parties would not ordinarily intend erroneous accounting treatment of liabilities to be carried forward. The accounts should reflect the correct accounting policy and the reality of the liabilities.
4. The expert had materially departed from the scope of the instructions by concluding that he could not apply the correct treatment of the leases. The parties accepted that court intervention was appropriate if that conclusion was wrong. It was unnecessary to choose between intervention for misinterpretation of jurisdiction and intervention for manifest error.

1. Court of Appeal (Civil Division): Shafi v Rutherford [2014] EWCA Civ 1186. The appeal was dismissed and the order for a fresh expert determination on the correct principles was left in place.
2. High Court: The expert determination was declared invalid and unenforceable, with a fresh determination directed. The judgment was from Leeds District Registry and the judge’s conclusions are described at paras [27]-[30].