Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2012] CSOH 31
CA76/10	OPINION OF LORD MALCOLM in the cause FINDLAY MacDONALD and PETER McLEAN Pursuers; against WILLIAM LIVINGSTONE AND ANOTHER Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: G. MacColl, Advocate; MacRoberts, LLP

First Defender: J. Cormack, Solicitor Advocate; McGrigors LLP

24 February 2012

[1] Prior to 26 February 2008, Findlay MacDonald, Peter McLean (the pursuers) and William Livingstone (the first defender) were partners in Robert J Hart & Company, a firm of chartered accountants. By letter of that date Mr Livingstone resigned as a partner, thus dissolving the firm. Since then the parties have been unable to agree dissolution accounts and a scheme of division. The pursuers have raised an action in which they seek various declarators with a view to resolving the impasse. In September 2011 the action was sisted to allow the parties to instruct an expert accountant on a joint remit with a view to a binding determination of their differences. In particular the expert was asked to determine whether the detailed partners' capital accounts as at 26 February 2008 fairly and accurately reflect the respective capital account position of each partner as at that date, and whether the pursuers' dissolution accounts of Robert J Hart & Company for the period 1 June 2006 to 26 February 2008 are fair and accurate. In the event of a negative answer, the expert was requested to advise on appropriate adjustments to the accounts. The joint remit to the expert provides, amongst other things, that "in the absence of manifest error (the expert's) decision in the form of a finalised written report shall be final and binding on the referring parties." The remit laid down a procedure to be followed, which included written submissions, an all party meeting, and such other procedure as the expert considered appropriate. The expert was to provide a draft report for the parties' comment prior to issue of the final report.

[2] The expert issued his final report on 16 December 2011. Subsequently agents for the first defender forwarded to agents for the pursuers a letter dated 2 February 2012 which challenged the expert's report in relation to that part which dealt with the ownership of endowment policies taken out in the name of Mr McLean and Mr MacDonald. The pursuers' contention is that these policies are personal to them, whereas Mr Livingstone claims that they are partnership property. The expert found in favour of the pursuers. The letter of 2 February sets out the reasons for the challenge. It is argued that there is a manifest error in the decision. That proposition is elaborated in the course of some three pages of text. It is suggested that it is clear from the evidence which was submitted to the expert on the life policies by the first defender in writing that certain of the expert's statements are erroneous. Having quoted the reasons for the expert's decision (which are set out later in this opinion), the letter continues:

"The expert has not provided reasons which were intelligible and adequate in the circumstances. ... The treatment of goodwill is manifestly irrelevant as is whether a follow-up meeting with the expert took place or not and why. What the pursuers state is simply no reason at all. That leaves the fact that the policies were in the individuals' names but it is made clear in the authorities, which were already before the expert, that is not enough and there is no explanation as to why, in this particular case, it might be concluded differently. Accordingly there is a manifest error."

The letter asserts that in his decision the expert recorded a series of findings

"which point overwhelmingly to the conclusion that ... the policies were partnership assets which he then either ignores or, if he does not ignore, does not give any reason as to why these are not relevant in ascertaining the intention of the parties."

The relevant findings are then recounted and the letter states:

"However the most significant omission from all the findings of the expert is any finding of there being an agreement between the pursuers and the first defender that partnership money could be used to pay for the policies and that these policies would be personal assets of the pursuers or even suggested evidence to this effect. Accordingly not only has the expert reached his conclusion that the presumption is rebutted on the basis of insufficient and irrelevant evidence and inaccurate interpretations of the evidence he has recorded, but he has ignored overwhelming evidence which he records in his decision, and which points to the contrary conclusion. The first defender submits that this is a manifest error."

It is contended that in considering this matter reference can be made to the legal authorities referred to by the first defender and the evidence submitted to the expert by the parties in respect of the life policies.

Parties' submissions

[3] At a by order hearing, on behalf of the first defender Mr Cormack invited the court to fix a hearing on the question of whether the expert had made a manifest error in relation to the treatment of the life policies. Mr Cormack referred to the letter of 2 February 2012. He then focused on the following passage in the expert's decision.

"The issue before me as part of my remit is whether the life policies in question are personal to Mr McLean and Mr MacDonald or a partnership asset. Legally that requires evidence to rebut the presumption in section 21 of the Partnership Act 1890. The opinions and evidence of the pursuers and the first defender differ. However;

1. Whatever the reason, the policies are in the names of Mr MacDonald and Mr McLean, but not Mr Livingstone.

2. The pursuers state that the policies were only included to 'strengthen the balance sheet' and were personal.

3. Goodwill was on the balance sheet and is now treated as personal. All parties seem to accept this.

4. The first offender did not feel a follow-up meeting was necessary and resisted the pursuers' right to reply.

This is no straightforward matter and each individual case hinges on the evidence available. Having considered that available in this particular case, I am of the view that the policies are personal to Mr MacDonald and Mr McLean."

[4] Mr Cormack submitted that the first reason is manifestly irrelevant since the policies were bought using partnership funds. The second reason does not support rebuttal of the presumption since, on no reasonable reading could it amount to an agreement between the parties. The third reason is plainly irrelevant and the fourth reason is simply a matter of procedure. Reference was made to various authorities, and it was submitted that "manifest error" means "oversights and blunders so obvious and obviously capable of affecting the determination as to admit of no difference of opinion": Veba Oil Supply & Trading GmbH v Petrotrade Inc [2002] 1 Lloyd's Rep 295 at para. 33 per Simon Brown LJ (as he then was). Mr Cormack accepted that, in the absence of a manifest error, the report is final and binding and has, subject to certain issues of arithmetic, resolved the dispute between the parties.

[5] On behalf of the pursuers, Mr MacColl indicated that they accept the outcome of the report, even in respect of those aspects which were decided in favour of the first defender. He submitted that there is no manifest error in the challenged section of the report. The expert received evidence from the parties and, having weighed up the evidence, he reached conclusions. The decision is not palpably ill-founded. Mr MacColl referred to a passage in the decision on the life policies which states:

"The policies were shown on the balance sheet of the partnership. The pursuers state that this was to strengthen the balance sheet. That implies a conscious decision and an awareness of putting personal assets on the balance sheet. If it was recognised that these were partnership assets, then they would have gone to the balance sheet as a matter of course rather than as a need to 'strengthen the balance sheet.' The first defender disagrees. Although not a specific part of my remit, the treatment of goodwill is relevant. Goodwill was on the balance sheet but it now appears to be accepted by all partners that goodwill is personal. I am aware of no reason why the impact of the Partnership Act and the appropriate authorities should treat each of these assets differently."

Counsel submitted that competing positions were being advanced by both sides. The expert weighed these matters up and explained his reasoning. The Veba Oil test is not met. The first defender has not put forward a prima facie or arguable case of manifest error. The court should refuse the motion for a hearing on the matter.

[6] Mr Cormack accepted that the issue at present is whether the first defender has presented a prima facie or arguable case of manifest error. If the answer to that question is no, the application for a hearing should be refused. Mr Cormack stressed that the life policies and goodwill are different assets. The expert does not tell the reader why the life policies should be treated in the same way as goodwill.

Discussion and Decision

[7] The action was sisted to allow a joint remit to an expert. The intention was to obtain a determination which would be "binding on the parties" and provide "a method of settling all matters" (minute of proceedings 22 September 2011). This purpose was reflected in the agreed terms of the joint remit, which provided that, except in the case of a manifest error, the expert's decision was to be final and binding. The parties decided to place the evidence and their contentions before the expert and invite him to resolve the disputes as to the accounts, thereby allowing the litigation to be brought to a conclusion.

[8] There are many cases which discuss "manifest error" or similar phrases in varying contexts. In Montgomery v Cameron & Greig and Others [2007] CSOH 63, Lord Reed referred to para 10-73 of the 18^th edition of Lindley & Banks on Partnership. It quotes an earlier edition of the work in which Lord Lindley discussed partnership accounts which are conclusive in all but obvious and manifest errors. The exception applies to "errors in figures and obvious blunders, not to errors in judgement". Lord Lindley continued by explaining that "all errors are manifest when discovered; but such clauses as those referred to here are intended to be confined to oversights and blunders so obvious as to admit of no difference of opinion." (This approach is echoed in the Veba Oil case referred to by Mr Cormack.) In Montgomery, Lord Reed continued (para 32):

"Provided termination accounts are prepared in good faith in accordance with the agreement, they are therefore binding on the partners. That would be so even if the valuation of the assets and the termination accounts did not represent their fair market value ..."

[9] In the present case an assertion by the first defender that the accounts as settled by the expert are wrong will not supersede the parties' agreement to be bound by the decision of the expert. This holds true even if the assertion is well-founded. Were it otherwise, the agreement to be bound by the decision, except in the case of a manifest error, would be robbed of any meaning or content. It is not sufficient to argue and then prove that the decision is wrong. Before a challenge is allowed, there must be an error which is obvious and clear beyond reasonable contradiction. Unless Mr Cormack has presented an arguable case that there is a manifest error in the report, his request for a full hearing on the point falls to be refused. In Galaxy Energy International Ltd (BVI) v Eurobunker S.p.A. [2001] 2 Lloyd's Rep 725, Mr Justice Thomas had to decide whether there was a real prospect of a party successfully defending a claim by demonstrating that there was a manifest error in a certificate as to the quality of a cargo of low sulphur fuel oil. He considered whether it was arguable that there was a plain and obvious error relating to either the certificate or the procedure that led to the making of the certificate. Having considered the certificate and the method used by the certifier, he was unable to identify any evidence showing that there had been an error. At the highest the evidence showed that there might have been an error, "... but even an error (and not merely the possibility of an error) is not enough. There is no evidence of plain and obvious error" (page 730).

[10] In the present case I am of the view that there is no arguable or prima facie case of a manifest error within the meaning of the joint remit. The expert has considered the evidence and the competing contentions presented to him in respect of the parties' dispute as to the life policies. He has decided to find in favour of the pursuers on the issue, and he has explained his reasons. The joint remit does not allow the disappointed party to re-open the matter by criticising the expert's reasoning or alleged lack of reasoning. The requirement of a "manifest error" means that the first defender must demonstrate an error which is so obvious as to be beyond reasonable contradiction. For my part, I am not in a position to say that the expert has erred. I can accept that there is an arguable case that his decision is wrong. However, as the letter of 2 February 2012, Mr Cormack's motion and submissions, and Mr MacColl's responses all demonstrate, this contention can be resolved only after a hearing at which the parties' arguments and counter-arguments are debated, considered and determined. This is not what is envisaged by "a manifest error". Once elaborate (or any) argument and counter-argument is required, it is clear that one is not in "manifest error" territory.

[11] It seems to me that, in truth, the first defender is seeking another "bite of the cherry" by launching various criticisms of the expert's decision on the life policies. Those criticisms do not identify any plain and obvious error in his decision - but are examples of the arguments and disputations which the agreed remit was designed to stop. I accept Mr MacColl's submission that, on the face of the decision, the expert has weighed and evaluated the evidence and the parties' submissions, and has provided supporting justifications for his decision. The first defender has criticised those reasons but, even if there was merit in those criticisms, in my opinion they fall short of what is required to remove the conclusive nature of the expert's decision.

[12] I shall refuse the first defender's motion for a hearing. Failing a successful challenge to the expert's report, both parties acknowledged that, subject to matters of arithmetic, their dispute is now resolved. However, if it transpires that further procedure is required, parties can request that the case is put out by order.