JUST BECAUSE YOU GIVE EXPERT EVIDENCE THAT DOESN’T MAKE YOU AN EXPERT: “ONE OF THE MOST EGREGIOUS AND NAKED USURPATION[S] OF THE FUNCTIONS OF THE COURT THAT I HAVE EVER SEEN”

Last week the “Covid Repeats” posts on this blog highlighted a few (and just a few) of the cases where judges had been critical of the role of experts, or experts involved in cases has been problematic.  That this remains a major problem in litigation is clear from the judgment of HHJ Matthews in De Sena & Anor v Notaro & Ors [2020] EWHC 1031 (Ch).  Many of the common problems seen on this blog over the past seven years are present.

“Overall, therefore, in relation to the evidence on accountants’ liability, I have disregarded both sides’ reports. I deprecate the (undoubtedly significant) expense which has been wasted on this aspect of the case, but it behoves the parties and their lawyers, when permission is given for such evidence to be obtained and adduced, in implementing that permission to pay close attention to the rules regarding the admissibility of expert evidence. Permission to adduce expert evidence on a topic by calling an accountant (or anyone else), is not a licence to ignore the rules as to what expert evidence is, and who can give it, or the conditions under which it is admissible in legal proceedings.”

“….one of the most egregious and naked usurpation of the functions of the court that I have ever seen.”

“I emphasise that it is just not enough to be a ‘forensic accountant’. It is not the experience of giving ‘expert’ evidence in court that makes you an expert. Those firms that provide expert witness services really ought to have learned by now that expertise is acquired by doing the thing in question, usually over many years, and that merely being an accountant (or anything else) for a long time does not mean that you thereby become an expert in everything that accountants (or whatever it may be) commonly do.”

THE CASE

The judge was giving judgment in an action, including an action against professional defendants, following a demerger. Part of the claim was against professional advisers.  The court gave permission for the parties to rely on expert evidence. Some of the evidence relates to accountancy practice in demergers.

THE JUDGMENT ON THE DEMERGER EVIDENCE

The judge commented specifically on the accountancy evidence called in relation to the role of accountants in relation to demergers.

The expert evidence

General

1. 1. Most evidence given at trial is evidence of fact. As a general proposition, evidence of opinion is not admissible. But expert opinion evidence is an exception to this general rule, now governed by section 3(1) of the Civil Evidence Act 1972. Expert evidence is a common and usually a helpful feature of modern litigation. As its name suggests, and as provided for by section 3(1), it is different from evidence of fact in that it involves the witness, who must possess sufficient expertise in the relevant subject-matter, giving his or her opinion as to one or more issues arising in the proceedings. An expert witness is to assume the facts for the purposes of giving such opinion evidence: see JP Morgan v Springwell [2006] EWHC 2755 (Comm), [21].

   2. There is no reason why an expert witness cannot also be a witness of fact to some extent (eg where a relevant thing or place is examined and then described by the expert, preparatory to giving an opinion: see eg Rogers v Hoyle [2015] QB 265, [27], [31], CA), but the two processes are distinct and must not be confused. On the other hand, the expert cannot usurp the functions of the court in finding the facts or interpreting the law. Nor can the expert witness give evidence of what he or she would have done in the particular situation: Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] 1 Ch 384, 402. Moreover, and importantly, expert evidence must be restricted to that which is reasonably required to resolve the proceedings: CPR rule 35.1. Mere desirability or helpfulness is not enough: see British Airways plc v Spencer [2015] EWHC 2477 (Ch), [68].

Expert evidence on accountants’ liability relating to demergers

1. 1. There were three kinds of expert evidence tendered at the trial. These related to (i) property valuation (Mr Gladwin for the claimants and Mr Jones for the defendants), (ii) share valuation (Mr Mesher for the claimants and Mr Butterworth for the defendants) and (iii) aspects of accountants’ liability (Mr Mesher for the claimants and Mr Plaha for the third defendant). No point arises on the admissibility of the first two kinds of expert evidence. These are clearly subjects of expertise, and the witnesses concerned were clearly expert in these fields. In relation to the last of these, however, at an early stage I raised a question as to the admissibility of such evidence. The directions order made by Mr Justice Birss in June 2018 provided in part as follows:

“17. The Claimants and the Third and Fourth Defendants (collectively) shall each have permission to adduce oral expert evidence from an accountant on the issue of scope and breach of duty so far as the claimant’s case against the Third and Fourth Defendants is concerned…”

1. 1. I have no doubt that the skill and knowledge required to advise a client how to carry out a demerger in a lawful and efficient way is properly the subject of a recognised expertise for this purpose. I am also in no doubt that the opinion of an expert in this field that a person professing to exercise this skill did or did not exercise it to the level reasonably required of a person holding himself or herself out as possessing it is admissible where a question arises as to whether it was so exercised.

   2. What caused me to express doubts about the expert evidence tendered in the field of demerger expertise in this case were:

1. The assumption made by the parties that, no doubt because accountants regularly advise clients on demergers such as to acquire the relevant expertise, therefore any accountant, whether he has the experience of advising clients on demergers or not, is qualified as an expert witness in this field. Birss J was not ordering that any accountant had the necessary expertise. His order was made against the backdrop of the existing law. He was therefore ordering that an accountant who had the necessary expertise could give the expert evidence in question.

2. The tendering of evidence as to whether the third defendant owed a duty of care to the claimants (especially in relation to case law specifically identified for the purpose) and if so what the scope of that duty was. The court’s earlier direction referred to the scope, though not in fact to the existence, of the duty. But that was to be read against the general law, which prohibits expert evidence on matters of law. The court’s direction cannot make inadmissible evidence admissible. What the judge undoubtedly meant was that the experts could give opinions on whether, and if so by how far, the third defendant had undershot the standard reasonably expected of reasonably competent accountants carrying out the functions of the third defendant in relation to the demerger transaction.

3. The tendering of evidence as to various questions of fact, including the terms of the contractual retainer that the third defendant had with the company.

1. 1. I consider first the question of the experience of the experts in relation to demerger transactions. For this purpose, I have looked at the curricula vitae attached to their reports. Mr Mesher’s says that he obtained his university degree in 1993, and has specialised in ‘forensic accounting’ since 1997. He qualified as an accountant doing audit/transaction work. In the list of his ‘professional specialisms’, there is no reference to demerger transactions. Mr Plaha’s CV does not state that he has any experience in demerger transactions. Nor does that of Mr Pooler, who I understand assisted him. After I raised this with counsel, I received a supplementary document, dealing with Mr Mesher’s experience in more detail. (I also received one from Mr Butterworth, though I am not concerned with him here.)

   2. The document relating to Mr Mesher said frankly that he did not “claim to be an expert in ‘demergers’ per se”, but that during the period 1993 to 2010 he worked for KPMG and was “exposed to various M&A transactions”. From 2010 to 2012 he was a partner in Grant Thornton’s forensic accounting team, where he continued to deal with the drafting of sale and purchase agreements and the mechanics of post-transaction accounting. From 2012 he has been practising in his present firm of forensic accounting where he has dealt with many post-transaction disputes, and assisting clients with untangling their business arrangements sometimes calculating the value of shareholdings in section 994 claims. I am afraid that this simply does not demonstrate expertise in demerger transactions, even though I accept that he will have had the opportunity to see one or more such transactions, and may even have participated in them. But that does not make you an expert in demergers. And it is for the expert witness tendered to demonstrate the expertise, not for the court to assume it.

   3. In these circumstances, I do not see how either Mr Mesher or Mr Plaha has acquired sufficient experience in carrying out demerger transactions as to be able to claim an expertise in it. I emphasise that it is just not enough to be a ‘forensic accountant’. It is not the experience of giving ‘expert’ evidence in court that makes you an expert. Those firms that provide expert witness services really ought to have learned by now that expertise is acquired by doing the thing in question, usually over many years, and that merely being an accountant (or anything else) for a long time does not mean that you thereby become an expert in everything that accountants (or whatever it may be) commonly do.

   4. Strictly speaking, that is an end to the question of the evidence on accountants’ liability issues. But there is a second point, and this is whether the evidence that they give in their reports is admissible at all. The report of Mr Mesher (on behalf of the claimants) in relation to accountants’ liability, sets out in section 3.1 the questions which he was asked by the claimants’ solicitors to consider. These are as follows (where ‘AB’ refers to Andrew Browne, ‘BF’ to the third defendant, ‘CDS’ and ‘C1’ to the first claimant, ‘DS’ to David Savill, ‘MDL’ to the second claimant, and ‘SNHL’ to Holdings):

“(i) What were the terms of the contractual retainer which BF had with SNHL group of companies (the “Group”)?

(ii) Was the Group’s retainer limited to BF’s functions as auditor?

(iii) If so, should BF have entered into a further contractual retainer to advise the Group on a demerger?

(iv) In order to advise the Group on a demerger would it have been necessary to have the assets of the Group independently valued?

(v) What are the circumstances in which BF could act for the Group and also advise the shareholders on a demerger?

(vi) In particular, would BF need clear written instructions from each of the shareholders that there was no conflict of interest inter se and that the terms of the demerger had been agreed?

(vii) BF’s case is that it was acting for the Group and not the shareholders. If it became apparent to BF (or if BF ought reasonably to have concluded) that there was no agreement between all the shareholders as to the terms of the demerger, should BF have:

(a) advised CDS that it could not continue to act for her and that she should be independently advised; and, or

(b) ceased to act for any party on the demerger?

(viii) would a reasonably competent chartered accountant in the position of DS or AB have considered it necessary to record in writing any suggestion given orally to C1 (none being admitted) firstly as to the conflict of interests and secondly that she should obtain separate accountancy of valuation advice?

(ix) do you consider that BF came under a duty of care to CDS or MDL, having regard to the principles set out in the case of BCCI (Overseas) Ltd (in Liquidation) v Price Waterhouse, namely:

(a) the precise relationship between the adviser and the advisee;

(b) the precise circumstances in which the advice came into existence and in which the advice was communicated to the advisee and whether the communication was made by the adviser or by a third party;

(c) the presence or absence of other advisers and the degree of reliance which the adviser intended or should reasonably have anticipated would be placed on its accuracy by the advisee and the reliance in fact placed on it;

(d) the presence or absence of other advisers on whom the advisee would or could rely; and

(e) the opportunity, if any, given to the advisee to issue a disclaimer.

(x) What was the scope of BF’s duty, if so, and when did it arise?

(xi) would a reasonably competent firm of chartered accountants in BF’s position have:

(a) sent the February and April 2011 clearance letters to HMRC in the circumstances then prevailing;

(b) failed to advise CDS that she was not receiving the equivalent of the market value of her shares in SNHL/SNL;

(c) drawn up demerger proposal which gave rise to CDS receiving less than she was entitled to for her shareholding in SNHL;

(d) applied a minority discount and/or a bulk or portfolio discount to the assets retained by the group and/or those transferred to MDL;

(e) applied such a discount without justification or notice to CDS;

(f) failed to advise CDS of the fact, reason for and implications of the second capital reduction in MDL;

(g) failed to advise CDS of the consequences of MDL being for fiscal purposes an investment rather than a trading company?”

1. 1. I have to say that I have never before seen such an extraordinary set of questions put to a witness being asked to give expert evidence. Questions (i), (ii) and (iv) are mixed questions of law and fact, both of which are for the court and not this witness. Question (iii) is not relevant, given that the third defendant obviously did advise on a demerger. Questions (v) and (vii) are questions of law for the court. Questions (vi) and (viii) are, to the extent that they are relevant at all, questions of law for the court. Question (ix) is one of the most egregious and naked usurpation of the functions of the court that I have ever seen. Moreover, since it refers only to one authority (and that more than 20 years old, when there have been many relevant decisions since), even if it were admissible, it would be of no use to the court. Question (x) is almost as egregious and objectionable. I am unable to regard the answers to any of these questions as admissible evidence in this case. I am astonished that these questions were asked at all, and almost as astonished that they were answered.

   2. Question (xi) is better than the rest. It concentrates on important aspects of the Bolam test for professional negligence, namely whether a reasonably competent firm of accountants in the position of the third defendant would have done certain things. But it does not ask whether the conduct of the third defendant in doing or failing to do those things fell below the standard reasonably required of the reasonably competent firm of accountants. There is usually a range of reasonably possible responses to a given situation, and what the Bolam test seeks to do is to ask whether the particular defendant’s actions fell outside that range. Nevertheless, the position remains that I am not satisfied that Mr Mesher has sufficient expertise in demerger transactions to answer the question.

   3. The expert report dated 14 August 2019 of Mr Plaha (to which Mr Pooler contributed) on behalf of the third defendant states in para 1.8 (using similar abbreviations to those in the report of Mr Mesher):

“I have been instructed to prepare an expert report dealing with scope and breach of duty as alleged by the Claimants and in particular:

(a) whether BF had a duty to advise MDL and/or CDS personally, and specifically:

(i) in circumstances where BF were engaged by SNHL and/or the Notaro Group from whom were BF entitled to take instructions?

(ii) Were BF engaged formally to act for CDS personally?

(iii) Did BF assume responsibility to advise CDS personally?

(iv) Were BF formally engaged to act for MDL?

(v) Did BF assume responsibility to advise MDL?

(b) Comment upon the following issues that would only be relevant if the Court were to determine that BF owed a personal duty to CDS and/or a duty to MDL (which BF denies):

(i) The advice which CDS should have received in relation to the alleged duty to advise her to obtain an independent valuation of assets. In particular, what with the duty of a reasonably competent firm of accountants have been and, in the circumstances of this case, did the actions of BF fall short of that standard?

(ii) BF’s duty to advise CDS on the impact of the bulk transfer discount on her and/or MDL.

(c) Explain the reasons for the second capital reduction and comment on:

(i) What was the reason for the second capital reduction; and

(ii) The effect of the second capital reduction on the value of CDS’s shareholding in MDL.

(d) Comment on the allegations in relation to the Clearance Letters.”

1. Question (a) is just as objectionable as questions (ix) and (x) were in Mr Mesher’s report. They are questions of law for the court. The first sentence of question (b) (i), the first 15 words of the second sentence and the whole of question (b)(ii) are also questions of law, and likewise objectionable. The remainder of question (b)(i) is acceptable. Question (c)(i) is a question of fact, which is also for the court (and on which the witness has none but hearsay evidence to give). Question (c)(ii) is partly a matter of law, but partly a matter of share valuation expertise, which I do not understand Mr Plaha (or Mr Pooler) to claim to possess. Question (d) is hardly a proper question at all. Nevertheless, some of the comments made in the report are helpful as showing the practice of accountants. Overall, therefore, there is only a little of the report which I would regard as admissible expert evidence, assuming the sufficient expertise of the writer of the report. But, as I have also said, insofar as the expert evidence given relates to the practice of demerger transactions, I do not regard either Mr Plaha or Mr Pooler as such an expert.

2. Overall, therefore, in relation to the evidence on accountants’ liability, I have disregarded both sides’ reports. I deprecate the (undoubtedly significant) expense which has been wasted on this aspect of the case, but it behoves the parties and their lawyers, when permission is given for such evidence to be obtained and adduced, in implementing that permission to pay close attention to the rules regarding the admissibility of expert evidence. Permission to adduce expert evidence on a topic by calling an accountant (or anyone else), is not a licence to ignore the rules as to what expert evidence is, and who can give it, or the conditions under which it is admissible in legal proceedings.