In the oil and gas sector, contracts frequently provide for disputes of a technical nature to be resolved by expert determination. The intention is that a suitably qualified expert will apply their experience to determine the relevant issue quickly and cost-effectively, without recourse to arbitration or litigation.
Common examples include: (i) price review disputes under long term LNG offtake agreements; (ii) measurement disputes under supply agreements; (iii) valuation disputes in joint operating agreements, for example when determining the buy-out price of a participating interest following a default; and (iv) completion accounts disputes in M&A transactions. In each case, the parties typically prioritise speed, technical competence and finality.
It is common for contracts to provide that the expert’s determination is final and binding “save for manifest error.” The meaning of that carve-out has recently been clarified by the Court of Appeal in WH Holding Limited v London Stadium LLP.
Finality of the Expert’s Determination as the Starting Point
The English courts have long taken the position that where parties contractually agree to be bound by an expert’s decision, they will generally be held to that bargain. Provided the expert has not departed from his instructions in any material respect and absent fraud, parties cannot challenge the outcome merely because the expert has made a mistake[1].
WH Holding confirms that the inclusion of a “manifest error” exception introduces only a narrow pathway for potential challenge.
What Is a “Manifest Error”?
The Court of Appeal summarised and reaffirmed the test[2] for manifest error as follows: “Absent contractual terms which provide differently when interpreted in context, an error will be manifest if, after investigation limited in time and extent, it is so obvious (and obviously capable of affecting the determination) as to admit of no difference of opinion”.
An arguable error will not suffice, even if the argument is well-founded. Critically, the error must be so clear that it admits of no counter argument. If the alleged error requires detailed analysis, competing interpretations, or expert debate, it will not qualify.
This point was made very clear by the fact that the Court of Appeal expressly said that if the question was the proper interpretation of the agreement, it might have found for the party seeking to challenge the expert’s determination. However, that did not mean that the expert's determination was "manifestly in error", demonstrating the high threshold of that must be met. Even if one party justifiably considers the expert’s reasoning or judgment to be flawed, if there is any room for debate it will not be a manifest error.
For oil and gas contracts, this distinction is particularly important. Many disputes—whether concerning pricing formulas, reserves calculations, or accounting adjustments—turn on complex technical or commercial judgments.
No Special Treatment for Interpretation of Formulae
A key issue in WH Holding was whether an incorrect application of a mathematical formula in a contract was open to challenge on the basis that the expert is instructed to apply the formula, and a failure to properly do so amounts to departing from the instructions given. It was accepted by counsel for the respondent that the effect of his argument would be that if a party could not succeed in challenging the incorrect interpretation of a mathematical formula on the ground of manifest error, it would simply re-frame the challenge as being a failure to follow instructions to apply that formula.
The Court of Appeal rejected this argument, saying that the nature of the expert’s instructions were to determine a dispute between the parties, in this case as to the interpretation and application of the formula, without making a manifest error. The test as to whether there has been a “manifest error” in the interpretation or application of a formula is the same as for any other term of the contract.
This has clear implications for the oil and gas sector. For example:
- in an LNG price review, an expert may interpret pricing clauses or indexation mechanisms in a way one party disputes;
- in a reserves valuation, an expert may adopt a particular methodology or assumption; or
- in completion accounts, an expert may interpret accounting principles or contractual definitions in a particular manner.
In all such cases, provided the expert’s approach is arguable, it will not amount to manifest error—even if another expert might have reached a different conclusion.
Practical Implications for Oil & Gas Contracts
The decision in WH Holding reinforces several key points:
- Clear drafting – reflecting the parties’ intentions – is critical
If parties intend to allow broader review of an expert’s determination—for example challenges to contractual interpretation—they must go beyond the standard “manifest error” wording (and probably provide for disputes to be resolved by courts or an arbitral tribunal, which cuts across the finality of the expert’s determination). - The risk of an arguably wrong determination must be understood
By agreeing to expert determination that is final in the absence of manifest error, the parties accept the risk that the expert may reach a decision that is arguably wrong but nonetheless binding on them. - Expert selection is paramount
Given the limited scope for challenge, careful thought should be given to the types of dispute that are suitable for expert determination, how the expert is selected to ensure they have the requisite technical expertise and experience, and the drafting of the expert’s instructions and scope (which should, where practicable, be set out in the contract).
[1] Campbell v Edwards [1976] 1 WLR 40; Jones v Sherwood Computer Services plc [1992] 1 WLR 277.
[2] As set out in Veba Oil Supply and Trading GMbH v Petrotrade Inc (“The Robin”) [2001] EWCA Civ 1832, [2002] CLC 405 and approved by the Supreme Court in Sara & Hossein Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2, [2023] 1 WLR 575.
