Article by Dudley Solan, Peter Lennon, Daniel Scanlon, Graham O’Doherty, Nicholas Cole and Enda O’Keeffe, Maples and Calder

A recent Privy Council decision looks at how courts must treat the evidence of expert witnesses (Caribbean Steel Co Ltd v Price Waterhouse (A Firm) [2013] UKPC 18).

In this case the plaintiff (“CSC”) acquired a majority shareholding of Caribbean Cable Company Limited (“CCC”) for $32m (Jamaican dollars).  Before CSC completed the purchase it obtained a valuation of CCC from Price Waterhouse (auditor of both CSC and CCC) which described a pension fund surplus of $13.85m as an asset of CCC.

Price Waterhouse continued to act as auditor to CSC after the acquisition of CCC.  Fifteen months after the acquisition it emerged that CCC had $1.4m in outstanding borrowings from its pension fund at the time that Price Waterhouse had carried out its valuation, which were not mentioned in the valuation report.

CSC sued Price Waterhouse for the full $32m purchase price as damages, together with the fees that CSC had paid for the report, on the basis that CSC would not have proceeded with the purchase of CCC’s shares had it known about the loans.

CSC adduced evidence from an expert witness who was a certified fraud examiner, a certified financial services auditor, and a forensic accountant.  The expert said that the loans should have been brought to CSC’s attention by Price Waterhouse.  However, he was not a chartered accountant, had never valued a company, and had not audited a company’s financial statements in accordance with the Companies Acts.

Price Waterhouse’s expert witness – a chartered accountant and head of Jamaica’s chartered accountants’ disciplinary board – said that the valuation was reasonable and had been properly carried out.  He said that the loans did not affect the value of pension fund surplus and that the $1.4m sum was not material to the company’s value.

The court of first instance found for CSC on the basis that any activity that affected the value of CCC should have been brought to CSC’s attention by Price Waterhouse.  The court said that this was  common sense and that it did not require any expertise in share valuation to reach such a conclusion.  The court awarded CSC $13.85m in damages, being the value of the pension fund surplus at the time of the valuation.

The Court of Appeal of Jamaica overturned this decision and approved Sanson v Metcalfe Hambleton & Co [1998] P.N.L.R. 542 which held that a court should be slow to find a professional negligent without hearing evidence to that effect from a member of the same profession.  The Court of Appeal said that it considered that CSC’s expert lacked relevant expertise and that the lower court should not have preferred his evidence to that of Price Waterhouse’s expert.

It went on to say that the lower court was wrong to regard it as a matter of obvious common sense that Price Waterhouse was negligent.  The fact that Price Waterhouse had adduced evidence from a suitably-qualified expert to the effect that it was not negligent had not precluded the lower court from rejecting that view and finding to the contrary. However, the Court of Appeal said that it was essential that the reasons given by the expert for reaching his opinion were carefully scrutinised by the court of first instance because, in circumstances where there was no sound reason for rejecting the opinion, the court could not properly have found that professional negligence had been established.

The Judicial Committee of the Privy Council endorsed the Court of Appeal’s decision, on appeal.  It is clear from this decision that a professional person should not be found to be negligent without concrete evidence from an appropriately qualified and experienced expert in the same profession.  In the absence of expert evidence to the contrary, clear evidence from an expert cannot be discounted unless the court finds sound reasons for so doing.

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