Avoiding an Accidental Arbitration of an Acquisition Agreement

In the world of acquisition agreements, I think it is safe to say that we commonly think of disputes and those who resolve them as falling into two buckets.  If we have a disagreement over how to interpret contract language – for example, what is the proper form and delivery of a notice required under the agreement – that is the type of legal dispute that one would expect to ultimately be resolved by a judge or arbitrator if no settlement could be reached.  A non-lawyer expert such as an accountant, however, would decide only issues within their particular area of expertise, such as the proper calculation of a company’s working capital under an agreed form of GAAP.

This seems a common-sense division of labor – but Pennsylvania courts may surprise clients and counsel who assume this distinction will be observed.  In the recent decision of the Superior Court of Pennsylvania in TTSP Corporation v. The Rose Corporation(1),  the court found that a provision requiring appointment of an independent accountant to resolve a dispute over a purchase price adjustment amount should be treated as an agreement to arbitrate.  A key issue in dispute between the buyer and seller in TSSP was whether the seller had delivered proper notice of its disagreement with buyer’s proposed adjustment amount – in other words, a question of interpretation of contract language rather than of the accuracy of accounts and calculations.  The Superior Court, however, stated that since the accountant was acting as an arbitrator, the principles of arbitration law meant that it was solely for the accountant, and not for the courts, to interpret and apply the notice provisions of the acquisition agreement.  

Pennsylvania is not alone in its willingness to treat these kinds of provisions for dispute resolution by experts as agreements to arbitrate, with all the attendant legal consequences.   In many states and Federal courts, “arbitral principles seeped into and, in some jurisdictions, swamped the law governing expert determinations.”(2)  While most parties accept that an accountant’s determination as to values and calculations should be definitive and enforceable, few have likely thought through the consequences of allowing an accountant the full range of powers of an arbitrator in hearing evidence, establishing rules of procedure, and interpreting law rather than numbers.

To ensure that an independent accountant or other expert only determines those issues that are clearly within the scope of their expertise, care should be taking both in drafting the provision itself and in determining the jurisdiction whose law will govern the agreement:

  1. All else being equal, give strong consideration to having the acquisition agreement governed by the law of Delaware or New York.  Both of these jurisdictions recognize the distinction between expert determinations and arbitrations, and their courts have far more experience and sophistication in the interpretation of such provisions than those of other jurisdictions.
  2. Do not import unnecessary procedural language into the expert determination provision.  In TTSP, for example, Superior Court noted that even though the agreement never used the word “arbitrate” or variants thereof, it included language requiring written submissions and oral presentations by the parties, and thus “had sufficient hallmarks inherent to an arbitration proceeding.”(3) 
  3. Always state explicitly that the expert is acting as a subject matter expert and “not as an arbitrator.”  This may not save you, however, in the face of conflicting language or a jurisdiction with bad case law.
  4. Describe the expert’s role as narrowly and precisely as possible.  For example, rather than using broad descriptions of items to be considered, try to tie the accountant’s work to specific line items in a benchmark balance sheet or income statement.
  1. 2019 Pa. Super. 262 (August 29, 2019).
  2. Penton Business Media Holdings v. Informa PLC, No. 2017-0847-JTL, https://courts.delaware.gov/Opinions/Download.aspx?id=275500 (Del. Ch. July 9, 2018), at p. 17.
  3. TSSP at note 12.

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