The Court of Chancery’s decisions in Agiliance and Ray Beyond build on other recent Delaware state court decisions analyzing whether dispute resolution provisions require an expert determination or arbitration, including the Delaware Supreme Court’s decision in Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC and, more recently, the Court of Chancery’s decision in Penton Business Media Holdings, LLC v. Informa PLC.
Collectively, the analysis and reasoning in Agiliance, Ray Beyond, Chicago Bridge, and Penton provides substantial guidance to commercial parties and practitioners regarding important dispute resolution issues determined under Delaware law, which governs a substantial percentage of commercial transactions worldwide.
“One national survey posits that only twenty-four states continue to recognize a distinction between experts and arbitrators …. At the federal level, the United States Courts of Appeals have split on whether an expert determination constitutes an arbitration under the FAA.”1 Delaware’s position on the issue, however, is well-established.
For decades, Delaware courts applying Delaware law have maintained the distinction between an arbitration and an expert determination.2 The recent Delaware state court decisions, including Agiliance,3 Ray Beyond,4 Chicago Bridge,5 and Penton,6 demonstrate the distinction under Delaware law between an arbitration and expert determination is alive and well. These decisions represent the most recent development under Delaware law analyzing “expert-not-arbitrator” dispute resolution provisions and provide substantial guidance to commercial parties and practitioners.
In Agiliance, the seller filed suit against the buyer seeking to compel arbitration of disputes relating to a post-closing net-working-capital adjustment under an Asset Purchase Agreement (the “APA”).7 The APA provided that disputes regarding the post-closing net-working-capital adjustment “shall be submitted for arbitration by a nationally recognized accounting firm.”8 The dispute-resolution process in the APA required both parties to submit proposed working capital calculations to the accounting firm, which would then select one of the two proposals and “not make any other determination. 9 The APA further provided that “[t]he determination of the Accounting Firm shall constitute an arbitral award ….”10
The Court of Chancery held the APA unambiguously expressed the parties’ intent that disputes be arbitrated: “In one paragraph, the parties used the word ‘arbitration’ twice, ‘arbitrate’ once, and ‘arbitral’ once. The parties never use the word ‘expert’ or state that the Accounting Firm should ‘act as an expert and not as an arbitrator.’ The language could hardly be clearer in intending arbitration.”11 The court emphasized, in particular, that the APA did not include language stating that the independent accountant was to act as “an expert and not as an arbitrator.”12 The court also rejected the buyer’s reliance on the fact that (i) the third-party accountant would be required to decide legal questions and (ii) the APA did not provide rules to govern an arbitration.13 The court recognized that earlier decisions, applying Delaware law, have required arbitration be conducted by an accounting firm with no legal expertise.14
Four days following the court’s decision in Agiliance, another member of the Court of Chancery issued a decision in Ray Beyond resolving a similar expert-not-arbitrator dispute. Like in Agiliance, (i) the third-party in Ray Beyond was an independent accountant tasked with resolving a post-closing financial calculation, (ii) the underlying dispute required resolution of embedded legal questions, and (iii) the governing agreement did not reference a set of procedural rules to govern the dispute process.15 Despite the material parallels with Agiliance, the Ray Beyond court held that the parties agreed to an expert determination, not arbitration.16 A critical distinction between the facts in Agiliance and Ray Beyond is the operative agreement in Ray Beyond expressly provided the third-party accountant would be “an expert, not an arbitrator.”17
The courts in Agiliance and Ray Beyond relied on two recent decisions, Penton and Chicago Bridge, which involved similar disputes regarding whether parties contractually agreed to an expert determination or an arbitration.18 In Penton, like in Ray Beyond, the contract expressly provided that the third-party “shall be acting as an accounting expert only and not as an arbitrator.…”19 As with any contractual analysis under Delaware law, determining the parties’ intent is paramount and, in Penton, the court explained that “[w]hen established legal terminology is used in a legal instrument, a court will presume that the parties intended to use the established legal meaning of the terms.”20 The court found the language in the agreement providing the third-party shall be an “expert only and not an arbitrator” unambiguously demonstrated the parties intent that the third-party accountant act only as an expert, not an arbitrator.21
The court in Penton explained when an agreement is ambiguous or “[i]f parties have not stated their intention explicitly, then a court will have to examine other aspects of the contract or even turn to extrinsic evidence.”22 The court noted that “[n]omenclature alone would not be dispositive,” reasoning that “[i]t is even possible to envision a setting where the parties included ‘expert not arbitrator’ language, but then constructed a dispute resolution provision that had numerous features associated with commercial arbitration.”23 At bottom, Delaware courts analyze dispute resolution provisions like any other contract, to fulfill and maximize the intent of the parties.
The Delaware Supreme Court’s decision in Chicago Bridge heavily influenced the Court of Chancery’s determinations in Penton, Agiliance, and Ray Beyond regarding whether the parties in each case agreed to an expert determination or arbitration.24 In Chicago Bridge, the Delaware Supreme Court agreed with a seller that, under the operative contract, the parties agreed an “independent auditor” would act as an expert, not an arbitrator, and in support of its holding the appellate court noted that the agreement “states in multiple places that the auditor was acting ‘as an expert and not as an arbitrator.’”25
The decisions in Agiliance,26 Ray Beyond,27 Penton,28 and Chicago Bridge29 each cited, with approval, a report prepared by the Committee on International Commercial Disputes of the New York City Bar Association that “sought to propose a coherent test to distinguish expert determination and arbitration.” In its report, the committee recommended that parties who wished to obtain an expert determination from an accountant, rather than inviting an arbitration, should “state that the accounting firm is to ‘act as an expert and not as an arbitrator.’”30
The New York Bar Association Report also “suggests that when difficult cases arise, courts should consider the ‘type and scope of authority’ given to the party charged with resolving the dispute,” explaining that “parties [do] not … normally grant the expert the authority to make binding decisions on issues of law or legal claims, such as legal liability.”31 While the report’s presumption is accurate, it is evident from cases such as Agiliance that Delaware courts, applying Delaware law, are not restrained from concluding a dispute-resolution provision requires an expert, not an arbitrator, to resolve legal questions.
Guidance Gleaned From Recent “Expert-Not-Arbitrator” Decisions
Collectively, the analysis and reasoning in Agiliance, Ray Beyond, Penton, and Chicago Bridge provides the following guidance to commercial parties and practitioners regarding important dispute resolution issues under Delaware law:
- Questions of law are typically resolved by arbitrators, but experts can decide legal questions.
- Inclusion of procedural rules in the contract governing the dispute resolution process is indicative of arbitration, not an expert determination, though the lack of identified rules will not preclude a finding that contractual parties agreed to arbitration.
- If parties have not stated their intention explicitly, a court will have to examine other aspects of the contract or even turn to extrinsic evidence.
- The parties’ course of conduct during a dispute resolution proceeding may be tantamount to an arbitration.
- Nomenclature alone is not dispositive of the parties’ intent to arbitrate or seek an expert determination.
- If arbitration is desired, the contract should (i) repeatedly reference arbitration, arbitrate, arbitrator, and/or similar terms and (ii) specifically reference a set of procedural rules to govern the arbitration (such as the American Arbitration Association's Commercial Arbitration and Mediation Procedures).
- If an expert determination is desired, the strongest way to express that intent is to include language in the contract stating the expert is “to act as an expert and not as an arbitrator."
- It is possible for the parties to include “expert not arbitrator” language, but then construct a dispute resolution provision that had numerous features associated with commercial arbitration.
Reed Smith has significant experience, on the one hand, representing parties pursuing an expert determination regarding post-closing contractual disputes and, on the other hand, representing parties seeking to arbitrate such post-closing disputes.
- Penton Bus. Media Holdings, LLC v. Informa PLC, 2018 WL 3343495, at *8 (Del. Ch. July 9, 2018) (citing Lina M. Colón Santiago, Insurance Appraisal & Arbitration, 8 No. 1 U. Puerto Rico Bus. L.J. 65, 74 (2016)); see also id. (“Early decisions from the courts of appeals considered state law when trying to determine whether an expert determination constituted an arbitration. Later circuit decisions applied federal common law.”) (citing Hartford Lloyd’s Ins. Co. v. Teachworth, 898 F.2d 1058, 1061-63 (5th Cir. 1990) (applying Texas law); Wasyl, Inc. v. First Bos. Corp., 813 F.2d 1579, 1581-82 (9th Cir. 1987) (applying California law); Portland Gen. Elec. Co. v. U.S. Bank Tr. Nat’l Ass’n as Tr. for Tr. No. 1, 218 F.3d 1085, 1091 (9th Cir. 2000) (Tashima, J., concurring) (expressing doubt about Wasyl); id. at 1091-92 (McKeown, J., specially concurring) (same); Bakoss v. Certain Underwriters at Lloyds of London Issuing Certificate No. 0510135, 707 F.3d 140 (2d Cir. 2013); Evanston Ins. Co. v. Cogswell Props., LLC, 683 F.3d 684 (6th Cir. 2012); Salt Lake Tribune Publ’g Co., LLC v. Mgmt. Planning, Inc., 390 F.3d 684 (10th Cir. 2004); Fit Tech, Inc. v. Bally Total Fitness Hldg. Corp., 374 F.3d 1 (1st Cir. 2004)).
- See, e.g., Collison v. Deisem, 265 A.2d 57, 59 (Del. Ch. 1970).
- See 2019 WL 343668 (Del. Ch. Jan. 25, 2019).
- See 2019 WL 366614 (Del. Ch. Jan. 29, 2019).
- See 166 A.3d 912 (Del. 2017).
- See 2018 WL 3343495.
- See 2019 WL 343668, at *1.
- Section 2.7(b)(ii) also included a provision in the event Agiliance and Resolver failed to agree to an accounting firm, by stating it Ernst & Young LLP would be selected if the parties failed to agree “after a reasonable time.” To avoid any doubt regarding what constitutes “reasonable time,” Section 2.7(b)(ii) could have specified a precise period of time, including by reference to calendar (opposed to business) days.
- 2019 WL 343668, at *1 (“The scope of the dispute to be resolved by the Accounting Firm shall be limited to a choice [between the two proposals] and the accounting firm shall not make any other determination.”).
- Id. at *3.
- Id. at *4 (“Nor does the fact that the arbitrators are not legally trained, or the parties’ decision not to predetermine the rules governing the arbitration, change or invalidate the intent of the parties to arbitrate.”).
- Id. (citing Viacom Int’l v. Winshall, 72 A.3d 78 (Del. 2013) and HBMA Hldgs., LLC v. LSF9 Stardust Hldgs. LLC, 2017 WL 6209594 (Del. Ch. Dec. 8, 2018)).
- 2019 WL 366614, at *3-8.
- Id. at *8.
- Id. at *1, *3, *6.
- See Agiliance, 2019 WL 343668, at *2, *3; Ray Beyond, 2019 WL 366614, at *1, *2, *6, *7.
- 2018 WL 3343495, at *3, *13.
- Id. at *12.
- Id. at *13. The Penton court further noted that, “[u]nder English law, the ‘expert not arbitrator’ language is the standard phrase that parties use to invoke an expertdetermination,” and cited as support “one authoritative treatise explain[ing], ‘[t]he most commonly encountered wording is that the expert is ‘to act as an expert and not as an arbitrator.’” Id. (quoting Clive Freedman & James Farrell, Kendall on Expert Determination 160 (5th ed. 2015)); see also EMSI Acquisition, Inc. v. Contrarian Funds, LLC, 2017 WL 1732369 at *16-17 (Del. Ch. May 3, 2017) (dismissing action after giving controlling weight to the parties’ contractual stipulation that the Settlement Auditor had acted as an expert and not an arbitrator).
- 2018 WL 3343495, at *13.
- Id. at *10, *13, *16; Agiliance, 2019 WL 343668, at *3; Ray Beyond, 2019 WL 366614, at *7, *9.
- 166 A.3d at 931.
- See Agiliance, 2019 WL 343668, at *3.
- See Ray Beyond, 2019 WL 366614, at *6.
- See Penton, 2018 WL 3343495 at *6, *13.
- See Chicago Bridge, 166 A.3d at 931.
- Penton, 2018 WL 3343495, at *13.
- Id. at *15.