DealLawyers.com Blog

This recent Sheppard Mullin blog discusses the role of the independent accountant in resolving disputes in a purchase price adjustment calculation and, in particular, the impact of engaging an accountant as an expert or an arbitrator. The blog notes that many states began interpreting arbitration to include expert determinations or appraisals following the passage of the Federal Arbitration Act regardless of the language in the purchase agreement, but under Delaware case law, an expert determination is different from arbitration in a number of ways:

[B]y invoking language calling for an expert determination in the purchase agreement, the parties narrow the third-party decision-maker’s scope of authority to factual disputes within an independent accountant’s expertise. Experts will not usually be granted the power to interpret the contract or make binding decisions on issues of law. As a result, any legal determination or issue of contractual interpretation that forms part of an expert determination will be subject to plenary review. The review of arbitration awards is governed by the FAA which requires that courts provide significant deference to the arbitrator’s decision. Generally, courts are not as limited in their review of expert determinations.

Finally, the process and procedures of arbitration are more formal and similar to a judicial process, with rules for the submission of evidence and the opportunity for the parties to make arguments. In contrast, expert determinations are “attended by a larger measure of informality and [experts] are not bound to the strict judicial investigation of an arbitration.”

The blog goes on to discuss how parties can elect an expert determination or arbitration:

Delaware courts have consistently held that specifying in the purchase agreement that the independent accountant will act as “an expert and not as an arbitrator” is a key indicator of the parties’ intent to obtain an expert determination. … Where the parties have not been explicit in their intent to employ an expert determination (i.e., by failing to include the “expert not arbitrator” language), Delaware courts will examine other aspects of the purchase agreement to determine the parties’ intent, including the scope of authority granted to the accountant, the dispute resolution procedures, and whether the procedures will finally settle the dispute.

[I]f arbitration is desired, the purchase agreement should (1) clearly state that the parties intend that the accountant act as arbitrator, and (2) specifically refer to a set of procedural rules to govern the arbitration. Alternatively, if the parties intend to engage the accountant as an expert only, the purchase agreement should clearly provide that the accountant will be acting “as an expert not as an arbitrator”.

– Meredith Ervine