Agreement to arbitrate upheld

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The Seventh Circuit on Dec. 30 held that a purchase agreement, which provided that differences in the amount of net working capital at closing shall be referred to an accounting firm “acting as experts and not as arbitrators” nevertheless provides for mandatory arbitration, where the contract also provided that the determination of the accountant shall be “final, conclusive and binding.”

Omni Tech Corp. sold its End User Division to MPC Solutions Sales, LLC. The contract provided for some post-closing adjustments to the price, including one for net working capital.

The agreement provided that, if net working capital exceeds $8 million, then the final purchase price rises by the amount of the difference; if net working capital is less than $8 million, then the price is reduced dollar for dollar.

After the closing, the parties disputed net working capital. Omni Tech claimed it was $10.6 million, but MPC asserted it was only $6.7 million.

The agreement provided that the parties “shall refer their remaining differences to [an accounting firm that] shall, acting as experts and not as arbitrators, determine solely on the basis of the standards set forth in this Section 3.3 … whether and to what extent, if any, the Final Net Working Capital requires adjustment in order to be prepared in accordance with this Section 3.3. … The determination of the Independent Accountant shall be final, conclusive and binding upon [Omni Tech] and [MPC Solutions].”

Instead of submitting the dispute to an independent accountant, however, Omni Tech filed suit in the Eastern District of Wisconsin, demanding that the court determine the Division’s net working capital on the closing date. MPC moved the court to stay or dismiss the suit so that the accountant could make the “final, conclusive and binding decision” for which the contract called.

District Judge Charles N. Clevert denied the motion, concluding that, because the accountants acted “as experts and not as arbitrators,” this is not an arbitration clause.
MPC appealed, and the Seventh Circuit reversed in a decision by Judge Frank H. Easterbrook.

The court wrote, “The district court assumed that it may ignore any form of alternative dispute resolution other than ‘arbitration.’ Why would that be so? Many contracts have venue or forum-selection clauses. These do not call for ‘arbitration’ but are routinely enforced, even when they send the dispute for resolution outside the court’s jurisdiction (cites omitted).”

The court cited several Wisconsin cases in which arbitration was required, even though the contracts did not use the word, “arbitration.”

In Lower Baraboo River Drainage Dis. v. Schirmer, 199 Wis. 230, 233-35, 225 N.W. 331, 333 (1929), the Wisconsin Supreme Court held that a construction contract provision — stating that engineer’s determination of disputes as to suitability of work will be “final and conclusive” — is an enforceable agreement to arbitrate.

Likewise, in Depies-Heus Oil Co. v. Sielaff, 246 Wis. 36, 41-44, 16 N.W. 2d 386, 388-90 (1944), the court held that an agreement for an appraiser to set the value for an exercise of option to purchase property is enforceable as an agreement to arbitrate.

The court thus concluded, “Names are unimportant, however; what matters is that Wisconsin respects the parties’ ability to make agreements of this kind.”

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The court reasoned, “The statement that PricewaterhouseCoopers will act as an expert and not as an arbitrator means that it will resolve the dispute as accountants do — by examining the corporate books and applying normal accounting principles plus any special definitions the parties have adopted — rather than by entertaining arguments from lawyers and listening to testimony. It does not imply that the whole section of the contract committing resolution to an independent private party is hortatory. Thus the provision for the ‘final, conclusive and binding’ resolution of this dispute by someone other than a federal judge must be honored; the judge is no more entitled to ignore it than he could ignore the contract’s detailed definition of ‘net working capital.’”

Noting a split in other circuits, the court declined to decide whether Wisconsin or federal law governs the characterization of a dispute-resolution process as arbitr
ation or not, and whether, if the answer is federal, any provision for a “final and binding” decision must be called an agreement to arbitrate.

Instead, the court found, “Because this agreement is valid under Wisconsin law, whether or not it carries the label ‘arbitration,’ it must be implemented in full.”

Accordingly, the court reversed, and remanded the case to the district court with instructions to stay the litigation pending consideration of net working capital by an independent accountant.

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David Ziemer can be reached by email.