Arbitration Case Analysis

Listen to this article

Even though the court held the provision in question valid under Wisconsin law, attorneys would be wise to avoid using similar provisions in the future.

Although it is clear that such disputes must be submitted to an accountant, numerous questions will remain unanswered.

First, as the court noted, it is unclear whether state or federal law governs the characterization of the process as “arbitration.”

Second, if federal law governs, it is not clear whether any provision for a “final and binding” decision is an agreement for “arbitration.”

The answer to this question would appear to be yes, inasmuch as, in Butler Products Co. v. Unistrut Corp., 367 F.2d 733, 735 (7th Cir. 1966), the Seventh Circuit held that use of an accounting firm to make a determination “binding on the parties” is arbitration whether Illinois or federal law supplies the definition.

Notwithstanding the holding in Butler Products, however, the Seventh Circuit in this case declared the issue to be open. Regardless of the ultimate answer the court would reach, it is certainly not in the interests of any individual client to be the one paying attorneys to litigate the issue.

In addition, it is not clear what the court’s standard of review would be, in the event of a dispute.

The contractual language that the accountant’s decision be “final, conclusive and binding” suggests it is to be given the same high level of deference as formal arbitration; but the language that the accounting firm act “as experts and not as arbitrators” suggests that the level of deference is lower.

The case is distinguishable, in several respects, from In re Lower Baraboo River Drainage Dist v. Schirmer, 199 Wis. 230, 225 N.W. 331 (1929), a case the Seventh Circuit cited for support.

	Related Links 7th Circuit Court of Appeals Related Article Agreement to arbitrate upheld

There, the contracting parties gave the engineer far more power than in the case at bar. The engineer held an open hearing, in which all parties had the right to participate, oral testimony was adduced, and there were examinations by expert engineers. Schirmer, 225 N.W. at 335.

Giving logical effect to the provision that the accounting firm not act as arbitrators, the normal presumptions that attach to arbitration — such as that the decision should be set aside only for fraud, mistake or misconduct — arguably should not apply.

Again, regardless of what the ultimate answer is regarding the breadth of the power given to the accountant, or what level of deference is to be given to the accountant’s decision, any attorney who drafts a contract containing similar language is creating the potential for uncertainty and litigation over matters that could be explicitly provided for.

– David Ziemer

Click here for Main Story.

David Ziemer can be reached by email.