The Delaware courts have been asked several times in the last few years to interpret contracting parties’ intent when they have relegated certain disputes to “an expert, not an arbitrator” as a form of alternative dispute resolution. On Jan. 29, the Delaware Court of Chancery issued the latest opinion on this topic in Ray Beyond v. Trimaran Fund Management, C.A. No. 2018-0497-KSJM, and reiterated that such language will be construed as limiting the ADR professional’s jurisdiction to deciding “factual disputes within the decision-maker’s expertise” rather than binding legal determinations that would be made by a judicial officer.
This dispute arose from the terms of a merger agreement, pursuant to which the plaintiff, Ray Beyond Corp., acquired ChanceLight Inc. from, among others, defendant Trimaran Fund Management L.L.C. One aspect of the terms of the merger was that a portion of the proceeds from the purchase were to be set aside in an escrow to be released upon certain conditions being met. Relevant to this discussion was whether, post-closing, a ChanceLight subsidiary entered into certain “qualifying contracts” with the Chicago Public Schools. The merger agreement’s clauses governing the release of the escrowed funds delegated certain matters to an independent accountant to be resolved. An underlying dispute arose between the parties as to whether a qualifying contract had ever been executed, and therefore, triggered the primary dispute addressed in this opinion: Must the question of whether a qualifying contract was executed be referred to the independent accountant or could it be adjudicated by a judicial officer in a court?
As is usual for this type of dispute, the court first turned to a review of the terms of the agreement at issue. The clause of the merger agreement at issue provided that “‘in the event that the CPS escrow amount is not fully distributed prior to July 1, 2018 … and [Ray Beyond] and [Trimaran] are not able in good faith to agree upon an appropriate distribution of the CPS escrow amount, the matter shall be referred to the settlement accountant.’” The section went on to provide that the settlement accountant would be an independent accounting firm that would serve as “‘an expert, not an arbitrator.’” The vice chancellor focused her analysis on whether “‘the matter’” of the “’appropriate distribution’” should be broadly interpreted to allocate to the settlement accountant the legal question of whether a qualifying contract had been executed. Ultimately, the court found such a broad interpretation was not warranted, as it was “inconsistent with the parties’ intent to narrow the settlement accountant’s role to that of ‘an expert, not an arbitrator.’”
The court reasoned as follows: “Delaware courts have interpreted similar expert-not-arbitrator stipulations as calling for an expert determination, not an arbitration. Expert determination and arbitration provisions confer fundamentally different scopes of authority to third-party decision-makers. A typical expert determination provision limits the decision maker’s authority to deciding a specific factual dispute within the decision maker’s expertise. In contrast, the scope of authority conferred on an arbitrator is analogous to the authority conferred on a judicial officer. The merger agreement’s expert-not-arbitrator provision, therefore, signals the parties’ intent to limit the scope of the settlement accountant’s authority to discrete factual issues within an independent accountant’s expertise.”
In adopting this reasoning, the vice chancellor looked to the following Delaware precedents: Chicago Bridge & Iron v. Westinghouse Electric, 166 A.3d 912 (Del. 2017); Penton Business Media Holdings v. Informa, (Del. Ch. July 9, 2018); and AQSR India Private v. Bureau Veritas Holdings, (Del. Ch. June 16, 2009). The court also looked to a New York City Bar Commission report on this topic: N.Y.C. Bar Comm. On Int’l Commercial Arbitration, “Purchase Price Adjustment Clauses and Expert Determinations: Legal Issues, Practical Problems and Suggested Improvements,” (2013) (the “N.Y.C. Bar Report”).
This opinion, and the precedent upon which it is based, gives guidance to practitioners on how to draft ADR provisions in contracts with the precision necessary to accomplish the desired goal. Where the contracting parties are merely looking to a neutral to help them work through narrow disputes over “technical questions” that would squarely fall within the “technical expertise” of that neutral, then the courts of Delaware will likely find that matter to properly be relegated to “an expert, not an arbitrator.” Where, however, the parties appear to intend to send broad disputes to a neutral that is empowered to address not only disputes of factual matters, but also ordained to make conclusive legal determinations based on those facts, the courts will be more likely to find that such a neutral is actually filling the role of an arbitrator.
As always, parties to contracts that will be interpreted under the law of Delaware are largely free to “self-order” and draft the terms of their agreement in the manner they best believe represents their shared intent. There are many ways to draft various forms of ADR provisions, and this decision reflects the Court of Chancery’s helpful review and analysis of but one of those variations.
Richard L. Renck is a trial lawyer with Duane Morris’ Wilmington office. He litigates matters in both the state and federal courts in Delaware―including a practice before Delaware’s Court of Chancery.
Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.