Purchase price adjustment dispute should be referred to expert under carve out clause in first instance (SDNY) | Practical Law

Purchase price adjustment dispute should be referred to expert under carve out clause in first instance (SDNY) | Practical Law

In Alstom v. General Electric Co., the US District Court for the Southern District of New York considered whether a dispute over a purchase price adjustment should be determined by an independent accounting firm (as an expert) or by arbitrators in an International Chamber of Commerce (ICC) arbitration.

Purchase price adjustment dispute should be referred to expert under carve out clause in first instance (SDNY)

by Practical Law Arbitration
Published on 18 Jan 2017 • New York, USA (National/Federal)
In Alstom v. General Electric Co., the US District Court for the Southern District of New York considered whether a dispute over a purchase price adjustment should be determined by an independent accounting firm (as an expert) or by arbitrators in an International Chamber of Commerce (ICC) arbitration.
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The US District Court for the Southern District of New York has ruled that a dispute over a purchase price adjustment should, in the first instance at least, be submitted to an independent accounting firm (IAF) as an expert, rather than to International Chamber of Commerce (ICC) arbitration.
An agreement between GE and Alstom was subject to a post-closing purchase price adjustment and contained a clause providing for disputes to be referred to International Chamber of Commerce (ICC) arbitration, with a carve-out clause providing for certain disputes to be referred to an international accounting firm (IAF), for expert determination. A dispute arose as to the purchase price adjustment and as to whether the disputed issues fell to be submitted to an IAF, under the carve-out clause, or to arbitration.
The court held that the plain language of the parties' agreement led to the conclusion that the dispute should be submitted to the IAF, at least in the first instance. The fact that the issues in question called for more than mere "bean counting" did not take them outside the scope of the purchase price adjustment dispute resolution provisions. Furthermore, it would be open to GE to argue before the IAF that Alstom's arguments relied on more than mere accounting and, any decision by the IAF on that score, would be subject to review for manifest error or gross negligence, in the usual way for an expert determination.
The case is a good illustration of the issues that can arise with carve-out dispute resolution clauses. The use of such clauses can be useful where there is likely to be a great diversity of claims that may arise under a contract, with specific types of claim being carved out from the main dispute resolution clause. However, precise drafting is important to ensure that it is clear which types of disputes are to be dealt with under the carved out mechanism, and which fall under the main dispute resolution clause. (Alstom v. General Electric Co., (S.D.N.Y. Jan. 10, 2017).)
The District Court of the Southern District of New York has ruled that a dispute over a purchase price adjustment should, in the first instance at least, be submitted to an independent accounting firm (IAF) as an expert, rather than by International Chamber of Commerce (ICC) arbitration.
The plaintiffs (Alstom and Alstom Transport Holdings BV (Alstom)) agreed to purchase a rail-signalling business for $800 million from the defendant (General Electric Co (GE)), which was subject to a post-closing purchase price adjustment. The parties agreed that:
  • Any issues identified in a "Dispute Notice" that remained in dispute after a defined time period should be determined by an IAF.
  • The IAF would function as an expert and not as an arbitrator.
  • The accountant's report would be conclusive and binding on the parties, absent manifest error or gross negligence.
In addition, a separate clause provided that, except with respect to any disputes to be resolved by the IAF, any dispute arising out of or relating to the agreement, including any question regarding its existence, validity or scope, be referred to ICC arbitration.
A dispute arose as to whether the items listed within Alstom's Dispute Notice fell to be determined by an IAF or by ICC arbitration. Alstom initiated court proceedings to compel GE to submit the dispute to the IAF. GE sought to stay the proceedings pending ICC arbitration. GE argued that as experts, and not arbitrators, the IAF was not given any authority beyond making calculations to make determinations on GE's business and engineering judgements.
At the outset, the court affirmed that the question of arbitrability is an issue for judicial (as opposed to arbitral) determination where parties fail to clearly and unmistakably provide otherwise (Howsam v. Dean Witter Reynolds Inc, 537 U.S. 79, 83 (2000)). The presence here of both a broadly worded arbitration clause and a carve-out clause for submission of certain disputes to an IAF, created an ambiguity that required judicial determination.
The court held that the plain language of the parties' agreement led to the conclusion that the items raised within the Dispute Notice should be submitted to the IAF, at least in the first instance. It noted that:
  • The fact that the issues raised in the Dispute Notice called for more than "bean counting" did not take them outside the scope of the purchase price adjustment dispute resolution provisions.
  • The designation of the IAF as experts, and not as arbitrators, only meant that the accountants would resolve the dispute as accountants do, by examining the corporate books and applying normal accounting principles, rather than entertaining arguments from lawyers and listening to testimony.
  • Furthermore, it would be open to GE to argue before the IAF (as it had before the court) that Alstom's arguments relied on more than mere accounting. Any decision made by the IAF on that score would be subject to review for manifest error or gross negligence, in the usual way for an expert determination.
The case is a good illustration of the issues that can arise with carve-out dispute resolution clauses. The use of such clauses can be useful where there is likely to be a great diversity of claims that may arise under a contract, with specific types of claim being carved out from the main dispute resolution clause. However, precise drafting is important to ensure that it is clear which type of disputes are to be dealt with under the carved out mechanism, and which fall under the main dispute resolution clause.
Case: Alstom v. General Electric Co., (S.D.N.Y. Jan. 10, 2017).