A recent opinion from the Delaware Court of Chancery reinforces the importance of using clear language when drafting dispute resolution clauses. In Agiliance, Inc. v. Resolver SOAR, LLC, No. 2018-0389-TMR, 2019 Del. Ch. LEXIS 33 (Jan. 25, 2019), the parties to an asset purchase agreement disputed whether their net working capital dispute resolution process was an arbitration or an expert determination. The answer ultimately would determine whether an accountant or a court would adjudicate some of the buyer’s contractual defenses. On January 25, the Delaware Court of Chancery held that the purchase agreement reflected the parties’ “clear intention” to arbitrate.

In Agiliance, the parties’ purchase agreement provided for a post-closing purchase price adjustment based on the difference between an estimated closing net working capital and a final net working capital calculated post-closing — a common provision in many purchase agreements. The parties were unable to agree on the final net working capital amount, and the buyer refused to participate in the purchase agreement’s dispute resolution process, arguing that the seller failed to comply with the purchase agreement’s notice provisions when disputing the net working capital calculation.

The seller then filed an action to compel arbitration. A threshold issue was whether the dispute resolution provision called for an arbitration or an expert determination. If an arbitration, the seller’s compliance with the purchase agreement’s notice requirements would be determined by the accountant arbitrator. If an expert determination, the court would determine the issue.

In addressing the seller’s motion for summary judgment, the Court of Chancery stated that the question of arbitration or expert determination depends on the parties’ intent. Therefore, the court looked to “the most objective indicia of that intent: the words found in the written [agreement].” Id. at *5.

The parties’ purchase agreement stated that any net working capital dispute “shall be submitted for arbitration by a nationally-recognized accounting firm that agrees to use its best efforts to complete such arbitration within thirty (30) days” and that the accounting firm shall “arbitrate the dispute and submit a written statement of its adjudication.” Id. at *2-3 (emphasis added). The purchase agreement further provided that “[t]he determination of the Accounting Firm shall constitute an arbitral award that is final, binding and unappealable.” Id. at *3 (emphasis added).

The court held that the purchase agreement’s language “could hardly be clearer in intending arbitration” and called out the agreement’s multiple, explicit references to “arbitration,” “arbitrate” and “arbitral.” Id. at *8. The court also distinguished the purchase agreement’s language from agreements that explicitly state that the accountant will act as “an accounting expert only and not as an arbitrator.” Id. at *8.

The court rejected several of the buyer’s arguments in support of its position that the parties intended an expert determination. Specifically, the buyer argued that the purchase agreement’s language limiting the accountant’s authority to choosing either the seller’s or the buyer’s proposed net working capital calculation entirely (commonly referred to as a “baseball arbitration”) was evidence that the parties intended an expert determination. The court, however, noted that baseball arbitration is binding arbitration under Delaware law and that parties commonly use such arbitration provisions to incentivize both sides to take reasonable positions. Id. at *9-10.

The court similarly rejected the buyer’s arguments that the parties’ failure to specify arbitration rules and the accountant’s lack of experience with legal issues were evidence that the parties intended an expert determination. The court concluded that these facts did nothing “to change or invalidate the intent of the parties to arbitrate” and that the purchase agreement “unambiguous[ly]” required arbitration. Id. at *10.

Having found that the dispute resolution process was an arbitration, the court held that the accountant arbitrator was responsible for adjudicating the buyer’s argument that the seller failed to comply with the purchase agreement’s notice provisions.

The court’s decision in Agiliance provides two important points for parties to merger agreements. First, you must understand the impact of the various types of dispute resolution and choose the one that best accomplishes your objectives. Second, be both deliberate and explicit when drafting dispute resolution clauses in your agreements. The more specific the agreement’s provisions, the easier it will be to enforce.