Expert Determination: Secret Alternative to Arbitration
Arbitration, of course, is well known in the United States. What is not generally known is that there is an alternative to arbitration. The law recognizes two well developed and distinct types of alternative dispute resolution proceedings each of which lead to a final and binding result: (i) arbitration and (ii) expert determination. Expert determination is a powerful alternative to arbitration which, when properly understood, can be preferable to arbitration for certain types of disputes. Expert determinations are governed by their own body of law that is separate, distinct, and materially different from the law of arbitration.
The lack of present awareness of the law of expert determination in New York is particularly surprising. The New York Legislature over 50 years ago enacted specific legislation governing expert determinations as a form of dispute resolution separate from arbitration. This legislation, which has become virtually unknown among contemporary practitioners, is found in CPLR Article 76 (as opposed to Article 75, which governs arbitration) and is supplemented by extensive case law. The Legislature added Article 76 to the CPLR specifically in order to ensure that the parties' election to have their dispute resolved by expert determination, as opposed to arbitration, is fully recognized and enforced by the New York courts. See In re Penn Central, 56 N.Y.2d 120, 126-27 (1982).
The law of expert determination is the subject of a report recently issued by the Committee on International Commercial Disputes of the New York City Bar called "Purchase Price Adjustment Clauses and Expert Determinations: Legal Issues, Practical Problems and Suggested Improvements."1 The author served as chair of the subcommittee that drafted the report.
The report sets forth the general jurisprudence of the law of expert determinations. It takes a particularly close look at cases concerning purchase price adjustment disputes, described below. While New York law is particularly well developed in this general area, there has been substantial confusion in the federal courts and in courts of other states concerning whether a particular dispute resolution clause provides for expert determination or arbitration. The report also examines some of the issues that have been the subject of litigation relating to such clauses, and makes suggestions as to how parties can draft these clauses so as to better express their intent and to minimize litigation.
Agreements governing the purchase and sale of private companies often include a provision allowing for an adjustment in the purchase price as of the closing date. Parties include such clauses because there can be a substantial period of time between the signing of the purchase agreement and the closing of the transaction. During this time, the value of the company may change. Purchase price adjustment clauses commonly contain their own dispute resolution mechanism. The parties usually agree that any dispute concerning the adjustment to the purchase price is to be submitted to an independent accounting firm for a final and binding determination.
Contracts providing for the final and binding resolution of an issue by submission to one or more experts can be found in a wide range of other commercial agreements.2 These include, for example, the determination of rent adjustments under long-term leases,3 the price to be paid upon exercise of an option to purchase shares in a private company or an option to purchase real property,4 and the amount of loss under an insurance policy.5
Expert determination, as distinct from arbitration, is recognized under the laws of many other countries, including England, Canada, Australia, New Zealand, Belgium, Germany, Hong Kong, Italy, France, and The Netherlands, among others. While each country has its own rules regarding expert determinations, what is important is that "[m]ost jurisdictions concur that arbitration laws do not apply to expert determination proceedings."6 This is the same position taken in the current draft of the Restatement Third of the U.S. Law of International Arbitration, which distinguishes and excludes expert determinations from its definition of arbitration.
New York state courts have regularly confirmed determinations made by independent accounting firms in purchase price adjustment disputes under the statutory authority of New York CPLR §7601, while at the same time recognizing and explaining why such proceedings are not arbitrations and not governed by arbitration law. See, e.g., Westmoreland Coal v. Entech, 100 N.Y.2d 352 (2003) (petition pursuant to CPLR §7601 to compel party to submit purchase price dispute to independent accounting firm); Doosan Infracore v. Ingersoll-Rand, No. 652170/2010 (N.Y. Sup. Ct. March 15, 2011) (confirming accounting firm's purchase price adjustment).
Indeed, Section 7601 was enacted in order to provide for judicial enforcement of expert determinations as separate and distinct from arbitration. Section 7601 provides that a "special proceeding may be commenced to specifically enforce an agreement that a question of valuation, appraisal or other issue or controversy be determined by a person named or to be selected." A report to the New York Legislature, submitted in support of legislation that led to the enactment of what is today Article 76 of the CPLR, recited the long and broad use of expert determinations, as follows:
Many business agreements contain provisions for determination by a designated third party…of valuation, appraisal of loss, verification of performance, ascertainment of quantity or quality, fixing of boundary lines, or other specific questions relevant to the transaction. Agreements of this kind were recognized as valid at an early date.7
Courts had previously held that such agreements could not be specifically enforced under the statute governing arbitration, because they were not arbitrations. See In re Delmar Box, 309 N.Y. at 63-64, 66. CPLR § 7601 provides the courts with broad statutory authority to enforce expert determination clauses, including the authority to confirm the decision made by the expert and enter it as a court judgment. See In re Penn Central, 56 N.Y.2d at 128-30.