An arbitration by any other name…

When entering into a contract, parties need to know that they could be agreeing to arbitration without knowing it. A New York federal court recently held that the parties’ agreement to utilize a third-party appraisal procedure in the event of a dispute entitles the successful party to exercise important enforcement rights relating to arbitration, even though the parties never used the word “arbitration.” This decision is important because an unsuspecting party, if it is not careful, can agree to a simple dispute-resolution mechanism but find itself defending what a court considers to be an arbitration award in an expedited proceeding with limited appellate rights – the last thingit may want to do.

In Seed Holdings, Inc. v. Jiffy International AS, 2014 WL 1141717(S.D.N.Y. Mar. 21, 2014), filed in the U.S. District Court for the Southern District of New York, the parties to a crossborder asset sale agreed to make certain adjustments to the purchase price based upon a series of calculations with respect to the working capital of the acquired assets. The parties subsequently disagreed as to the purchase price. They submitted their dispute to independent accountants for binding resolution pursuant to the dispute resolution provision in the parties’ asset purchase agreement, and the accountants found in favor of the buyers. The sellers then commenced an action against the buyers in New York state court, but the buyers removed the proceeding to federal court based upon the Federal Arbitration Act and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Since arbitration awards ordinarily are enforced by way of expedited procedures and are subject to limited appellate review, and for other reasons, the sellers in Seed Holdings, Inc. argued that the price adjustment proceeding before the independent accountants was not an “arbitration” and that the buyers were not entitled to enforce the accountants’ decision in federal court as if it were an arbitration award. Relying on prior authority from the U.S. Court of Appeals for the Second Circuit, in New York, the district court held that the parties’ agreed-upon, contractual appraisal procedure was tantamount to an arbitration, although the term “arbitration” was not utilized by the parties and their agreement did not require the independent accountants to apply any particular law or follow any specified rules of procedure. The court stated that “no magic words such as ‘arbitrate’ … are needed to obtain the benefits of [arbitration]” and that “the crucial inquiry is whether the parties have agreed to submit a dispute that has arisen between them for final and binding determination by a third-party.”

The court acknowledged a somewhat contrary view by the U.S. Court of Appeals for the Eleventh Circuit, which employs a multi-factor test and examines whether a proceeding not described as an “arbitration” involves the “common incidents of classic arbitration” including the use of an independent adjudicator, the application of substantive legal standards, the consideration of evidence and arguments, and the rendering of a decision determining the rights and obligations of the parties. This more expansive approach contrasts New York law, which focuses more on whether the parties “clearly intended to submit some disputes to their chosen instrument for the definitive settlement of certain grievances.”

A party facing a multi-million dollar payment obligation does not want to discover that it agreed in a contract to a third-party appraisal procedure but is later deemed to have participated in an “arbitration” and now lacks adequate appellate recourse. In light of the conflicting laws, it is extremely important that, going forward, parties to commercial contracts, whether it be an asset purchase agreement or otherwise, ensure that the right dispute resolution, jurisdiction, choice of law and other provisions are included in your contracts. These legal and strategic decisions are critical and should be addressed with counsel early on, before agreeing to dispute-resolution mechanisms that can have hidden pitfalls and long-lasting consequences.