302 A.3d 975
Del. Ch.
2023
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Background

  • Seller Vincent P. Mona sold his privately held electrical-construction company to Purchaser ArchKey for a $21 million headline price; the SPA included a post-closing Accountant True‑Up Mechanism tied to an Adjusted Closing Balance Sheet.
  • SPA §2.6 required Purchaser to prepare the Adjusted Closing Balance Sheet “in good faith and in accordance with GAAP and consistent with the past practices of [the Company] and the November Balance Sheet,” and designated Ernst & Young as the “Independent Accountant,” stating that the Independent Accountant “shall act as an arbitrator.”
  • Purchaser delivered an Adjusted Closing Balance Sheet that reduced consideration to about $8.375 million, creating a ~$12.6 million shortfall; Mona served an objection (the January Letter) asserting 45 disputes and alleging lack of good faith and GAAP violations.
  • Purchaser filed suit seeking to declare Mona’s objection invalid and to compel payment; Purchaser moved to compel arbitration before the Independent Accountant.
  • The Court treated the motion (after discovery) as a summary‑judgment motion on arbitrability, held that the SPA’s mechanism is an Accountant True‑Up Mechanism (an expert determination), not FAA arbitration, and stayed the litigation pending the Independent Accountant’s determinations.
  • The court ruled that accounting questions (consistency with past practice, GAAP compliance, and whether entries were made in good faith) are for the Independent Accountant; claims beyond the accountant’s authority (e.g., a breach of a substantive assignment obligation or a post‑accountant implied‑covenant claim) remain for the court after the accountant’s findings.

Issues

Issue Plaintiff's Argument (ArchKey) Defendant's Argument (Mona) Held
1) Does §2.6’s reference to an Independent Accountant as an “arbitrator” compel FAA arbitration? SPA calls the accountant an arbitrator; FAA should apply and court must compel arbitration. The provision is a standard Accountant True‑Up (expert determination); calling the accountant an "arbitrator" is not dispositive. The provision is an Accountant True‑Up Mechanism (expert determination), not FAA arbitration; word “arbitrator” is not dispositive—look to scope/authority.
2) Who decides procedural/interpretive disputes (e.g., whether Mona’s January Letter was a valid Objection Notice)? All disputes concerning the true‑up (including notice sufficiency) should go to the Independent Accountant. Court should resolve procedural/legal questions such as sufficiency of the Objection Notice and waiver. Court applies contract interpretation; procedural/legal gateway issues can be for the court. The accountant decides matters squarely within the true‑up (limited to disputed items in the Objection Notice).
3) Do disputes about whether the Adjusted Closing Balance Sheet is consistent with past practices and GAAP go to the accountant? Yes; the Independent Accountant should resolve accounting treatment and consistency questions. No; the court should decide the meaning of “past practices” and whether GAAP or past practice controls. These accounting questions are for the Independent Accountant; the court provides interpretive guidance (definition of consistency, interplay of GAAP and past practice) but leaves application to the accountant.
4) Can Mona pursue an implied‑covenant / bad‑faith claim now, or must the accountant act first? Purchaser impliedly argues the accountant should resolve first; litigation may follow. Mona seeks an immediate judicial determination of bad faith and other contract claims. The Independent Accountant must first determine accounting issues and may decide whether entries show lack of good faith for the true‑up; a court can address an implied‑covenant claim (including bad‑faith theory) only after the accountant’s determinations.

Key Cases Cited

  • Terrell v. Kiromic Biopharma, Inc., 297 A.3d 610 (Del. 2023) (adopts the authority‑based test to distinguish arbitration from expert determination)
  • Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912 (Del. 2017) (recognizes narrow scope of accountant true‑up where accountant acts as expert, not arbitrator)
  • Penton Bus. Media Hldgs., LLC v. Informa PLC, 252 A.3d 445 (Del. Ch. 2021) (discussion of arbitration vs. expert determination spectrum and analytical factors)
  • Viacom Int’l, Inc. v. Winshall, 72 A.3d 78 (Del. 2013) (distinguishes substantive and procedural arbitrability and gateway questions)
  • Hall Street Assocs. L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008) (limits parties’ ability to expand judicial review of arbitral awards under the FAA)
  • Baldwin v. New Wood Res. LLC, 283 A.3d 1099 (Del. 2022) (recognizes implied‑covenant claim premised on malicious or bad‑faith conduct)
  • Katz v. Oak Indus., Inc., 508 A.2d 873 (Del. Ch. 1986) (sets forth restrictive test for implying contractual terms via implied covenant)
  • Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (explains limits and function of the implied covenant of good faith and fair dealing)
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