A new case from the Sixth Circuit addresses whether accountants who are resolving a dispute about payments made under an agreement can also make legal determinations about the same agreement. In a 2-1 decision, the Sixth Circuit held that the scope of the dispute clause is broad enough to allow the accountants to resolve contract interpretation issues, as long as they are “relatively simple” and “closely related to accounting.” Shy v. Navistar Int’l Corp., __ F.3d__, 2015 WL 1383106 (6th Cir. March 27, 2015).
In Shy, Navistar was obligated to make annual contributions to a trust for its retired employees. The amount of the contribution was determined by a formula. If the committee managing the trust disputed the “information or calculation” provided by Navistar to support its contribution, and the parties could not resolve the dispute, the agreement provided that an accounting firm would resolve the dispute with a final and binding decision.
In this instance, the committee disputed how Navistar classified revenue when it was applying the formula. (The dissent states that “the gravamen of the [committee’s] allegations is that Navistar is engaging in a bad faith scheme to negate its substantive contractual duty to contribute a portion of its profits to fund the benefits of its retirees.”) The committee filed suit in federal court over those issues. Navistar responded by moving to compel arbitration, and the district court denied the motion. It found the claims fell within the scope of the arbitration clause, but that Navistar had waived its right to arbitrate.
On appeal, the Sixth Circuit reversed. It found that the claims were arbitrable, and that Navistar had not waived its right to arbitrate.
Why am I writing about accountants determining the application of a financial formula on an arbitration blog? Because contract clauses that allow an appraisal process to determine a value, or an accountant to resolve a financial dispute, are generally deemed arbitration clauses under federal law, even when no derivative of the word “arbitration” appears in the clause. As long as there is an independent adjudicator, substantive standards (like a contract) that apply, an opportunity for both sides to present their case, and a final decision, the process is deemed an arbitration that falls within the FAA.
And, in this decision, the Sixth Circuit found that the bean counters who determine how the formula applies were not limited to just counting beans. Because the contract clause called for the accountants to resolve disputes over “information or calculation,” the court held the language was broad enough to also encompass how Navistar categorized the information, and even “operational practices of Navistar” if those were closely tied to the information provided to the committee. The court did not exclude questions of contract interpretation from the scope of the arbitration, finding no indication the parties intended that limitation and finding the contract disputes at issue were “relatively simple” and “closely related to accounting.”
The dissent complained that the majority took the presumption in favor of arbitration too far. It accused the majority’s holding – that the accountants could determine legal questions that are closely connected to the financial questions –of having “no limiting principle.” “If applied as a general rule, any form of misconduct or bad faith dealing, or any fundamental change in the nature of the relevant business or transaction, could be characterized as an informational dispute…”
I find this an interesting case because many industries commonly use dispute mechanisms in which a specialist of some type is called on to resolve a specific type of dispute. (A panel of doctors determine whether you qualify for disability insurance, for example, or a panel of real estate appraisers determine the value of a property.) However, drafters of these clauses should take note that these clauses will be deemed arbitration clauses, and then the broad presumption of arbitrability will apply to the scope of those clauses. So, if you don’t want your bean counter to have the power to determine whether your beans are legal, these clauses must be written with carefully demarcated boundaries.
By Liz Kramer