Agiliance, Inc. v. Resolver SOAR, LLC

• Court: Court of Chancery of Delaware
• Decided: January 25, 2019
• Docket: 2018-0389-TMR
• Status: Published

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE TAMIKA R. MONTGOMERY-REEVES LEONARD WILLIAMS JUSTICE CENTER VICE CHANCELLOR 500 N. KING STREET, SUITE 11400 WILMINGTON, DELAWARE 19801-3734

Date Submitted: November 15, 2018 Date Decided: January 25, 2019

Steven T. Margolin, Esquire David A. Felice, Esquire Benjamin J. Schladweiler, Esquire Bailey & Glasser, LLP Samuel L. Moultrie, Esquire 2961 Centerville Road Greenberg Traurig, LLP Suite 302 The Nemours Building Wilmington, DE 19808 1007 North Orange Street, Suite 1200 Wilmington, DE 19801

RE: Agiliance, Inc. v. Resolver SOAR, LLC Civil Action No. 2018-0389-TMR

Dear Counsel:

This letter opinion addresses Plaintiff’s Motion for Summary Judgment.

Plaintiff seeks to compel Defendant to arbitrate disputes over the net working capital

of the assets that Defendant bought from Plaintiff. Defendant resists arbitration,

arguing that the parties agreed to an expert determination of certain narrow disputes,

not to binding arbitration. For the reasons that follow, I hold that the asset purchase

agreement at issue requires the parties to arbitrate their dispute, and I grant Plaintiff’s

motion for summary judgment. Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 2 of 15

I. BACKGROUND

I draw the facts below from the pleadings and the evidence submitted by the

parties.1 The facts I cite are undisputed.

Agiliance, Inc. (“Agiliance”) is a Delaware corporation involved in the

enterprise risk intelligence software business. 2 On October 16, 2017, Agiliance and

Resolver SOAR, LLC (“Resolver”) entered into an Asset Purchase Agreement (the

“Agreement”) under which Resolver purchased substantially all of Agiliance’s

assets. 3 The Agreement provides for a post-closing adjustment to the purchase price

based on net working capital (the “Net Working Capital”) in case there are

differences between the preliminary net working capital reported by Agiliance

during negotiations and the closing date net working capital recorded by Resolver. 4

Section 2.7 of the Agreement creates a process for the parties to resolve any

disputes about Net Working Capital.5 Section 2.7(b) of the Agreement requires

Resolver to “furnish to [Agiliance] a statement setting forth the Net Working Capital

1 See Ct. Ch. R. 56(c). 2 Compl. 1. 3 Id. 4 Id. at 2. 5 Fantuzzi Aff. in Supp. of Pl.’s Mot. for Summ. J. (“Fantuzzi Aff.”) Ex. A § 2.7. Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 3 of 15

as of immediately prior to the [c]losing.”6 Section 2.7(b)(i) requires the parties to

work in good faith to resolve any disputes and allows Agiliance to object to

Resolver’s statement of Net Working Capital within thirty days so long as Agiliance

“provides specific written notice (which objection shall state in reasonable detail the

basis of [Agiliance]’s objections and [Agiliance]’s proposed adjustments).”7

Section 2.7(b)(ii) provides a procedure to resolve disputes that the parties

cannot resolve themselves.8 It requires that “[i]f [Agiliance] and [Resolver] do not

reach . . . written agreement . . . , then such disagreement 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.” 9 It states that

“[Resolver], on the one hand, and [Agiliance], on the other hand, will submit a

proposed” Net Working Capital calculation to the nationally-recognized accounting

firm (the “Accounting Firm”). 10 “The scope of the dispute to be resolved by the

Accounting Firm shall be limited to a choice of either the [Resolver proposal] or the

6 Id. Ex. A § 2.7(b). 7 Id. Ex. A § 2.7(b)(i). 8 Id. Ex. A § 2.7(b)(ii). 9 Id. 10 Id. Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 4 of 15

[Agiliance proposal], and the Accounting Firm shall not make any other

determination.”11 Thereafter, the “accounting firm shall . . . arbitrate the dispute and

submit a written statement of its adjudication, which statement, when delivered to

[Agiliance] and [Resolver].” 12 “The determination of the Accounting Firm shall

constitute an arbitral award that is final, binding and unappealable and upon which

a judgment may be entered by any court having jurisdiction thereof.”13

On January 9, 2018, Agiliance objected to Resolver’s statement of Net

Working Capital.14 On January 24, 2018, Resolver provided an updated statement

of Net Working Capital.15 On February 21, 2018, Agiliance attempted to initiate

arbitration.16 On February 28, 2018, Resolver refused to participate in the arbitration

process, arguing that Agiliance’s original objection was not sufficiently specific.17

11 Id. 12 Id. 13 Id. 14 Compl. 3. 15 Id. 16 Id. at 4. 17 Id. Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 5 of 15

On May 31, 2018, Agiliance filed its complaint in this case.18 On June 6, 2018,

Agiliance filed its Motion for Summary Judgment,19 which is now before me.

II. ANALYSIS

Agiliance moves for summary judgment. Summary judgment will be

“granted if the pleadings, depositions, answers to interrogatories and admissions on

file, together with the affidavits, show that there is no genuine issue as to any

material fact and that the moving party is entitled to a judgment as a matter of law.”20

The movant bears the initial burden of demonstrating that there is no question of

material fact.21 When the movant carries that burden, the burden shifts to the

nonmoving party “to present some specific, admissible evidence that there is a

genuine issue of fact for a trial.”22 When considering a motion for summary

judgment, the evidence and the inferences drawn from the evidence are to be viewed

18 Id. at 1. 19 Pl.’s Mot. for Summ. J. 1. 20 Twin Bridges Ltd. P’ship v. Draper, 2007 WL 2744609, at *8 (Del. Ch. Sept. 14, 2007) (citing Ct. Ch. R. 56(c)). 21 Deloitte LLP v. Flanagan, 2009 WL 5200657, at *3 (Del. Ch. Dec. 29, 2009). 22 Id. Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 6 of 15

in the light most favorable to the non-moving party. 23 Even so, the non-moving

party may not rely on allegations or denials in the pleadings to create a material

factual dispute.24 The pending motion for summary judgment turns on two

questions: (1) whether the parties agreed to arbitrate or obtain an expert

determination regarding disputes over the Net Working Capital; and (2) if they

agreed to arbitrate, whether the issues Resolver raises are procedural or substantive

in nature.

A. The Parties Agreed to an Arbitration, not an Expert Determination

The parties disagree about the nature of the dispute resolution clause in the

Agreement. Agiliance argues that the parties agreed to arbitration; Resolver argues

that the parties agreed to expert determination. “Determining what type of dispute

resolution mechanism the parties have agreed to presents a question of contract

interpretation.” 25 The question of arbitration or expert determination depends on the

intent of the parties.

23 Ct. Ch. R. 56(e); Judah v. Del. Trust Co., 378 A.2d 624, 632 (Del. 1977); Fike v. Ruger, 754 A.2d 254, 260 (Del. Ch. 1999), aff’d, 752 A.2d 112 (Del. 2000). 24 Fike, 754 A.2d at 260. 25 Penton Bus. Media Hldgs., LLC v. Informa PLC, 2018 WL 3343495, at *12 (Del. Ch. July 9, 2018). Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 7 of 15

Because Delaware adheres to the objective theory of contract interpretation, the court looks to the most objective indicia of that intent: the words found in the written instrument. As part of this initial review, the court ascribes to the words their common or ordinary meaning, and interprets them as would an objectively reasonable third-party observer.26

“[W]here a word has attained the status of a term of art and is used in a technical

context, the technical meaning is preferred over the common or ordinary meaning.”27

“When established legal terminology is used in a legal instrument, a court will

presume that the parties intended to use the established legal meaning of the

terms.” 28 “If a writing is plain and clear on its face, i.e., its language conveys an

unmistakable meaning, the writing itself is the sole source for gaining an

understanding of intent.” 29 “[W]hen we may reasonably ascribe multiple and

different interpretations of a contract, we will find that the contract is ambiguous.”30

26 Sassano v. CIBC World Mkts. Corp., 948 A.2d 453, 462 (Del. Ch. 2008) (footnotes omitted). 27 Viking Pump, Inc. v. Liberty Mut. Ins. Co., 2007 WL 1207107, at *13 (Del. Ch. Apr. 2, 2007). 28 Penton, 2018 WL 3343495, at *12 (citations omitted). 29 Id. (quoting City Investing Co. Liquid. Tr. v. Cont’l Cas. Co., 624 A.2d 1191, 1198 (Del. 1993)). 30 Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010). Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 8 of 15

Despite that, “[t]he parties’ steadfast disagreement will not, alone, render [a] contract

ambiguous.”31

This Court has recently addressed the question of whether a provision

contemplates arbitration or expert determination in Penton Business Media

Holdings, LLC v. Informa PLC. 32 Both parties rely heavily on this case and argue

that it sets the standard by which I should examine the language at issue here.

In Penton, two companies bought a third company. 33 The agreement and plan

of merger contained “a dispute resolution mechanism that called for the parties to

submit disputes to an independent accounting firm” and stated that “the accountant

‘shall be acting as an accounting expert only and not as an arbitrator.’” 34 In

determining whether the parties had agreed to an expert determination or an

arbitration, Vice Chancellor Laster looked to the parties’ intent and wrote that

“[w]hen established legal terminology is used in a legal instrument, a court will

31 Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del. 1992) (“A contract is not rendered ambiguous simply because the parties do not agree upon its proper construction.”). 32 2018 WL 3343495 (Del. Ch. July 9, 2018). 33 Id. at *1. 34 Id. Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 9 of 15

presume that the parties intended to use the established legal meaning of the

terms.” 35 Examining the language of the agreement before him, the Vice Chancellor

held that “[t]his language explicitly calls for the role of ‘expert’ while disclaiming

the role of ‘arbitrator.’” 36 The Vice Chancellor noted that “[t]he Chicago Bridge

decision cited a report prepared by the Committee on International Commercial

Disputes of the New York City Bar Association which sought to ‘propose a coherent

test to distinguish expert determination and arbitration . . .’” 37 “[T]he committee

recommended that parties who wished to obtain an expert determination from an

accountant, rather than inviting an arbitration, should ‘state that the accounting firm

is to act as an expert and not as an arbitrator.’’” 38

The contract language here is unambiguous. The language of the Agreement

manifests an intent to require the parties to arbitrate their disputes. In Section

2.7(b)(ii) the parties agreed that any “disagreement shall be submitted for arbitration

35 Id. at *12 (citations omitted). 36 Id. at *13. 37 Id. (construing Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912 (Del. 2017)). 38 Id. (quoting N.Y.C. Bar Comm’n on Int’l Commercial Arbitration, Purchase Price Adjustment Clauses and Expert Determinations: Legal Issues, Practical Problems and Suggested Improvements (2013)). Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 10 of 15

by a nationally-recognized accounting firm that agrees to use its best efforts to

complete such arbitration.” 39 They also agreed that the independent accounting firm

will “arbitrate the dispute and submit a written statement of its adjudication, which

statement, when delivered to [Agiliance] and [Resolver], shall become final and

binding upon [Agiliance] and [Resolver],” 40 and that the “determination of the

Accounting Firm shall constitute an arbitral award.” 41 In one paragraph, the parties

used the word “arbitration” twice, “arbitrate” once, and “arbitral” once. The parties

never use the word “expert” or state that the Accounting Firm should “act as an

expert and not as an arbitrator.” The language could hardly be clearer in intending

arbitration. Unlike in Penton, where the agreement instructed that the accountant

“shall be acting as an accounting expert only and not as an arbitrator,” here no

evidence of intent in favor of expert determination exists. The clear intention of the

parties as expressed in the Agreement requires binding arbitration.

Resolver makes several arguments that it believes shows the parties’ intent to

have the Accounting Firm act as an expert. First, Resolver argues that the parties’

39 Fantuzzi Aff. Ex. A § 2.7(b)(ii). 40 Id. 41 Id. Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 11 of 15

decision to limit the remit of the Accounting Firm to deciding between two

submissions (a procedure commonly known as “baseball arbitration”) is evidence

that the parties intended an expert determination.42 Second, Resolver argues that

Section 2.7(ii)’s admonition that “the Accounting Firm shall not make any other

determination” shows that the Accounting Firm should not consider issues like

notice, which Resolver wants to raise.43 Third, Resolver argues that Section 2.7’s

failure to specify arbitration rules indicates an intent that the Accounting Firm be an

expert.44 Fourth and finally, Resolver argues that the Accounting Firm’s lack of

legal experience or training shows it is not suited to act as an arbitrator. 45

Resolver points to no support in the law for the notion that baseball arbitration

is not arbitration because it addresses narrow issues and requires the independent

arbitrator to accept one party’s submission entirely. There is a long history of

companies using baseball arbitration in an attempt to incentivize reasonable

42 Def.’s Opp’n Br. 8. 43 Id. at 9. 44 Id. at 10. 45 Id. Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 12 of 15

submissions.46 Narrow or broad, the enforceability of an arbitration clause depends

on the intent of the parties as expressed in the language of the contract, and here the

language is clear. Resolver’s argument that “the parties did not even authorize the

Accounting Firm to do its own math” and, therefore, could not have agreed to

binding arbitration 47 misses the point. The parties chose baseball arbitration, which

is binding arbitration under Delaware law. Nor does the fact that the arbitrators are

not legally trained, 48 or the parties’ decision not to predetermine the rules governing

the arbitration, change or invalidate the intent of the parties to arbitrate. Resolver

cites no cases, and I know of none, in support of either of these propositions. Thus,

the unambiguous contractual terms require the Accounting Firm to arbitrate.

46 See, e.g., Cede & Co. v. Technicolor, 1990 WL 161084, *8 n.17 (Del. Ch. Oct. 19, 1990) (“[I]f it is understood that the court [or arbitrator] will or is likely to accept the whole of one [witness’s] testimony or the other, incentives will be modified. While the incentives of the real world applications of the [model] will not be replicated, at least the parties will have incentives to make their [estimate] appear most reasonable. This would tend to narrow the range of estimates, which would unquestionably be a benefit to the process.”). 47 Def.’s Opp’n Br. 9. 48 See, e.g., Viacom Int’l Inc. v. Winshall, 72 A.3d 78 (Del. 2013), and HBMA Hldgs., LLC v. LSF9 Stardust Hldgs. LLC, 2017 WL 6209594 (Del. Ch. Dec. 8, 2018) (enforcing an arbitration agreement to be carried out by an accounting firm with no legal expertise). Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 13 of 15

B. Resolver’s Objections are Questions of Procedural Arbitrability

Having determined that the parties agreed to arbitrate, I must now resolve their

dispute about whether the issues Resolver raises regarding notice are questions of

procedural arbitrability (as Agiliance argues) or substantive arbitrability (as

Resolver contends).

The Delaware Supreme Court has defined the categories of procedural and

substantive arbitrability and explained what falls into each. In Viacom International,

Inc. v. Winshall,49 the Court defined substantive arbitrability as “gateway questions

relating to the scope of an arbitration provision and its application to a given dispute,

and are presumptively decided by the court” 50 because “the court presumes that

parties intended courts to decide issues of substantive arbitrability.” 51 In contrast,

“[p]rocedural arbitrability issues concern whether the parties have complied with the

terms of an arbitration provision, and are presumptively handled by arbitrators.

These issues include whether prerequisites such as time limits, notice, laches,

estoppel, and other conditions precedent to an obligation to arbitrate have been

49 72 A.3d 78 (Del. 2013). 50 Viacom, 72 A.3d at 82 (quoting Viacom Int’l, Inc. v. Winshall, 2012 WL 3249620, at *12 (Del. Ch. Aug. 9, 2012)). 51 James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 79 (Del. 2006). Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 14 of 15

met . . .” 52 “[P]rocedural arbitrability also includes . . . what evidence the arbitrator

should consider in deciding the dispute.”53

Resolver argues that “this case presents a mere ‘gateway’ question as to

whether the parties’ impasse is an arbitrable dispute.” 54 In particular, Resolver

argues that “Agiliance materially breached the contract and failed to satisfy a

condition precedent to the invocation of the arbitration clause; namely, it failed to

deliver ‘specific written notice’ that stated ‘in reasonable detail the basis of [its]

objections and [its] proposed adjustments’ based upon a ‘valid objection.’” 55

Resolver raises classic questions of procedural arbitrability. Resolver objects

to arbitration precisely based on conditions precedent and notice, and Viacom is

squarely on point. Resolver’s attempt to distinguish Viacom because “the parties

therein conceded that the FAA governed the dispute”56 is unconvincing. Resolver

cites no authority, and I know of none, for the proposition that a failure to include

52 Viacom, 72 A.3d at 82 (quoting Viacom, 2012 WL 3249620, at *12). 53 TIMP Participants LLC v. DSW Gp. Hldgs. LLC, 2016 WL 490257, at *9 (Del. Ch. Feb. 4, 2016) (citing Viacom, 72 A.3d at 83-34). 54 Def.’s Opp’n Br. 12 (citations omitted). 55 Id. at 4. 56 Id. at 12. Agiliance, Inc. v. Resolver SOAR, LLC C.A. No. 2018-0389-TMR January 25, 2019 Page 15 of 15

arbitration rules in an arbitration clause invalidates the arbitration clause or changes

the distinction between procedural and substantive arbitrability.

III. CONCLUSION

For the foregoing reasons, Agiliance’s Motion for Summary Judgment is

GRANTED.

IT IS SO ORDERED.

Sincerely,

/s/ Tamika Montgomery-Reeves

Vice Chancellor

TMR/jp