In contrast, the Post-Closing Adjustment prepared by Coopers
& Lybrand on behalf of Melun and eventually accepted in large
part by the arbitrator challenged the November 30, 1986,
balance sheet not solely on account of events intervening
between August 31 and November 30. Many of the challenges and
much of the adjustment involved assertions that would also have
impugned the August 31 balance sheet. To this extent, the
adjustment claimed and awarded was outside the arbitrator's
powers and represented a fundamental alteration of the
Agreement between the parties.
The arbitrator clearly viewed his task as to determine the
true value of S & C's assets as of November 30, and to correct
any perceived errors in the accounting methods used in valuing
the assets. This was an incorrect interpretation of his
authority under the Agreement. The arbitration clause is quite
narrow. It does not empower the arbitrator to resolve any and
all disputes between the parties, or to determine the "fair"
sale price for the company. Rather, it envisions arbitration
solely about "the amount, if any, by which the book value of [S
& C] increased or decreased during the period from September 1,
1986 to the Closing Date." Agreement ¶ 1(d)(i). While Melun
conceivably may have valid claims about the inaccuracy of the
August 31 figures and the accounting practices underlying those
figures, the arbitration agreement did not cover that dispute.
Strange points out that the adjustment imposed on him by the
arbitrator exceeds the amount he received as the purchase
price. Under the arbitrator's award, he ends up paying Melun to
take over his stock. Melun answers that it took over
responsibility for $1,500,000 of S & C's debts. Both
observations are really irrelevant. If S & C's operations were
so disastrous during the period from August 31, 1986 to the
Closing that the decrease in Book Value as of Closing exceeded
the original payment (by more than $60,000), such an adjustment
would be payable. Although Strange contends it is illogical, it
is not. Under the Agreement he was to receive only 80% of the
Original Book Value while the Post-Closing Adjustment was to be
for the full amount of the decrease in value occurring in the
closing period, minus a deductible. Thus if the book value of
S & C should have declined from a positive balance of over
$300,000 as of August 31 to 0 at the Closing Date, Strange
would end up paying Melun to take his stock. A fortiori this
result would obtain if the events of the closing period drove
the company into insolvency, with liabilities exceeding assets.
That is the way the Agreement was written. It did expose
Strange to the risk that he might have to pay Melun to take his
stock. So this aspect of Strange's argument does not
demonstrate the merits of his contention.
The merits of his position, however, lie in the fact that the
adjustments made were not limited, as the Agreement required,
to events occurring subsequent to August 31. Strange's
Agreement limited his risk of Post-Closing Adjustment by
arbitration to the events between August 31 and Closing.
Melun contends it did not accept the August 31 balance sheet
and protests that it had not received sufficient documentation
by the time of Closing to appraise the balance sheet and
formulate its objections. Strange responds that Melun had full
access to the documents and made no requests of his accountants
for further documents at the time.
This dispute is irrelevant to the controversy. If Melun's
accountants were not satisfied with the August 31 balance sheet
at the time of Closing, whether by reason of express
disagreement or because of inadequate documentation, Melun was
free to terminate the Agreement. It could properly have walked
away or proposed a renegotiation. It did neither. It closed
after Coopers' review of S & C's balance sheet.
Once it had done so, the Post-Closing Adjustment limited both
purchaser and seller to adjustments arising from the events of
the Closing Period. That is the sole issue covered by the
I do not suggest that Melun is barred from claiming fraud and
suing for either damages or rescission on that basis. That is
not the issue before the court. The sole issue presented at
this time is whether the arbitrator acted within the scope of
his authority. I find that in undertaking a fundamental
of S & C's accounts, rather than limiting himself to the
changes occurring in the closing period, the arbitrator went
outside the scope of the powers conferred by the Agreement.
Petitioner's motion to confirm the arbitral award is denied.
Respondent's cross-motion to vacate the award is granted. The
action is remanded to the arbitrator to make findings as to
increases or decreases in the book value resulting solely from
the events of the period from August 31 to closing.*fn5