This action concerns the scope of an arbitrable dispute
arising from the sale of a business. Petitioner, Stena Line
(U.K.) Limited ("Stena") seeks an order compelling arbitration
concerning a dispute over a balance sheet dated March 31, 1990,
on which a post-closing adjustment to the purchase price is to
be based. Respondents Sea Containers Ltd. ("Sea Containers")
and its wholly owned subsidiary Ferry and Port Holdings Limited
("Holdings") do not object to arbitration, but ask this Court
to limit the scope of the arbitration.
In March 1990, Stena agreed to purchase from Sea Containers,
through its subsidiary Holdings, a group of ferry businesses
operating between England and the continent of Europe and
between England and Ireland. Pursuant to the stock purchase
agreement between the parties (the "Agreement"), there was to
be a post-closing adjustment to the purchase price of $380
The adjustment was to be determined using two balance sheets,
each balance sheet to be prepared by the entity managing the
business when the relevant financial data became available.
Thus, the first balance sheet, dated December 31, 1989, was to
be prepared by Holdings, and the second, dated March 31, 1990,
was to be prepared by Stena.
Agreement at 11.
Section 1.3(c) of the Agreement imposed the same requirements
on the March balance sheet, with the additional proviso that it
"be prepared on a consistent basis with the policies set forth
in the notes to the December 31 Balance Sheet." Id. at 16.
Section 1.4 of the Agreement provides for a "Post Closing
Adjustment," which will adjust the sale price to account for
changes in the business occurring during the period between the
payment of initial consideration and the closing. This
adjustment is to incorporate a calculation based in part on the
"Losses," or decline in the figure designated as "net equity"
from the December to the March balance sheet, with a cap of $20
million. See Agreement § 1.3(c), at 17. Thus, even if the
difference were greater than $20 million, Stena's recovery
would be based on the lower figure.
The party receiving each balance sheet was given 60 days
after receipt to advise the opposing party in writing of the
amounts and descriptions of any adjustments that the receiving
party felt were necessary. Agreement at 12, 17. The Agreement
provides for expedited arbitration of unresolved differences,
in which they are to be submitted to an independent accountant
of national standing in England.*fn2 Agreement § 1.3(d), at
The closing was held on April 9, 1990. On April 5, 1990,
Holdings delivered the December 31 balance sheet to Stena.
Stena informed Holdings by telex of their belief that the
December balance sheet was not prepared in accordance with the
terms of the Agreement, but Stena did not dispute the matter
formally at that time. Stena claims that this was because they
had concluded that the operating losses for the quarter ending
March 31 would easily exceed the $20 million cap, and that "if
losses equaled or exceeded the $20 million cap, the December 31
balance sheet would have no economic impact on the parties."
Petitioner's Memorandum of Law in Support of Its Motion to
Compel Arbitration ("Pet. Mem.") at 5. Therefore, Stena decided
not to go to the expense of auditing and arbitrating the
Affidavit of Heidi B. Goldstein, sworn to Nov. 14, 1990,
On July 6, 1990, Stena provided Holdings with the March 31
balance sheet. Stena prepared the March 31 balance sheet in a
manner that it contends complied with the requirements of the
Agreement, but which was not wholly consistent with the
procedure used in the December 31 balance sheet. The March
balance sheet required Holdings to pay Stena $32.3 million.
Holdings objected to the calculations in the March 31 balance
sheet, and, on September 4, 1990, sent Stena a listing of the
adjustments Holdings asserted were necessary to correct the
March balance sheet. Holdings contends that the March balance
sheet is not consistent with the December balance sheet, and
is, therefore, not in conformity with the Agreement. Stena, on
the other hand, contends that the December balance sheet did
not comply with UKGAAP, and did not present a "true and fair
view" of the business, while the March balance sheet does.
Holdings interprets Stena's arbitration demand as, in part,
an attempt to challenge the validity of the December balance
sheet, a right that Holdings contends Stena has waived by its
failure to object within the contractual sixty day period.
Consequently, respondents ask this Court to "direct the
arbitrator to accept as binding the December Balance Sheet and
to follow its policies in resolving the disputes relating to
the March Balance Sheet." Respondents' Memorandum of Law in
Response to Petitioner's Motion to Compel Arbitration ("Resp.
Mem.") at 34. In the alternative, respondents request the Court
to direct the parties to proceed first to arbitrate any
disputes over the December balance sheet, and then to proceed
with a separate arbitration concerning the March balance sheet.
This Court has noted previously that the Federal Arbitration
Act, 9 U.S.C. § 1, et seq., "created a `federal policy favoring
arbitration,' which requires that courts `rigorously enforce
agreements to arbitrate.'" Scher v. Bear Stearns & Co.,
723 F. Supp. 211, 214 (S.D.N.Y. 1989) (quoting Moses H. Cone
Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1,
24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983) and Dean Witter
Reynolds Inc. v. Byrd, 470 U.S. 213, 221, 105 S.Ct. 1238, 1242,
84 L.Ed.2d 158 (1985)); see also Nolde Bros. v. Local No. 358,
Bakery & Confectionery Workers Union, 430 U.S. 243, 254-55, 97
S.Ct. 1067, 1073-74, 51 L.Ed.2d 300 (1977). Further, "`"[t]he
Act leaves no place for the exercise of discretion by a
district court, but instead mandates that district courts shall
direct the parties to proceed to arbitration on issues as to
which an arbitration agreement has been signed."'" McDonnell
Douglas Finance Corp. v. Pennsylvania Power & Light Co.,
858 F.2d 825, 830 (2d Cir. 1988) (quoting Genesco, Inc. v. T.
Kakiuchi & Co., 815 F.2d 840, 844 (2d Cir. 1987) (quoting Dean
Witter, supra, 470 U.S. at 218, 105 S.Ct. at 1241)).
This is not to say that courts will force arbitration when it
was clearly not the intention of the parties to put a given
matter under the province of an arbitration agreement. See
Chevron U.S.A., Inc. v. Consolidated Edison Co., 872 F.2d 534,
537 (2d Cir. 1989). This Court has stated that "[i]t is
fundamental that arbitration agreements are creatures of
contract law." Scher, supra, 723 F. Supp. at 214. Thus, "the
first task of a court asked to compel arbitration of a dispute
is to determine whether the parties agreed to arbitrate that
dispute. . . . [A]s with any other contract, the parties'
intentions control, but those intentions are generously
construed as to issues of arbitrability." Mitsubishi Motors
Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105
S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985).
Once a court has determined that an arbitration clause
exists, "any doubt concerning the scope of arbitrable issues
should be resolved in favor of arbitration, whether the problem
at hand is the construction of the contract language itself or
an allegation of waiver, delay, or a like defense to
arbitrability." Moses H. Cone Memorial Hospital, supra, 460
U.S. at 24-25, 103 S.Ct. at 941-942. In fact, "[t]he existence
of an arbitration clause in [an
agreement] raises a presumption of arbitrability that can be
overcome only if `it may be said with positive assurance that
the arbitration clause is not susceptible of an interpretation
that covers the asserted dispute. Doubts should be resolved in
favor of coverage.'" Associated Brick Mason Contractors, Inc.
v. Harrington, 820 F.2d 31, 35 (2d Cir. 1987) (quoting AT & T
Technologies, Inc. v. Communications Workers of America,
475 U.S. 643, 650, 106 S.Ct. 1415, 1419, 89 L.Ed.2d 648 (1986));
see also Kerr-McGee Refining Corp. v. M/T Triumph,
924 F.2d 467, 470 (2d Cir. 1991).
In trying to determine the scope of arbitration provisions,
courts have distinguished between "narrow" and "broad"
arbitration clauses. Broad clauses purport to refer all
disputes arising out of a contract to arbitration, while narrow
clauses limit arbitration to a specific type of dispute.
See McDonnell Douglas, supra, 858 F.2d at 832. "With narrower
clauses . . . a court considering the appropriate range of
arbitrable issues must `consider whether the [question at]
issue is on its face within the purview of the clause.'" Id. at
832 (quoting Rochdale Village, Inc. v. Public Service Employees
Union, 605 F.2d 1290, 1295 (2d Cir. 1979)).
The clause in question here is clearly a narrow one. The
Agreement prescribes arbitration only for disputes concerning
the two balance sheets. In addition, the Agreement explicitly
prohibits the arbitrator from conducting an independent audit,
and puts a number of express restrictions on his inquiry. Thus,
the Agreement identifies only a small subset of all possible
disputes as arbitrable. Consequently, this Court must determine
the relevant scope of the arbitration ordered herein. All
conditions precedent have been satisfied for arbitration to
occur regarding the March balance sheet. The sole issue is the
extent to which the arbitrator may consider the December
balance sheet as well.
Holdings is correct in asserting that the December balance
sheet is not arbitrable at this point. The procedures set out
in the Agreement were not satisfied in regard to the December
balance sheet.*fn3 The remaining issue, which concerns the
extent to which procedures used in the December balance sheet
must be followed in the March balance sheet, is within the
province of the arbitration. The Agreement dictates, inter
alia, that both balance sheets are to present a "true and fair
view" of the business, and are to comply with UKGAAP, to be
applied "on a consistent basis" with prior periods. The March
balance sheet has the additional requirement of consistency
with the "policies set forth in the notes" to the December
balance sheet. However, that provision does not necessarily
mandate that all procedures used in preparing the December
balance be slavishly followed in preparing its successor, to
the exclusion of all other requirements.
The provisions of the Agreement make clear that the
arbitrator has a duty to determine whether the March balance
sheet complies with all of the requirements of the Agreement.
This Court must grant him full rein in weighing the importance
of each of the requirements, and the proper balance to be
struck among UKGAAP standards, consistency, and a "true and
fair" picture of the business. The Court will not prevent the
arbitrator from analyzing the December balance sheet, and
indeed assumes that the arbitrator will do so, to the extent
necessary to determine its impact on the March balance sheet.
The arbitrator shall determine whether the March balance sheet
is in accord with the Agreement. If in doing so the arbitrator
determines that the December balance sheet does not comply with
the Agreement, the arbitrator shall not alter the findings of
the December balance sheet, unless the parties agree otherwise.
However, the arbitrator need not be constrained to reapply any
incorrect procedures to the March balance sheet, but
shall be free to apply the correct standards as dictated by the
For the reasons set forth above, the Court grants Stena's
petition to compel arbitration concerning the March 31 balance
sheet, with the restriction that the arbitrator cannot alter
the results of the December 31 balance sheet without the
consent of all parties. The Court does not, however, restrict
the arbitrator from examining the December balance sheet, nor
from examining the validity of the procedures used therein, for
purposes of determining whether the proper procedures were used
in preparing the March balance sheet.