the objections in 15 days, the dispute was to be submitted to the accounting firm of Peat Marwick Main & Co., which is now KPMG Peat Marwick, ("Peat Marwick"), for a final and binding determination. Petition para. 14.
The closing date of the sale of the Foreign Businesses was April 2, 1990. Nashua delivered the Closing Balance Sheet to Gestetner on or about September 10, 1990. It showed a Closing Date Net Book Value for the Foreign Businesses of $ 124,188,000, or $ 1,961,000 more than the net book value of $ 122,227,000 in the Unaudited Balance Sheet. Petition para. 17.
By agreement of the parties, Gestetner's 90-day period to deliver its objections began to run on September 24, 1990, so that Gestetner had until December 8, 1990, to make its objections. On December 7, 1990, Gestetner delivered to Nashua extensive objections to the Closing Balance Sheet, including 187 objections in 18 categories, totalling $ 24,313,000. Petition para. 19. The objections raise numerous technical accounting issues. Certain of the objections have been revised, based on further inquiry, with the net effect of reducing the total objections by $ 3,349,000, to $ 20,964,000. Petition para. 20.
During the 15 days after Nashua received the objections, the parties did not resolve any of them. Therefore, Gestetner contends that, as of December 21, 1990, the parties had, and continue to have, a dispute that is to be arbitrated before Peat Marwick pursuant to Section 1.5(b) of the Purchase Agreement. Petition para. 21.
Gestetner did not commence arbitration when the 15-day contractual period expired on December 21, 1990. Instead, from December 1990 through October 2, 1991, Gestetner and Nashua met, corresponded and had telephone conversations in an effort to settle all or part of their dispute. Petitioner alleges that throughout this period of settlement negotiations, Nashua repeatedly asserted that the matter would be brought to arbitration if the parties failed to reach agreement. Petition para. 25. Petitioner further alleges that it was not until August, 1991, that Nashua even intimated that it would contend that some of Gestetner's objections were beyond the scope of the arbitration provision in the Purchase Agreement.
Petitioner alleges lastly that Nashua has gone to great lengths to delay defending Gestetner's claim in arbitration and has succeeded in extending the time before arbitration from the contractual 15-day period to 10 months. Accordingly, Gestetner seeks an order directing Nashua to proceed forthwith to arbitration in New York City before Peat Marwick and an award of its costs and disbursements of this action.
Both parties agree that the Petition is governed by the Federal Arbitration Act ("FAA"), 9 U.S.C. et. seq. The Supreme Court has consistently recognized that the FAA "establishes a federal policy favoring arbitration." See, e.g., Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226, 96 L. Ed. 2d 185, 107 S. Ct. 2332 (1987). Thus, "'questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration . . . Any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. . . .'" Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 87 L. Ed. 2d 444, 105 S. Ct. 3346 (1985) (quoting Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-35, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983)).
Of course, this does not imply that courts will force arbitration when it was clearly not the intention of the parties to place a given matter within the ambit of an arbitration agreement. See Chevron U.S.A. Inc. v. Consolidated Edison Co., 872 F.2d 534, 537 (2d Cir. 1989). 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. . . . As with any other contract, the parties' intentions control, but those intentions are generously construed as to issues of arbitrability." Mitsubishi, 473 U.S. at 626.
In determining the scope of arbitration provisions, courts have "at times distinguished between 'broad' clauses that purport to refer to all disputes arising out of a contract to arbitration and 'narrow' clauses that limit arbitration to specific types of disputes." McDonnell Douglas Fin. Corp. v. Pennsylvania Power & Light Co., 858 F.2d 825, 832 (2d Cir. 1988). "When 'dealing with a narrower arbitration clause, . . . it will be proper to consider whether the conduct in issue is on its face within the purview of the clause.'" McAllister Bros., Inc. v. A & S Transp. Co., 621 F.2d 519, 522 (2d Cir. 1980) (quoting Rochdale Village, Inc. v. Public Serv. Employees Union, 605 F.2d 1290, 1295 (2d Cir. 1979)). "Thus, even though even a narrow arbitration clause must be construed in light of the presumption in favor of arbitration, the court is not free to disregard the explicit boundaries set by the agreement between the parties." Chevron 872 F.2d at 537-38 (citing McDonnell Douglas 858 F.2d at 832).
Here the explicit boundaries set by the parties are articulated in Section 1.5(b) of the Purchase Agreement, which provides that the Closing Balance Sheet shall be consistent with GAAP and with the accounting principles applied in the preparation of the Unaudited Balance Sheet. Section 1.5(b) further provides that:
The Purchaser [Gestetner] and its representatives shall have the right to review all work-papers and procedures used to prepare the Closing Balance Sheet and the calculation of the Closing Date Net Book Value and shall have the right to perform any other reasonable procedures to verify the accuracy thereof. Unless the Purchaser, within 75 days after the receipt of the Closing Balance Sheet and the Closing Date Net Book Value, notifies the seller in writing that it objects to the Closing Date Net Book Value and specifies the basis for its objection, the Closing Date Net Book Value shall become final and binding on the Parties for purposes of this Agreement. If the Purchaser and Seller are unable to resolve such objection within 15 days after any such notification has been given, the dispute shall be submitted to Peat Marwick Main & Co. . . . Such accounting firm shall make a final and binding determination as to the matter or matters in dispute.
While this provision is technically a "narrow" one in that it does not provide for arbitration of all disputes between the parties, it is "broad" insofar as it does not restrict the scope of objections to the Closing Net Book Value that may be brought before Peat Marwick. In the instant case, petitioner objected to the Closing Date Net Book Value on the grounds, among others, that the Closing Balance Sheet failed to comply with GAAP. This objection, petitioner avers, is precisely the type that Section 1.5(b) contemplates for arbitration.
Nashua offers a different interpretation of Section 1.5(b). According to Nashua, Gestetner's objections are not properly subject to determination by Peat Marwick under Section 1.5(b) because Gestetner's objections are covered by other provisions of the Purchase Agreement. Nashua's argument may be summarized as follows: (1) the Closing Balance Sheet is required to be consistent with the Unaudited Balance Sheet; (2) the Unaudited Balance Sheet is required to comply with GAAP; (3) therefore, a contention that the Closing Balance Sheet fails to comply with GAAP is actually a contention that the Unaudited Balance Sheet fails to comply with GAAP; and (4) because the Purchase Agreement provides that indemnification is the exclusive remedy for claims that the Unaudited Balance Sheet fails to comply with GAAP, it is also the exclusive remedy for contentions that the Closing Balance Sheet fails to comply with GAAP.
Nashua's argument is unpersuasive. First, Nashua fails to appreciate the significance of the Second Circuit's recent decision in Chung v. President Enters. Corp., 943 F.2d 225 (2d Cir. 1991). In Chung, a buyer and seller had agreed to arbitrate only breach of warranty disputes. When the buyer sought to compel arbitration, the seller argued that the buyer's claims, although presented as warranty claims, were in fact claims based on a failure to achieve projected revenues and therefore were not covered by the narrow arbitration agreement. The Second Circuit rejected this argument, characterizing it as one "directed at the merits of the dispute rather than the issue of arbitrability." 943 F.2d at 230. The court noted that "to determine arbitrability we need only consider whether there exists an interpretation of the parties' agreement that covers the disputes at issue." The court held that because the buyer's claims could be interpreted as warranty claims, arbitration was required, even though an arbitrator might "subsequently agree with [seller's] interpretation of the agreement." Id.
Chung makes it clear that where claims may be understood to raise an arbitrable issue, arbitration must be compelled, even if the claims can also be characterized another way. Here, the question is not even close. Gestetner's objections are objections to the Closing Date Net Book Value. Section 1.5 of the Purchase Agreement certainly may be understood to make such objections arbitrable. Section 1.5(b) provides that disputes over Gestetner's objections are to be submitted to Peat Marwick and in no way limits the nature of objections Gestetner may bring. Thus, not only may Gestetner's objections be understood to be arbitrable, but also Gestetner's objections appear, after facial consideration, to be clearly within the scope of the arbitration agreement, notwithstanding Nashua's attempt to portray them otherwise. Here, as in Chung, respondent's arguments relate to the merits
of Gestetner's objections -- whether they are defective under the Purchase Agreement itself -- and are thus more appropriately brought before the arbitrator.
Second, Nashua's attempt to rebut the plain meaning of the arbitration provision in Section 1.5(b) is undercut by Nashua's own behavior prior to litigation.
The parties' practical interpretation of their contract prior to litigation provides "compelling evidence of the parties' intent." Ocean Transport Line, Inc. v. American Philippine Fiber Industries, Inc., 743 F.2d 85, 91 (2d Cir. 1984).
As the Supreme Court has observed: "Generally speaking, the practical interpretation of a contract by the parties to it for any considerable period of time before it comes to be the subject of controversy is deemed of great, if not controlling, influence." Old Colony Trust Co. v. Omaha, 230 U.S. 100, 118, 57 L. Ed. 1410, 33 S. Ct. 967 (1913). See also Viacom International, Inc. v. Lorimar Productions, Inc., 486 F. Supp. 95, 98 & n.3 (S.D.N.Y. 1980) (applying the rule that the parties' practical interpretation is entitled to great if not controlling weight).
Here, Nashua's conduct demonstrates that it shared Gestetner's understanding that this dispute is within the arbitration agreement. From December 1990 until at least June of 1991, Nashua appears to have acknowledged that the dispute over Gestetner's objections was subject to arbitration. For example, on December 13, 1990, one week after Nashua received Gestetner's objections, William Luke, Nashua's vice-president of finance and chief financial officer, stated the following in a letter to Gestetner: "Pursuant to the Agreement, if Gestetner and Nashua are unable to resolve Gestetner's objections within 15 days of notification, the dispute shall be submitted to arbitration." Copsey Ex. C.
On June 11, 1991, more than six months after Nashua had received Gestetner's objections, Luke stated in a letter to Gestetner that "we believe that it is appropriate at this time to start the arbitration process." Later in the same letter he proposed that Peat Marwick "be contacted so that the parties can begin the process of selecting an arbitrator and so that we can begin discussing the appropriate scope of the arbitration . . . ." Copsey Ex. G.
Luke included with his June 11, 1991, letter a proposed joint letter to Peat Marwick from Nashua and Gestetner. The proposed joint letter stated: "Pursuant to Section 1.5 of the Purchase Agreement . . . any disputes relating to the audited net book value of the [Foreign Businesses] that the parties are not able to resolve shall be submitted to KPMG Peat Marwick for arbitration." Id.
The Court finds these statements reflecting the parties' practical interpretation of the contract to be highly probative of the intended meaning of Section 1.5(b), notwithstanding Nashua's insistence that it consistently expressed concern about the scope of the arbitration.
For the above stated reasons, the Court grants Gestetner's petition to compel arbitration and directs the parties to proceed forthwith pursuant to Section 1.5(b) of the Purchase Agreement.
William C. Conner
United States District Judge
Dated: February 10, 1992
New York, New York