Chancery Decides Scope Of Expert's Authority In Valuation Dispute Resolution Mechanism

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This dispute arose from a disagreement over the authority of an appraiser to include legal assertions and extrinsic evidence in his valuation.
United States Litigation, Mediation & Arbitration
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Paul v. Rockpoint Group LLC, C.A. 2018-0907-JTL (Del. Ch. Jan. 29, 2024)
This dispute arose from a disagreement over the authority of an appraiser to include legal assertions and extrinsic evidence in his valuation. The underlying dispute stemmed from the departure of a co-founder from a limited liability company. The parties' LLC Agreement established a dispute resolution mechanism to determine the value of the co-founder's share if a subsequent qualifying transaction occurred.

The dispute resolution procedure called for the parties to agree on an appraiser to value the co-founder's share of the transaction proceeds. Since the parties could not agree on an appraiser, each selected their own, and each party's appraiser prepared a valuation. The two appraisers met and attempted to but could not reach agreement on a valuation. Thus, under the dispute resolution mechanism, the appraisers were to pick a third appraiser, and that third appraiser would choose one of the two valuations to establish the amount due.

The departed co-founder sought judicial relief after the two appraisers issued their valuations but before a third appraiser was selected, arguing that the defendant's appraiser's valuation improperly included legal assertions and extrinsic evidence. Applying the "authority test," the Court of Chancery held that the appraiser is an expert, not a plenary arbitrator, and therefore "has authority to interpret contract terms to the extent necessary to fulfill its valuation task but lacks authority to address broader questions of contract formation and interpretation." Thus, in determining that the appraisal process contemplated an expert determination rather than an arbitrator, the appraiser's authority was limited to deciding a specific factual dispute within their expertise (in this case, a valuation) and lacked authority to decide all legal and factual issues necessary to resolve the matter. Rather, the appraiser's role was to value the co-founder's interest using valuation techniques. As a remedy, the Court ordered the defendant to submit a redacted valuation report to the third appraiser, eliminating the improper legal arguments and extrinsic evidence.

This decision is an important reminder to drafters of dispute resolution mechanisms to be clear in designating the role of a decision maker as an arbitrator or an expert to avoid increased burden and expense in litigation over the designated neutral's authority.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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