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When Is an Appraisal Provision in a Contract an “Arbitration Agreement?”

Authors: Molly Honoré

Markowitz Herbold attorney Molly Honoré recently co-authored an article for the Oregon State Bar Litigation Journal on appraisal provisions in contracts.

Jane Q. Lawyer represents a closely-held business called Tech Corp. Tech Corp has a dispute with its 40% equity owner, Programmer. Programmer is no longer happy at Tech Corp because she feels unappreciated and wants to be bought out. Programmer acquired her stock in Tech Corp under a stock Purchase Agreement that included an Oregon choice of law provision. Tech Corp is amenable to buying out Programmer and parting ways, but Tech Corp and Programmer dispute the value of the company and the price at which Tech Corp would have to buy back Programmer’s stock. Jane anticipated such a dispute and included a useful provision in the stock Purchase Agreement: the parties must submit any valuation issue to a named valuation expert before either party can file suit under the agreement.

However, while Jane is gathering relevant documents for the valuation expert, Tech Corp calls Jane in confusion, telling her Programmer has just served Tech Corp with a complaint for breach of the stock Purchase Agreement. Jane calls You, her trusted litigator and friend, for advice. Jane asks You the following questions:

1)Can Tech Corp stay the litigation and compel Programmer to submit the valuation issue to the named valuation expert?

2)If yes to Question 1, and Programmer disputes the valuation expert’s conclusions, what standards will a court apply to Programmer’s objections? Your answers hinge on whether the valuation provision is an “arbitration agreement” under the Federal Arbitration Act. If the FAA applies, Tech Corp has means beyond ordinary contract law to force Programmer to submit to the valuation.

To read the article in its entirety, visit the OSB Litigation Journal.