Anonymised, illustrative composite. An asset purchase agreement for a machine shop sent a working-capital dispute to an independent accounting firm for a final and binding determination. Both sides had been calling it 'the arbitration clause' for months. It was not one.
At a glance
An asset purchase agreement for a specialty machine shop included the standard mechanism for resolving a post-closing working-capital dispute: the buyer would prepare a closing statement, the seller could object, and if the two sides could not agree, the disagreement would be “referred to an independent accounting firm, mutually agreed or appointed by the ICAO, whose determination of the disputed items shall be final and binding on the parties.” No hearing was specified. No provision addressed submissions, evidence, or reasons. Both legal teams had referred to this, informally and repeatedly through negotiation, as “the arbitration clause.”
The buyer's closing statement of working capital came in at $505,000, well below the $650,000 target set in the letter of intent. The seller objected, proposing $600,000. Unable to agree, the parties appointed an independent accounting firm under the clause, which determined working capital at $560,000 — a figure neither side had proposed, and one the buyer believed rested on an error: the firm appeared to have averaged two inconsistent inventory-valuation methodologies rather than applying the FIFO policy the purchase agreement's accounting schedule specifically required.
The buyer applied to the Superior Court of Justice to set aside or vary the determination. Before the court could reach the merits of that argument, it had to decide what kind of process had actually produced the number.
LOI target: $650,000. Buyer's proposed closing figure: $505,000 (a $145,000 shortfall in the buyer's favour). Seller's proposed figure: $600,000. The accountant's determination: $560,000. The gap the buyer was contesting — between $560,000 and what a correctly-applied FIFO methodology would have produced — was the entire dispute.
No statute defines “expert determination” or draws the line between it and arbitration. The distinction is a matter of contract interpretation and common law, and it turns on what the parties actually asked the decision-maker to do: submit rival cases to an adversarial, evidence-based process resulting in a reasoned decision — arbitration, governed by the Arbitration Act, 1991 — or rely on the decision-maker's own expertise and investigation to reach a figure, with no hearing and no obligation to give reasons — expert determination, governed only by the parties' contract and reviewable at common law on narrow grounds.
The Arbitration Act itself supplies the contrast, by showing what machinery an arbitration carries that this clause never mentioned. s.7(1) gives a party to an arbitration agreement the right to a mandatory stay of a competing court proceeding: “If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court...shall, on the motion of another party to the arbitration agreement, stay the proceeding.” s.45(1) then gives a leave-based appeal on a question of law where the arbitration agreement is silent on appeals. Both provisions presuppose an arbitration agreement exists. Neither had anything to attach to here, because the clause never described a hearing, never provided for submissions or evidence from either side, and never required the accountant to give reasons — it asked for a number, from an expert, based on the expert's own review of the books. That is the shape of an expert determination, not an arbitration, regardless of what both legal teams had been calling it.
The consequence of that characterisation is not that the determination becomes unreviewable — it is that it is reviewable on a different, narrower common-law standard: a court will interfere with an expert determination only for fraud, collusion, or a departure from the mandate the parties actually gave the expert — not simply because the expert may have gotten the accounting wrong on the merits. “Wrong” and “outside the mandate” are different questions, and only the second one is reviewable.
The court held the clause was an expert determination, not an arbitration — so the Arbitration Act's stay provision was never engaged, and the buyer's application was properly before the court on that threshold point. But the scope of review that followed was narrow: the court found the accountant had used a debatable but genuinely available methodology within the accounting firm's professional judgment, not a departure from the FIFO instruction so clear as to fall outside the mandate the parties had actually given. The $560,000 figure stood.
The buyer had been right that a court could hear the challenge. It had not appreciated how little the court could actually do with it once it did.
Had this same clause instead been drafted — or found — to be an arbitration, the buyer would have had access to s.45's leave-based appeal on a question of law, arguably a marginally better fit for an accounting-methodology dispute than the near-unreviewable manifest-error standard that actually applied. The two regimes are not simply the same process under different names; on these facts, the buyer might well have preferred the one it did not get.
The tell was informal, and it was everywhere: both legal teams called this “the arbitration clause” throughout the negotiation, in emails, in markups, in the closing checklist. The document itself never used the word “arbitration,” never referenced the Arbitration Act, and provided no procedure for a hearing — all the hallmarks of expert determination sitting in plain sight under a label nobody had checked against the text.
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