Commercial Division Blog

Posted: August 22, 2022 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Christopher R. Dyess, Joshua Wurtzel, Hillary S. Zilz / Categories Arbitration Mediation and Other ADR, Contracts

Party Cannot Avoid Narrow Dispute-Resolution Clause in Contract By Dressing Up Claim of Breach as a Breach of a Covenant To Which Dispute-Resolution Clause Does Not Apply

On June 21, 2022, Justice Joel M. Cohen of the New York County Commercial Division issued a decision in BD Capital Partners Ltd. v. EBIX, Inc., 2022 N.Y. Slip Op. 31951(U), holding that a party cannot avoid a narrow dispute-resolution clause in a contract by dressing up its allegations as a breach of separate covenants in a contract to which the dispute-resolution clause does not apply, explaining:

Accepting that BD Capital submitted an EO Objection Notice, BD Capital's claims cannot proceeding in this Court because they circumvent the dispute-resolution procedure mandated by the SPA. Both causes of action in the Complaint ask the Court, or a jury, to settle a dispute about the Earnout Statement, thus supplanting the [*6] role contractually assigned to the Neutral Auditor. The First Cause of Action contests the Company's stated Revenue and EBTIDA figures in the Earnout Statement (Compl. ¶ 54), and seeks as damages "the amount of the full Two-Year Earnout Amount (as defined in the SPA and to be calculated in accordance with the SPA), in an amount to be determined at trial" (id. at 11-12). But that is not what the SPA contemplates. Any dispute about the "Earnout Statement or the calculations set forth thereon" —especially a dispute about Revenue and EBITDA, the main drivers of the Earnout Amount — must go through the contractually-ordered process of objection, negotiation, and submission to the Neutral Auditor (NYSCEF §§ 2.4 [d]-[e]). Similarly, the Second Cause of Action seeks "a decree of specific performance requiring [Defendants] to provide an accurate Financial Statement" (Compl. ¶ 63). But again, a dispute over the accuracy of Defendants' [**5] calculations in the Earnout Statement falls squarely within the scope of section 2.4 [e]. And because BD Capital has not alleged compliance with section 2.4 [e], its claims fail as a matter of law.

. . .

BD Capital urges that the dispute-resolution procedure "cannot possibly occur until . [*8] . . a court adjudicates whether, and to what degree, [Defendants] have materially breached the Section 2.4(h) Covenants" (Compl. ¶ 47). To be sure, the First Cause of Action alleges breaches of those covenants (id. ¶¶ 50-55). But those allegations are not independent of the dispute about the Earnout Statement, which must be resolved in accordance with section 2.4 [e]. They are, essentially, the same dispute clothed in different provisions of the contract. The First Cause of Action alleges (A) that Defendants breached the covenants "by [**6] failing to operate the Company in a manner that maximized BD Capital's opportunity to receive the Earnout Amounts" (Compl. ¶ 53), (B) that "[d]ue to [Defendants'] breaches . . . the Company did not reach Revenue and EBITDA levels it would have otherwise reached" (id. ¶ 54), and (C) that BD Capital sustained damages equal to the Earnout Amount "to which it would have been entitled had [Defendants] not breached the Section 2.4(h) Covenants" (id. ¶ 55).

Courts will strictly enforce dispute-resolution clauses in a contract. And this case shows that even creative pleading cannot avoid those clauses when they otherwise apply. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions about a dispute-resolution clause in a contract.