In Northern Data AG v. Riot Platforms, Inc., a Delaware court dealt with a case in which the parties disagreed on the final price and submitted several issues to an accounting expert. The expert resolved four issues in favor of the Buyer. To no surprise, the Seller then ran to court.
For two of the four issues, the Seller claimed that the accounting expert defied his contractual mandate by adhering to generally accepted accounting principles (GAAP) to the exclusion of the Seller’s historical accounting practices. For the other two issues, the Seller insisted that they dealt with indemnity claims that fell outside the accounting expert’s authority. The Court granted summary judgment to the Buyer on the first set of issues and granted the summary judgment to the Seller on the second set.
As to the first set of issues, the Seller unconvincingly argued certain payments should be recognized as deferred revenue as of closing because the expert improperly ignored the Seller’s historical practices for recording revenue. The parties’ Share Purchase Agreement (SPA) required that the expert’s analysis be “in accordance with GAAP, in a manner in accordance and consistent with” the Seller’s own accounting statements. In reviewing the accounting expert’s findings under the high bar of the “manifest error” standard typically used when appeals of alternate dispute resolutions are made, the Court held that the expert did not deviate from the SPA’s requirements in that (a) the Seller’s revenue recognition methodology was inconsistent with GAAP and (b) the SPA only required that the Seller’s accounting practices being taken into account if “there [we]re multiple ways to apply GAAP” on a particular accounting issue.
As to the second two issues, the Seller successfully argued that the expert exceeded his authority by providing opinions as to two items that related to indemnity claims—regarding the Seller’s alleged double billing of a client and the Seller’s liability to pay a disputed invoice from its electricity provider. The nature and scope of the Seller’s accounts receivable and indebtedness represented and warranted in the SPA depend upon the interpretation of legal terms in the SPA, which is unrelated to accounting issues. The plain language of the SPA required that claims for breaches of representations and warranties be resolved through specified indemnity provisions. Therefore, the Court held that “[t]hese are indemnity claims that involve legal issues” and thus that the accounting expert “lacked the authority to resolve such matters” even if they “related to an accounting matter.”
Becky would have made sure the contract’s language was so clear there was no possibility of a valid argument being presented in court.
David Seidman is the principal and founder of Seidman Law Group, LLC. He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, and other issues. In particular, he has a significant amount of experience in hospitality law by representing third party management companies, owners, and developers.
He can be reached at david@seidmanlawgroup.com or 312-399-7390.
This blog post is not legal advice. Please consult an experienced attorney to assist with your legal issues.
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