100 N.Y.2d 351 (2003)
When a stock purchase agreement contains both purchase price adjustment and indemnification provisions, objections to asset values based on failures to comply with GAAP existing at the time of the agreement are claims for breach of warranty, subject to the exclusive remedies specified in the indemnification provisions.
Summary
Westmoreland Coal Co. acquired Entech’s coal mining subsidiaries via a stock purchase agreement containing both price adjustment and indemnification clauses. Westmoreland objected to Entech’s closing date certificate, claiming GAAP violations in asset valuations. Entech refused to submit to alternative dispute resolution (ADR) under the price adjustment clause, arguing that the indemnification clause provided the exclusive remedy for breaches of representation or warranty. Westmoreland sued to compel ADR. The New York Court of Appeals held that Westmoreland’s objections were claims for breach of warranty, governed by the indemnification provisions, and thus not subject to ADR.
Facts
Entech and Westmoreland entered into a stock purchase agreement where Westmoreland would acquire Entech’s coal mining subsidiaries. The agreement included interim financial statements warranted by Entech as compliant with GAAP. The purchase price was subject to adjustment based on the closing date net asset value. After closing, Westmoreland objected to the closing date certificate, alleging the asset values didn’t comply with GAAP and sought a significant price adjustment. Entech argued that these objections were warranty breaches subject to the agreement’s indemnification clause, which dictated litigation as the exclusive remedy.
Procedural History
Westmoreland petitioned to compel ADR per the purchase price adjustment provisions. The Supreme Court granted the petition. The Appellate Division affirmed, holding any material objection to the closing date certificate must be submitted to an independent accountant for arbitration. Entech appealed to the New York Court of Appeals.
Issue(s)
Whether Westmoreland’s objections to the closing date certificate, based on alleged failures to comply with GAAP, fall under the stock purchase agreement’s purchase price adjustment provisions requiring ADR, or the indemnification provisions providing for exclusive litigation in court for breaches of representation and warranty?
Holding
No, because Westmoreland’s objections related to accounting conventions and asset values already present in the interim financial statements, which Entech warranted as GAAP-compliant. These objections are claims for breach of warranty and are subject to the exclusive remedies detailed in the indemnification provisions, namely litigation.
Court’s Reasoning
The court emphasized interpreting the contract as a whole, stating, “A written contract ‘will be read as a whole, and every part will be interpreted with reference to the whole; and if possible it will be so interpreted as to give effect to its general purpose.’” The court reasoned that the purchase price adjustment clause required the closing date certificate to be prepared consistently with the interim financial statements. Entech warranted that the interim financial statements complied with GAAP. Westmoreland’s objections essentially alleged a breach of this warranty. The indemnification clause provided the exclusive remedy for warranty breaches, specifying litigation. Allowing ADR would circumvent the indemnification clause’s limitations and the $1.75 million threshold for indemnification. The court also noted Westmoreland’s due diligence obligations and experience in the coal business. It stated, “These sophisticated commercial parties surely could not have intended to consign a significant portion of the purchase price to ADR.” The court emphasized that warranty claims require the protections of discovery, evidence rules, and appellate review, which are absent in ADR. The court found that “Westmoreland’s objections related to noncompliance with GAAP are, in fact, claims for breach of a representation or warranty. These claims may only be pursued in a court of law”.