APA Arbitration Clause Doesn’t Apply to Buyer/Seller Affiliate Contract


M&A Stories

September 29, 2020


Buyers and sellers of businesses often select arbitration as their dispute resolution procedure. Arbitration is seen as faster and less costly than going through the courts.

However, a binding arbitration clause in an acquisition document is not a guaranty that there won’t be an attempt to force the dispute into a court.

The deal

This deal here involved the sale of a Vicksburg, Mississippi auto dealership. The transaction was structured as an asset acquisition. There was an asset purchase agreement between the buyer and seller for the dealership assets (other than the land and building). There was also a purchase contract for the real estate between a buyer affiliate and a seller affiliate.

The agreements were signed but the deal did not close.

The lawsuit

The buyer and buyer affiliate sued the seller and seller affiliate in a federal Mississippi court to force the seller and its affiliate to close the deal and for damages.

The seller and its affiliate asked the court to compel the buyer group to arbitrate pursuant to the arbitration clause in the asset purchase agreement. The buyer affiliate claimed that it could not be compelled to arbitrate the real estate contract dispute, because it was not a party to the asset purchase agreement (which contained an arbitration clause) and that there was no arbitration clause in the real estate purchase contract.

The court agreed with the buyer affiliate. It compelled the buyer and sell to arbitrate the asset purchase agreement dispute, but permitted the real estate purchase contract dispute to proceed.

This case is referred to as BLW Motors, LLC v. Vicksburg Ford Lincoln Mercury, Inc, Civil Action No. 3:19-CV-577-DPJ-FKB, United States District Court, S.D. Mississippi, Northern Division, (April 1, 2020) 


So now things get more complicated, expensive and time consuming. The buyer and seller battle out the non-real estate part of the deal in arbitration while the buyer affiliate and seller affiliate battle out the real estate part of the dead in a federal court.

Acquisitions of a business often involve multiple related agreements and multiple related parties. An arbitration clause in one agreement will probably not apply to disputes between related parties in a related agreement. Therefore, make sure that all parties to all agreements agree in writing to arbitration for all disputes arising from all of the acquisition documents.

By John McCauley: I help people manage M&A risks involving privately held companies.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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