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Court of Chancery Finds Violation of GAAP Claim Subject to Arbitration Because Claim was Actually Breach of Warranty and Representation

OSI Systems, Inc. v. Instrumentarium Corp., C.A. No. 1374-N, 2006 WL 656993 (Del. Ch. Mar. 14, 2006). In this case, plaintiff buyer and defendant seller in the sale of a business argued over the type of contractual arbitration that should be used to solve a disagreement over the form of arbitration each preferred. The Court of Chancery granted seller's motion on the pleadings because buyer's claims were for breaches of representations and warranties, which fell under the indemnity provisions of the contract and the form of arbitration set forth in those provisions must be used by buyer.

Buyer's claims rested fundamentally on its assertion that the seller premised its financial statements and estimates of working capital on accounting judgments that violated generally accepted accounting principles ("GAAP"). Because seller based its claims on GAAP violations, it argued that there should be a Closing Adjustment Arbitration in which plaintiff would be entitled to the monetary difference provided by a GAAP calculation. Buyer argued that a failure to comply with GAAP was a breach of warranty and representation, and therefore the parties should engage in legal arbitration, as provided by their contract. The Court of Chancery agreed with buyer that this dispute was subject to legal arbitration. The court advised that if seller wished to claim the contract was not materially accurate because it was not GAAP-based, it must prove that claim in legal arbitration because that was the process the parties agreed would govern claims for breach or representations and warranties. Authored by: Fotini Antonia Skouvakis 302.888.5202 fskouvakis@morrisjames.com