The opinion of the court was delivered by: LACEY
Presented is the issue of arbitrability of a certain dispute between the parties. For the reasons hereinafter set forth, I find in favor of the petitioner and grant its motion to compel arbitration. The cross motion of the respondent is denied.
On May 6, 1975 the Singer Company (Singer) commenced this diversity action, 28 U.S.C. § 1332, proceeding under the United States Arbitration Act (the Act), 9 U.S.C. §§ 1-14 (1970), by a Motion to Compel Arbitration and seeking an order directing respondent, The Tappan Company (Tappan), to proceed to arbitration under a certain Agreement to Purchase (Agreement), dated February 25, 1972, and annexed to Singer's Petition as Exhibit A.
Tappan then filed a Cross-Motion to Dismiss for Absence of an Indispensable Party, and its Answer and Demand for a Jury Trial. Having heard oral argument, I requested and received additional submissions from the parties which have waived further oral argument.
On February 9, 1972 Tappan and American Standard Inc. (American) entered into an Agreement of Purchase and Sale (American Agreement), Tappan acquiring the assets of five American divisions, the Environmental Comfort Systems Group (ECSG). Thereafter, Singer acquired from Tappan under their Agreement two of the ECSG divisions, The Commercial Air Conditioning Division (CACD) and the Wilmington Coil Division (WCD). Tappan concedes the making of this Agreement, which embodies an arbitration provision; but it denies that the issues here in dispute were intended by the parties to be arbitrable under that provision.
Under Section 2.2 of the Agreement Singer and Tappan were to deliver to Arthur Young & Co. (AY), American's accountant, and later to Peat, Marwick, Mitchell & Co. (PMM), Singer's accountant, a combining divisional balance sheet of ECSG as of January 31, 1972, "prepared in accordance with generally accepted accounting principles consistent with those applied in the preparation of the August 31, 1971 combining divisional balance sheet of ECSG." PMM was to review that portion of the January 31, 1972 combining divisional balance sheet and AY report pertaining to the sale to Singer, defined as the Closing Balance Sheet, to determine "compliance thereof with the principles which the parties have agreed above shall be followed in its preparation. . . ."
If PMM, after such review, raised objections which were not resolved by agreement of the accounting firms, or of the parties, the "matter" was to be "referred to arbitration." Thus I find that it is the question of whether the Closing Balance Sheet was "prepared in accordance with generally accepted accounting principles consistent with those applied in preparation of the August 31, 1971 balance sheet of ECSG" which the parties intended to be referred to arbitration under the Agreement should a dispute in connection therewith go unresolved.
Pursuant to Section 2.2, PMM rereceived the financial report on April 28, 1972; and on May 10, 1972, by letter to Ernst & Ernst (E&E), Tappan's accountant, raised objections thereto.
On May 26, 1972, in response to Tappan's oral request for a meeting to discuss PMM's objections, Singer's L. J. Clark wrote to L. B. Ellison of Tappan agreeing to a meeting, but stating that ". . . I feel the subject of this meeting should be discussion of the selection of an arbitrator as defined in . . . the agreement". See Exhibit B to Ellison Affidavit.
That meeting took place on June 5, 1972. Attending were representatives of Tappan, Singer, and the three accounting firms. The parties to the meeting, including Clark, agreed that, instead of proceeding to arbitration at once, the three accounting firms "should be able to satisfy many of the questions, or objections" in PMM's letter of May 10, 1972. See Ellison letter to Clark, dated June 12, 1972, Exhibit C to Ellison Affidavit. Of major significance as bearing upon the matter at bar, Ellison wrote in part:
It was agreed that this same group would reconvene on Thursday, June 22, 1972, at 9:30 A.M. in the offices of Peat, Marwick, Mitchell & Co., to further review the information pertaining to the receivables and warranties. In the meantime, Peat, Marwick, Mitchell & Co. was to briefly summarize those points as originally set forth in their May 10, 1972 letter, on which they are now satisfied, and no further work need be done.
The June 22, 1972 meeting referred to in Ellison's letter was never held, and, for the several reasons set forth in the August 22, 1975 affidavit of Singer's Clark, nothing further was submitted to respondent by PMM. Instead, Singer retained another accounting firm to investigate and review, and advise Singer on, the disputed items. As to this, and to explain Singer's delay in invoking the arbitration provisions, Mr. Clark has averred (Id.):
"9 . . . The purpose of retaining Leidesdorf was to ensure that Singer did not commence an arbitration against Tappan . . . unless Singer had a good claim to a substantial amount of money. Leidesdorf's review of the books and records of CACD bearing on such reserves took far longer than expected. . . .
10. Moreover, during June and July, 1972 Singer and Tappan were heavily engaged in negotiations unrelated to the dispute. . . . In addition, during the balance of 1972 Singer was engaged in negotiations with Tappan to obtain assignments of the patents, patent applications and the files of the pending patent cases related to the businesses acquired by Singer from Tappan to which Singer was entitled under § 1.1.7 of the Agreement. Tappan was then refusing to assign these items to Singer. . . . Finally, Singer and Tappan have had an ongoing business relationship throughout the period 1972-1975. . . .
11. In April, 1973, after the expenditure of a very substantial amount of time and effort and at a substantial cost, Leidesdorf advised Singer's attorneys that in its opinion the warranty and receivables reserves were understated by the amounts set forth in Singer's letter demanding arbitration. However, only the passage of time and CACD's actual subsequent experience with expenditures for future warranty costs on air conditioners sold prior to January 31, 1972 and collection of accounts receivable then outstanding would determine whether these reserves were in fact inadequate.
12. Moreover, Singer recognized that any arbitration proceeding commenced by it against Tappan would be expensive, time consuming and disruptive for all parties involved. Accordingly, Singer refrained from demanding arbitration until it could determine whether, in fact, the warranty and receivables reserves reflected in the Closing Balance Sheet were inadequate and, if so, by what amounts.
13. During the second half of 1974 Singer requested Leidesdorf to perform a subsequent events review with respect to the CACD warranty and receivables reserves and to advise it as to what Singer's actual experience had been in these two areas. Leidesdorf reported to Singer in early 1975 that the amount of future warranty costs attributable to the warranty reserve had been even higher than it had anticipated and that the uncollectible accounts receivable had been approximately the same as Leidesdorf had advised they would be. Upon receipt of this advice Singer commenced the instant arbitration proceeding. . . .
14. Singer believes that its delay in commencing the arbitration proceeding until February, 1975 was entirely reasonable and justified. First, the passage of time could not jeopardize either Singer or Tappan's ability to present evidence as to what the warranty and receivables reserves should have been. . . . Second, Singer was convinced that this delay in instituting the arbitration proceeding would not prejudice Tappan in any way. . . .
Singer's delay in invoking arbitration has been argued by Tappan as inconsistent with certain specific provisions of their Agreement, as follows:
If within 20 days from the time the objection shall first be raised by Peat, Marwick, Mitchell & Co. the matter shall not be resolved by agreement of the parties, the matter shall be referred to arbitration before an arbitrator which shall be another national accounting firm to be selected by the parties. . . .
Section 8.5 which provides that certain actions under the Agreement must be taken "promptly" and "as early as practicable".
Tappan's contentions with respect to the applicability of these provisions to this proceeding will be discussed in more detail hereinafter.
Returning to the chronological development, on February 13, 1975 Singer's counsel wrote as follows to Tappan ...